Note: To fund development of an entertainment facility which was to include electronic bingo in Houston County, Alabama, U.S, the Houston County Commission, the local government, created the Cooperative District and Improvement District of Houston County Crossing Project (County Crossing), which issued Series 2009 Bonds pursuant to a trust indenture agreement. Series 2009 bonds were authorized by the U.S. Congress to aid in recovery from the Great Recession. Under the terms of the trust indenture, the U.S. Bank National Association (Indenture Trustee) served as trustee for the County Crossing bonds. To protect the bond holders, Indenture Trustee also required establishment of a trust funded with a percentage of the proceeds of the bond sales and issuance of a USD 5 million standby LC in favor of Indenture Trustee on behalf of the bond holders. The standby was issued by Wells Fargo Bank (Issuer) and contained an annual automatic extension clause with a final expiring date and permitted drawings in the event of default or notice of non-extension.

Subsequently, it was determined that electronic bingo was illegal under Alabama law, resulting in County Crossing's filing for bankruptcy. When collected revenues were not sufficient to service the bonds, Indenture Trustee made a partial drawing on the standby and was paid. When Issuer sent a notice of non-extension, Indenture Trustee drew down the balance and was paid. Russell Wright, CEO of one of the corporate owners of County Crossing, who had delivered a side letter and amended side letter to Indenture Trustee in connection with the indenture, informed Indenture Trustee through attorneys that he had "a legal interest in the Letter of Credit." He had issued a promissory note for USD 5 million and together with Dr. Robert Wright, Jr. (the Wrights) threatened to commence litigation unless that amount was returned.

Concerned, the Indenture Trustee sought declaratory relief in U.S. federal court as to the validity of the LC, the side letter, the amended side letter, Trustee's right to draw on the LC, and whether the Wrights haD the right and standing to challenge such validity. The Wrights moved to dismiss for lack of subject matter jurisdiction, mootness, and the absence of affected parties. The U.S. District Court for the Middle District of Alabama, Albritton, J., denied the Wrights motion to dismiss for want of subject matter jurisdiction but withheld ruling on the other aspects of the motion pending further action by the parties.

The Wrights alleged that since Indenture Trustee did not seek a declaration of its rights with respect to the LC before withdrawing the full amount of funds, there was no actual controversy, a required for courts to exercise subject matter jurisdiction. The Wrights argued that declaratory relief would be inappropriate because Indenture Trustee was attempting to legitimize a defense to a future lawsuit and had not experienced any harm. Furthermore, the Wrights stated that they had no intention to file suit against Indenture Trustee for drawing down the LC which, besides making declaratory relief inappropriate, also made the matter moot. Indenture Trustee countered by arguing that merely promising not to file suit is not enough to make a matter moot. Indenture Trustee stated that mootness "requires proof under a voluntary cessation test."

The Judge ruled that there was an actual case or controversy present. The Judge reasoned that Indenture Trustee had already drawn down the funds and the Wrights had previously demanded the return of the funds and threated litigation. The Judge concluded that "the allegations of the Complaint present an actual case or controversy so as to support subject matter jurisdiction in this case." As to the matter of mootness, the Judge agreed with the Indenture Trustee that a mere promise not to sue is not enough to make a case moot. Therefore, the Judge remanded the case on that issue to allow Wrights time to "formally state their intentions." The Judge noted that should the parties reach a formal agreement, the court would consider such agreement when deciding the issue of mootness.



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.