Topics: Contract to issue LC

Note: Bluebonnet Hotel Ventures, LLC (Hotel Developer) and Wachovia Bank, N.A. (Bank) executed a term sheet for a standby LC which "proposed the terms and requirements for a [USD] 42 million letter of credit". The LC would enable Hotel Developer to issue tax-exempt Gulf Opportunity Zone bonds (so-called "GO Zone" bonds) to finance the hotel project. After executing the term sheet, Hotel Developer and Bank also entered into a swap contract for Hotel Developer to hedge the interest rate it would pay on the GO Zone bonds that it expected to issue.

The term sheet stated that Bank would issue the standby in the amount of USD 42 million on certain conditions, the most relevant being Bank's review and approval of the construction contract and the GO Zone bond documents. The term sheet contained boilerplate language protecting Bank, stating that the term sheet was "intended solely as a summary of certain terms of a loan [Hotel Devloper has] asked us to consider . . . [and] does not confer any rights or impose any obligations on [Hotel Developer] or us." Bank never issued the standby because Hotel Developer experienced various problems with the proposed general contractors and with design changes to the project. During this time period, Hotel Developer delayed the issuance of the GO Zone bonds (and the start of the swap contract) for nearly a year, by which time prevailing interest rates dropped significantly. As Bank never issued the standby, Hotel Developer obtained a standby from another bank and issued the bonds.

Hotel Developer sued Bank to rescind the swap agreement on a theory of rescission and a theory of detrimental reliance and moved for summary judgment. The U.S. District Court for the Middle District of Louisiana, Brady, J., granted Bank's motion for summary judgment.

Hotel Developer argued that its expectations were that the standby would be issued and that the standby and the swap contract were part of one overarching transaction between the parties. The Judge disagreed, explaining that the term sheet unequivocally stated that Bank had no obligation to issue the standby and therefore it was unreasonable for Hotel Developer to rely on the term sheet. The Judge agreed with Bank's argument that when the parties executed the swap agreement, it was uncertain whether the standby would be issued. The Judge also looked to the provisions of the swap agreement and the parties' course of dealing in communicating about the extensions to the start of the swap, and reasoned that the parties treated the swap agreement completely separate from, and not contingent on, issuance of the standby. Additionally, the Judge referenced the legal rule that "[i]t is not reasonable for a party to rely upon representations made outside the scope of a fully-integrated, written 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.