Note: In connection with a residential real estate development, Walker Properties of Woodbury II, LLC (Applicant) agreed to provide the local government, the City of Woodbury in the U.S. state of Minnesota (City/Beneficiary), with two standby letters of credit issued by the Construction Mortgage Investors Company (Issuer) for the amount of the estimated costs of required activities. The development agreement distinguished between Applicant's development of the property and improvements undertaken by City/Beneficiary to be financed through assessments on the property. Under the development agreement, Applicant waived any right to challenge City/Beneficiary's assessments, and City/Beneficiary was entitled to draw on the letters of credit if Applicant defaulted on the agreement.

When City/Beneficiary completed its part of the agreement and served Applicant with assessments, Applicant objected and sued City/ Beneficiary challenging the assessments. The lawsuit was dismissed based Applicant's waiver in the development agreement of the right to challenge the assessments. Subsequently, Applicant sued City/ Beneficiary again in Minnesota state district court when City/Beneficiary refused to release the letters of credit, alleging that the agreement was an illegal contract and that City/Beneficiary had breached the agreement. In September 2008, while the lawsuit was still ongoing, City/Beneficiary sent Applicant a notice of default for failing to pay its property tax assessments for two years. When Applicant failed to cure the default, City/Beneficiary notified Issuer that it intended to draw on the letters of credit.

Applicant then applied for, and was granted in January 2009, a temporary injunction to prevent City/ Beneficiary from drawing on the letters of credit. The injunction also required Applicant to post a USD 500 bond. City/Beneficiary moved to dissolve the injunction, or at a minimum increase the amount of the bond, arguing that USD 500 was inadequate. Agreeing, the trial court increased the bond, stating "in order to protect the city a bond is to be posted in the amount of $684,079.08 . . . within 60 days of the entry of" the order regarding the bond. When Applicant failed to post the bond within the required 60-day, Beneficiary moved to dismiss Applicant's complaint for failure to comply with the trial court's order. The trial court granted the motion, dismissing Applicant's complaint for violating the court order to pay the bond and prejudicing City/Beneficiary since the improvements were paid for with city funds. The trial court also found that the letters of credit did not adequately protect City/Beneficiary since Issuer had filed for bankruptcy. On appeal, the Court of Appeals of Minnesota, in an opinion by Willis, J., affirmed.

The appellate court agreed that City/Beneficiary had been prejudiced by Applicant's failure to pay the assessments. The opinion also noted that Issuer had filed for bankruptcy, and Applicant even conceded that it was "unsure whether the letters of credit are valid." As to the issue of unreasonable and inexcusable delay, the opinion observed that Applicant's failure to pay the assessments, abide by court orders, and its overall delay since 2005 were both unreasonable and inexcusable, especially considering Applicant had waived its right to challenge the assessments in the initial agreement.



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.