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Note: As owner of Dupont Street Developers LLC (Buyer), Joseph Brunner (Alleged Fraudster), contracted with 49 Dupont Realty Corp. (Seller) to purchase land located in Brooklyn, New York for USD 20,000,000. Subsequently. Alleged Fraudster “effectuated a transfer of the contract rights” from Buyer to another entity owned by Alleged Fraudster, Anmuth Holdings, LLC (Anmuth). As part of a proposed resale, Chaim Miller, an individual, formed 49 Dupont Lofts LLC (collectively, Plaintiffs) to purchase the property from Anmuth. Plaintiffs intended to “flip” the property and sell it to a group of Chinese-based buyers but were told by Alleged Fraudster that doing so would be “illegal”. Alleged Fraudster and Plaintiffs restructured the agreement with Alleged Fraudster promising Plaintiffs to assign the contract of sale from Anmuth to the proposed Chinese buyers and pay Plaintiffs the difference in price “less [Alleged Fraudster]’s actual costs in obtaining a letter of credit” if Plaintiffs would lend Alleged Fraudster funds for the LC.

The land had previously been designated by the state as a hazardous waste site due to petroleum discharge, and pursuant to a regulatory order, Seller was “obligated to implement an environmental remediation program and obtain a certification of completion” from the appropriate New York regulatory body. Under the contract between Seller and Buyer, Alleged Fraudster assumed the obligations under the remediation order and was required to provide a letter of credit in favor of Seller to secure Alleged Fraudster’s performance thereunder. Accordingly, Alleged Fraudster, using Plaintiffs’ fund, obtained three letters of credit issued by Investors Bank (Issuer) cumulatively for USD 4,700,000 in favor of Seller.

Claiming that Alleged Fraudster had breached the underlying agreement by maintaining the collateral for the LCs beyond the agreed one-year term, Plaintiffs sued Alleged Fraudster and Buyer for a preliminary injunction to prevent the extension of the LCs for another year. Plaintiffs’ injunction applications were denied on two occasions. When Issuer no longer intended to extend the LCs, Plaintiffs again sued Alleged Fraudster and Buyer, joining Issuer, for an order “extending, suspending and/or staying the expiration date of” the LCs. After a temporary restraining order was granted in favor of Plaintiffs, the order was vacated. Plaintiffs then moved for reconsideration and an order like that previously granted or, alternatively, one “restraining any party from drawing down” the LCs or restraining Issuer from honoring any demand or releasing the collateral whatsoever. Following oral arguments, the Supreme Court of New York, Ash, J., denied any stay or injunction regarding the LCs.

The Judge noted the independence principle of letters of credit and stated that “Plaintiffs are not entitled to the various injunctive relief that they seek…[b]ecause Plaintiffs do not have a relationship, contractual or otherwise, with [Issuer] or [Seller], Plaintiffs do not have a legally cognizable claim against them.” Looking to the relationship between Plaintiffs and Alleged Fraudster, the Judge noted that Plaintiffs allegations only demonstrate a “contingent entitlement” to the collateral supporting the LCs. Moreover, the claimed harm Plaintiffs sought to prevent was entirely monetary and thus incapable of constituting “irreparable harm” to justify an injunction.

[MJK]

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