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Note: To assure completion of improvements in a residential housing development, Harmony Holdings, LLC (Developer/Applicant) obtained a USD 1,301,705.63 standby letter of credit from Wachovia Bank (Issuing Bank) in favor of Georgetown County (Local Government Unit/Beneficiary). The local governmental regulations (the Regulations) permitted use of a standby as a form of “financial guarantee” to permit the sale of land parcels in lieu of completing the improvements, provided that it was 12.5% of an approved cost estimate of the improvements. In accordance with its procedures, Local Government Unit/Beneficiary accepted the standby and allowed Developer/Applicant to proceed with the sale of land. Two lots were sold to David M. Repko (Land Owner).

The applicable regulations permitted reduction of the outstanding amount of the standby.

“A developer may reduce a financial guarantee during the initial coverage period. A request to reduce the financial guarantee shall be submitted to the Planning Department and include a revised construction cost estimate. The Planning Department will forward the revised cost estimate to [the] County Department of Public Works for approval. Reductions of financial guarantees will not be allowed within [six] months of any previous reduction request and shall be no less than 125% of the revised construction cost estimate.”

On four occasions, Developer/Applicant requested reductions in the value of the LC from Local Government Unit/Beneficiary. Ultimately, the original value of the LC was reduced by 88%.

After the LC expired, Developer/Applicant informed Local Government Unit/Beneficiary of its fiscal inability to complete further infrastructure work, and subsequently declared bankruptcy. Local Government Unit/Beneficiary later discontinued the community project.

Estate Owner sued Local Government Unit/Beneficiary for negligence arising from its handling of the financial guarantees, seeking actual and future damages. Local Government Unit/Beneficiary moved for a directed verdict, arguing that the Regulations did not create a duty to Estate Owner and that Local Government Unit/Beneficiary was otherwise immune from liability pursuant to the Regulations' sovereign immunity provisions. The trial court granted Local Government Unit/Beneficiary’s motion for directed verdict, finding that no duty existed. On appeal, the Court of Appeals of South Carolina, Lockemy, J., reversed and remanded.

Presented with issues of statutory interpretation, the appellate court ruled that the Regulations did not preclude Local Government Unit/Beneficiary from owing a duty to Estate Owner regarding the general completion of work. Local Government Unit/Beneficiary was not immune from liability because the Regulations constituted a county ordinance and were preempted by the South Carolina General Assembly’s enactment of the Tort Claims Act. Estate Owner was further entitled to a private right of action because Estate Owner fell within the state’s exception regarding special duties owed to private citizens pursuant to a six-part test. Because Estate Owner’s claim arose from these special duties, the court concluded that the trial court erred in granting Local Government Unit/Beneficiary’s directed verdict. Estate Owner was entitled to seek damages for Loccal Government Unit/Beneficiary’s negligent handling of the LC.

Regulations for LCs: Under the Regulations, the County may accept a letter of credit as a financial guarantee. Article V, Section 3-3 states an approved letter of credit must (1) be equal to 125% of the approved cost estimate; (2) be issued for an initial coverage period not less than twelve months from the date the final plat is filed for recording; (3) be irrevocable, unconditional, and subject to presentation for drawing within South Carolina; (4) be payable to the County; (5) be for at least $10,000 in construction; and (6) substantially conform to a required format.

[MJK]

The Georgetown County, South Carolina, USA, standby form from its website follows:

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