Note: The borrower, 225 Associates, brought an action against the lender, Connecticut ousing

Finance Authority, for return of money advanced by it to supplement escrowed funds that had been advanced by the general contractor. The general contractor had provided the lender with an LC for US$ 169,790.00 issued by the Connecticut National Bank. The borrower argued that the lender's failure to draw on the LC portion of the escrow disentitled it to hold the portion deposited by the borrower and sued the lender for refund of that amount. The Superior Court of Connecticut for the Judicial District of Fairfield, Skolnick, J., ruled that the borrower was not entitled to return of the escrowed funds. On appeal, the Appellate Court of Connecticut, Hennessy, J.,affirmed.

The borrower argued that the failure to draw on the LC was equivalent to disbursing the funds to the contractor. Noting that the lender/beneficiary was not entitled to draw on the LC because there was no unsatisfactory performance and that the terms of the mortgage serving the loan entitled the lender to a right of set off of the borrower's funds, the appellate court rejected its argument. In addition, it concluded that "not calling the letter of credit did not in any way invalidate the right of setoff exercised by the [lender]."


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.