Note: To finance the development of a 384-unit, multifamily, moderate income apartment complex, Blue Ridge Development, Ltd. ("Developer") received a $17,800,000 loan from Professional Mortgage Co. ("Lender") that was guaranteed by the Department of Housing and Urban Development ("Guarantor"), a U.S. government agency. Pursuant to Guarantor's regulations, the general contractor was required to execute a "Completion Assurance Agreement" ("CAA") with the Developer and Lender, by which terms the contractor obtained a standby LC issued by Professional Bancorp Mortgage Co. in favor of the Developer and Lender for $2,914,316 to indemnify against any expense, loss or damage sustained as a result of any contractor default. The CAA dictated that the Guarantor, while not a party to the agreement or the LC, had to pre-approve any draws on the LC. Additionally, the CAA allowed the Lender to assign its and Developer's rights to the LC funds to Guarantor in the event of a contractor default. When the contractor defaulted, Developer made a demand on Guarantor to authorize a $650,000 draw on the LC for the repair of construction defects and reimbursement for overpayments to the contractor. Guarantor responded that it would not authorize a draw on the LC at that time, but would consider the request and make a decision at a later date. When Developer missed a mortgage payment and went into default, Lender demanded that Guarantor pay the amount of the loan and accept an assignment of the mortgage, including rights to the LC. Guarantor, "already the owner of the mortgage of the property via assignment, purchased . . . the property as 'lien foreclosure judgment-holder' at [a] foreclosure sale." A motion by Developer to vacate the sale was denied. Developer sued Guarantor for breach of contract and unjust enrichment for failing to authorize draws on the LC. The U.S. Court of Federal Claims, Gibson, J., granted a motion to dismiss Developer's contract claims, and transferred the unjust enrichment claim to the U.S. District Court for the Southern District of Florida, due to lack of jurisdiction. The parties disputed whether Guarantor was in privity of contract with Developer regarding the CAA agreement and its requisite LC. The Claims Court noted that Guarantor was not a signatory to the CAA agreement, and had only referenced that agreement in its contracts with Developer. As such, there was no express contract regarding the LC over which the court had jurisdiction. With regard to an implied-in-fact contractual relationship, the Claims Court ruled that Guarantor "was simply acting as overseer . . . to [Developer's] construction contract, but its involvement in the CAA funds did not rise to the level of an implied contractual relationship." Developer further argued that a contractual relationship with respect to the LC funds was established when Lender assigned the mortgage to Guarantor. The Claims Court disagreed, noting that the language of the CAA expressly indicated that "upon assignment of the CAA's letter of credit funds by the Lender, all rights to said fund, including [Developer's], would be transferred to [Guarantor]." Since there was an assignment of Developer's rights, it had no legal recourse to any of the LC funds..59 2001 LC CASE SUMMARIES

Comment: While HUD's refusal to authorize a draw on the LC may seem harsh and inequitable, as the court noted in its opinion, it appears that the Developer failed to make not just one mortgage payment, but any mortgage payments. HUD managed to escape a potentially murky business relationship on technical merits.


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.