Article

Topic: Third Party Actions

Note: In connection with the development of a spa and resort, the Reserves Development Corporation and its sole shareholder, Abraham Korotki, (Applicants) obtained two standby letters of credit from Wilmington Trust Corporation (Issuer) to meet the bonding requirements of Sussex County (County/Beneficiary) for the sewer system. The LCs were issued on 7 June 2005 with annual extensions through 7 June 2010.

In March 2007, Bella Via (Property Owner), complained to the County/Beneficiary that the work was at a standstill. Although Property Owner exaggerated the extent of the standstill, County investigated and was not satisfied that work was being completed. On 21 October 2008, County/ Beneficiary informed Issuer that Applicants had failed timely to complete the infrastructure and that the County Council had decided that a drawing should be made on the LCs. Issuer informed Applicants. Applicants asked County/Beneficary not to draw on the LCs because Applicants had retained a contractor to complete the outstanding work. County/Beneficiary asked Applicants to submit signed contracts evidencing its intent to complete the projects. When Applicants failed to submit contracts, County/Beneficary demanded payment from Issuer. Applicants then sued County, and obtained a temporary restraining order enjoining Issuer from releasing the LC proceeds.

On 30 January 2009, Applicants and County/ Beneficiary filed a Stipulation of Dismissal and Compromise requiring County/Beneficiary to refrain from drawing on the LCs until the last 30 days before their 7 June 2010 expiration, unless Applicants provided satisfactory replacement letters. The work was not completed by the expiration date of the LCs. Applicants sought to extend the letters of credit, but Issuer refused. On the day the LCs expired, Applicants and County/Beneficiary stipulated that the funds would be transferred into a county escrow account.

Applicants sued Property Owners for breach of contract, claiming in an amended complaint dated 3 July 2007 that Property Owner fraudulently induced County to call LCs. The Sussex County Superior Court, Silverman, J., agreed, entered judgment from the bench against Property Owner and awarded damages to Applicants on 3 January 2008.

On 5 November 2008, Applicants again filed suit against Property Owner with the Court of Chancery of Delaware, demanding relief from an alleged fraudulent transfer by Property Owner to avoid collection of the prior judgment. After a five-day trial in 23-27 January 2012 and receipt of post-trial briefings, which revisited the issue of fraudulent inducement, the court, Silverman, J., ruled that Property Owner's principals did not fraudulently induce County into calling the LCs.

The Judge noted that despite Property Owners' falsehoods in his exaggeration of the lack of progress, County/Beneficiary did not act in reliance of Property Owner's representation. County/ Beneficiary clearly had an independent basis through its own investigations to demand payment on the letters of credit. Therefore, there was no fraudulent inducement.

Comment: Judge Silverman states that County/ Beneficiary's failure to notify Applicants about the decision to call the letters of credit is "bothersome", but was not compensable fraud. "Bothersome" in this context refers only to the Judge's view of proper behavior. There is no legal requirement for the beneficiary to notify the applicant before making a demand on a letter of credit.

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