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Note: Peoples United Bank's predecessorin- interest ("Issuer") issued three standby LCs in favor of the Local Government required for the development of two parcels of land. The LCs expired one year after their expiration date and were subject to "automatic renewal for an additional one year period except where the [Local Government] advised 45 days prior to such date that the Letters of Credit would not be renewed." The LCs expired in 2010 and the development was precluded.

Darby Group Companies, Inc. ("Mortgagee") entered into a Loan Purchase Agreement ("LPA") with Wulforst Acquisition, LLC ("Mortgagor") in September 2011 to refinance two parcels of land. Per the LPA, Mortgagee agreed, if required, to replace certain Letters of Credit generated and issued by Issuer in favor of municipal agencies in the aggregate amount of USD 681,560.00. Subsequently, Mortgagee issued a mortgage note to Mortgagor.

Individuals who had agreed to purchase the existing mortgages on the parcels in the LPA also entered into a Loan Purchase and Sale Agreement with Issuer, in which Issuer agreed to sell them mortgage loans encumbering the parcels. Issuer subsequently demanded the individuals to deposit the sum of USD 681,560.00 into an account with Issuer under the terms of a Cash Collateral Agreement to insure Issuer against payment liability of the previously issued LCs. The individuals assigned the Cash Collateral Agreement to Mortgagee, who funded the account until September 2012, after Mortgagee provided replacement LCs with the Local Government. In July 2012, Mortgagor began defaulting on its payments to Mortgagee.

In light of Mortgagor's continued default, Mortgagee commenced an action to foreclose on the mortgage and sought summary judgment. In response, Mortgagor contended that it was fraudulently induced into the agreement as a result of misrepresentations regarding the full force and effect of the standbys made by Mortgagee during negotiations and sought equitable estoppel. The New York Supreme Court, Suffolk County, Whelan, J., granted summary judgment for Mortgagee.

The court noted that Mortgagee had provided the required documents for a judgment of foreclosure as a matter of law. As such, it was Mortgagor's burden to establish a defense. Mortgagor asserted that Mortgagee misrepresented that the LCs in question were in full force or would be replaced if required by the Local Government. Furthermore, Mortgagee was allegedly told that Mortgagor had limited finances and that the LCs had to remain in place. As such, it was claimed that only after the signing of the LPA that a third party defendant purportedly learned from the Local Government that development was precluded due to the expiration of the LCs. The Judge stated that "To make out a claim for or defense premised on fraud in the inducement, the defendant must establish a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation and damages" and that "Where the facts allegedly misrepresented are not matters peculiarly within the knowledge of the presenter of such facts and the claimant has the means to discover the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, the defendant cannot claim justifiable reliance on misrepresentations of his adversary". As such, the Judge rejected Mortgagor's defense both because the expiration dates of the LCs were easily discoverable and because the LCs were not matters peculiarly within the knowledge of the Mortgagee.

[ABS/mjb]

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