Article

Note: The Borkowskis (Sureties) entered into a Guarantee Agreement with First American Bank (Lender) to assure repayment of a loan of about USD 22 million made to Renaissant 1000 South Michigan LLC (Borrower). Borrower had also obtained a standby LC (USD 4 million) in favor of Lender. When the loan went into default, Lender drew on the standby. It also sued Sureties. The trial court did not apply the LC proceeds to reduce the Sureties’ liability. On appeal, the Appellate Court of Illinois, First District, Sixth Division, Hoffmann, Presiding Judge, ruled, that there was “no error in the circuit court’s conclusion that the proceeds of the letter of credit and the Bank’s credit bid were properly applied”.

The appellate opinion noted that the standby was applied for by the Borrower, and not by the Sureties. Therefore, the proceeds under the LC had to be credited directly towards the debt from the underlying loan agreement, and not the Guarantee Agreement. The liability of the Sureties, accordingly, could not be reduced by way of the drawing under the LC.

[KCM]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.