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Note: To ensure that reimbursements were made to consumers under the tire-protection plans, Millennium Protection Group, Inc. (Protection Company/Applicant) purchased bonds from Lexon Insurance Company and/or Bond Safeguard Insurance Company, and Acstar Insurance Company (Bonding Companies/Beneficiaries). The bond was collateralized by ten standby letters of credit issued by Wachovia Bank, N.A., which was succeeded in interest by Wells Fargo Bank, N.A. (Issuer) in favor of Bonding Companies/Beneficiaries. The letters of credit were secured by Protection Company/Applicant’s certificates of deposit.

Shortly afterwards, Protection Company/Applicant filed for bankruptcy and Bonding Companies/Beneficiaries drew on seven of the letters of credit and Issuer honored all seven presentations. To reimburse itself, Issuer liquidated the certificates of deposits and one of Applicant’s deposit accounts in the total amount of USD 190,261.22 under the security agreement with Protection Company/Applicant.

Upset by Issuer’s actions, Wilbur Ray Harrison (President of Protection Company) sued Issuer in Texas state court for breach of contract, fraud by omission, and conversion. Issuer subsequently removed the case to federal district court. There, President of Protection Company moved to compel the production of requested documents, the deposition of a non-managing employee of Issuer’s Successor, and for a mediation deadline to be set. In April, the United States District Court Northern District of Texas, Horan, J., denied Applicant’s motion to compel. The Judge noted that, as a general proposition, motions to compel must have the specific requests that movants seek to compel attached, and non-managing employees of opposing parties must be subpoenaed for depositions.

Issuer then moved for leave to file an amended answer and second motion for summary judgement. In July, the Judge granted Issuer’s motion for leave to file an amended answer after the deadline under application rules, and granted Issuer’s motion for leave to file a second motion for summary judgement.

The Judge noted that, under Fed. R. Civ. P. Rule 16(b)(4), Issuer satisfied the good cause requirement to file a second motion for summary judgement because it provided a compelling explanation for why it failed to file until after the deadline, the amendment sought was important, and there was no evidence that the President of the Protection Company would be prejudiced as a result.

Text of Reimbursement Agreement: The opinion stated that the reimbursement agreement “authorized [Issuer] to ‘honor any presentation or drawing under the [letters of credit] that appears on its face substantially to comply with the terms and conditions of the [letters of credit].’”

Text of Standby: The opinion stated that the standbys provided that “each letter of credit required the beneficiary to present its claim to [Issuer] with a written certification stating that the beneficiary was entitled to the requested draw[.]”

[CTR/CEF]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.