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Note: To assure completion of the Quintero Golf and Country Club in Arizona by Gary McClung and his related companies (Developers/Applicants), Hillcrest Bank (Issuer) lent more than USD 50 million to Developers/Applicants and also issued standby LCs in favor of Quintero Community Association, Inc. and others (Investors/Beneficiaries) who also invested in the property development undertaken. When the development failed, Developers/Applicants requested that Issuer cancel the LCs, which it did.

Investors/Beneficiaries sued Issuer and its Board of Directors (Board), alleging that it had conspired to conceal the development's financial condition and thereby improperly induced Investors/Beneficiaries to invest in the venture, asserting sixteen counts including breach of contract, breach of fiduciary duty, fraud, negligence, conspiracy, aiding and abetting, conversion, and intentional interference with business relationships. Issuer and Board moved to dismiss for failure to state a claim. The United States District Court for the Western District of Missouri, Western Division, Kays, J., granted the motion with respect to fourteen of the counts, and denied the motion with respect to the remaining two, including an LC claim for breach of contract.

Investors/Beneficiaries alleged that the cancellation of the LCs by Issuer amounted to a breach of fiduciary duty, tortious interference with Investors/Beneficiaries' contractual relationship with Developers, breach of contract, and negligence. Issuer also averred that Board aided and abetted Issuer in executing the alleged misconduct.

In dismissing all but one of the LC-related claims, the Judge ruled that Issuer's status as issuer did not impose on it a fiduciary duty and that Investors/ Beneficiaries' "confusing and garbled" complaint made mere conclusory allegations that did not amount to cognizable claims. The Judge did conclude, however, that alleging the existence of a contractual LC relationship, a failure to perform issuer's duties, and resulting damages is enough to maintain a breach of contract claim and denied Issuer and Board's motion to dismiss with regard to this claim.

Comment: Since Hillcrest Bank is insolvent, due in part, no doubt, to its improvident investments, the U.S. Federal Deposit Insurance Corporation (FDIC) is acting in the capacity of receiver. The FDIC has consistently insisted that it is able to cancel outstanding LCs issued by failed banks with impunity.

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