Prior History: U.S. Bank Nat'l Ass'n v. Bank of Am., N.A., No. 12 Civ. 4873 CM, 2012 WL 6136017 (S.D.N.Y. Dec. 11, 2012) [USA], noted in 2013 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW AND PRACTICE at 514.

Note: Barclays Capital Real Estate Inc. (Lender/1st Beneficiary) lent USD 24 million to THI IV PBG LLC (Borrower/Applicant) for commercial mortgages on real estate property, which was evidenced by a promissory note and secured by a standby letter of credit subject to ISP98 for USD 1.25 million issued by Bank of America (Issuer). Issuer was also servicer to the commercial mortgage. The LC expired on 1 May 2007 but provided that "it [would] be automatically extended without amendment for periods of one year from the present expiry date or from the then relevant expiry date unless at least 60 days prior to that then relevant expiry date [Issuer] notif[ies] the beneficiary by written notice via overnight courier service that [Issuer] elect[s] not to extend this letter of credit."

Lender/1st Beneficiary "transferred and assigned its rights, title and interest in the Loan" to LaSalle Bank NA (Trustee) which in turn "transferred and assigned" its rights to U.S. Bank (Trustee's Assignee). However, whether either the LC itself or its proceeds were assigned was disputed.

On 11 February 2010, Issuer "delivered a Notice of Non-Extension (i.e., a termination notice) with respect to the Letter of Credit to [Lender/1st Beneficiary], who was still the listed beneficiary on the Letter of Credit . . . Neither [Issuer] nor [Lender/1st Beneficiary] took any action to notify [Trustee's Assignee] . . . of the pending termination of the Letter of Credit." As a result, the standby expired without being drawn on which left the loan partially uncollateralized.

When Borrower subsequently defaulted on the loan, Trustee's Assignee sued Issuer and Lender/1st Beneficiary for breach of contract, sued Lender/1st Beneficiary for failure to assign the LC, and sued Issuer for failure to perform its duties as servicer. After Issuer's first motion to dismiss was granted due to Trustee's Assignee's failure to plead that Issuer was liable only in the alternative, Trustee's Assignee amended the complaint, and Issuer again moved to dismiss for failure to state a claim upon which relief could be granted. The U.S. District Court for the Southern District of New York, McMahon, J., denied Issuer's motion to dismiss.

Issuer argued that Trustee's Assignee failed to allege that Lender/1st Beneficiary had properly assigned the LC, which would be a necessary predicate for Issuer to be liable to the claimed assignee as servicer. The Judge agreed that Trustee's Assignee could have improved its pleading, but concluded that by clearly stating that its complaint against Issuer was in the alternative, it could be fairly inferred that the pleading was based on the theory that Lender/1st Beneficiary did properly assign the LC, triggering their obligation as servicer to the mortgages.

The Judge also stated that his ruling regarding Issuer's earlier, successful motion to dismiss controlled the proceedings and would continue to control the case going forward. Therefore, Issuer's duties as servicer of the mortgages did not require any action until Lender/1st Beneficiary assigned the LC, despite Trustee's Assignee's belief that Issuer's freestanding obligation as servicer could establish independent liability. Further, Issuer could not have forced Lender/1st Beneficiary to assign the LC, so that any breach of contract as servicer would not have resulted in damages unless such an assignment did in fact occur. As a result, Lender/1st Beneficiary and Issuer could only be held liable in the alternative.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.