Note: In connection with the development of land, a predecessor of People's United Bank (Issuer) issued three standby LCs totaling USD 681,560 in favor of the Town of Riverhead, NY and its related agencies, and which expired in 2010. In connection with a complex refinancing of the land development, Issuer's secured rights were to be satisfied and the LCs to be replaced. As a condition, Issuer required "proof of cancellation of the Letters of Credit from each beneficiary, together with delivery of such letters". In the alternative, a cash deposit with Issuer was required. The stated concern was to protect Issuer "against payment liability under the terms of the issued Letters of Credit which were negotiable paper". Since the condition was not met, a cash deposit was provided. The agreement also contained a release and discharge of Issuer.

In connection with the foreclosure on the project, Neil Rego and George Heinlein (Principals), who funded the deposit, cross claimed against Issuer, claiming money damages as a result of Issuer's fraudulent or negligent misrepresentation "regarding the existence and continuing viability of the Letters of Credit. These claims rest upon the purported inaccuracy of certain factual recitals set forth in the Cash Collateral Agreement regarding the Letters of Credit, including that the Letters of Credit, as of the October 24, 2011 date of the Cash Collateral Agreement, 'are still outstanding and have not expired'; that 'the Letters of Credit may continue to remain outstanding until they are replaced' by the buyers; and that 'as consideration of [Issuer's] agreement to continue the Letters of Credit until they are replaced and as a condition of the Bank's promise to transfer and sell the Loan, the Bank required that the Buyer execute this Agreement in favor of the Bank'". Relying on these recitals, Principals did not replace the LCs and the municipality would not permit construction to proceed. Issuer moved to dismiss the cross claims. Principals opposed the motion but also moved to amend the cross claim. The New York Supreme Court, Suffolk, County, Whelan, J., granted Issuer's motion and denied Principals' motion to amend.

The Judge ruled that claims in contracts and tort against Issuer were barred by the general release contained in the refinancing agreement and that the proposed amendment to the cross claim failed to state a cause of action as a matter of law. The Judge indicated that it is necessary to show a fiduciary duty or confidential relationship in order to prove constructive fraud or negligent misrepresentation. The Judge observed that in this case "the expiration date[s] of the Letters of Credit were stated on the face thereof and the moving defendants were well aware of the need to replace those Letters of Credit with some other form of security with the Town and its interested agencies". Principals "had the means to ascertain the truth regarding the continued existence or viability of the Letters of Credit by simply reviewing the expiration dates set forth on the face thereof and other pages".



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.