Article

Factual Summary:

As part of the loan agreement to finance a residential construction project, issuer agreed to provide any letters of credit required by the local government. The applicant suffered many setbacks in the project, and the issuer informed the applicant on several occasions that it was in default based on delays, inspections, or failure to meet the loan to value ratio. The applicant then asked the issuer to issue a standby to post as a bond for grading work. The local government, however, rejected the standby because the issuer had too many outstanding letters of credit with it. The issuer, however, promptly issued an LC to a bonding company to collateralize the bonds issued for the project. The local government accepted these bonds after a 28 day delay.

Tired of difficulties in receiving loan disbursements, the applicant refinanced the entire loan with another institution and terminated its relationship with the issuer. The applicant then sued the issuer for breach of the loan contract and breach of the issuer's duty of good faith and fair dealing. The applicant alleged that the issuer breached its duties, among many other allegations, by representing that it could issue letters of credit satisfactory to the local government. The issuer moved for summary judgment which was granted.

Legal Analysis:

1. Lender Liability: Duty of Good Faith & Fair Dealing. The court recognized under Maryland law, the duty of good faith and fair dealing is extremely narrow in scope. The applicant would have to show that the issuer's actions prevented the applicant from being able to perform its obligations under the contract. The duty of good faith could not create additional obligation beyond the contract itself. The court noted that the applicant's accusation that the issuer had falsely represented that it was approved to issue letters of credit satisfactory to the local government sounded more like a fraud claim (which the applicant had originally brought, but dropped from its complaint). However, the court went on to rule that the issuer had not breached any duty of good faith because at the time the statements were made, they were believed to be true. The issuer had in the past decade issued numerous letters of credit acceptable to the particular unit of local government involved and was surprised that this one was rejected. Additionally, when the beneficiary rejected the credit, the issuer acted with dispatch to secure a suitable alternative. In no instance, the court found, had the issuer acted improperly. The court's assessment: "The present case appears to be little more than a prototype 'lender malpractice' suit in which a frustrated real estate developer sues its bank 'blaming the lender for its business failure...."' Howard Oaks, Inc., 810 F. Supp. 674, 676.

(*1) Although a 1996 decision, this case was reported too late in the year to meet the printing deadline.

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