Article

Note: Beach Community Bank (Lender) extended a loan to Riverwalk Freeport, LLC, (Developer), a developer of real estate. The City of Freeport (City) issued a development order permitting construction of a proposed residential development. In compliance with development requirements, Developer provided City with an irrevocable standby letter of credit in the amount of approximately USD 4,870,000 issued by DC Capital DC Banking Group (Issuer). Prior to issuance of the standby, City had signaled that the Issuer was acceptable to the City.

When Developer failed to complete construction of the infrastructure, City attempted to draw on the standby. The DC Capital LC "ultimately proved to be fraudulent and/or uncollectable." A subsequent investigation revealed that City had not checked the authenticity of the LC or the financial solvency of its issuer.

Lender sued City for negligence, alleging that in approving development of a residential project, City had failed to ensure that Developer had posted adequate security and failed to determine the legitimacy of its standby and its issuer that issued the uncollectible letter of credit as bond for project. City moved to dismiss the negligence action for failure to state a cause of action on the grounds that City owed Lender "no common-law, statutory, or special duty of care, but even if a duty existed, the decisions at issue were policy-making, planning-level functions for which [City] is immune from suit." The Florida Circuit Court for the City of Freeport denied City's motion to dismiss on the grounds that it had no defense of sovereign immunity. City filed petition for writ of certiorari. On appeal the Florida District Court of Appeals, Padovano, Rowe and Ray, J.J., in an opinion by Ray, J., reversed.

Since the Lender's allegations of negligence "concerned a discretionary, planning-level policy decision of the sovereign", the appellate court decided that City had sovereign immunity and precluded any further trial proceedings against City.

Comment: It is unclear from the opinion whether the standby was fraudulent or whether the purported issuer was. In either event, City should have insisted that the LC be advised by its bank, particularly since it was purportedly issued by a non-bank issuer.

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