Article

Factual Summary: In 1988, the beneficiary municipality approved the applicant's planned subdivision development conditioned upon the tender of satisfactory construction and maintenance bonds. The applicant procured a standby for $5,590,000 to cover the construction of the improvements. After several extensions, its final expiry date was set for 31 December 1995. In 1991, the applicant claimed that all improvements had been constructed and requested that the beneficiary agree to reduce the amount of the standby to $250,000 and to treat it as a maintenance bond. The beneficiary agreed to do so.

In 1993, the applicant brought suit to disconnect its property from the corporation limits of the beneficiary municipality. During the litigation the beneficiary proposed a settlement whereby it would purchase the land from the applicant and paid the applicant a $250,000 non-refundable earnest money deposit. The settlement negotiations, however, broke off, and the applicant retained the $250,000 deposit.

In November 1995, the municipality's clerk requested that the applicant renew the standby set to expire on 31 December, but the applicant refused.

On 6 December, the applicant won its suit; and the judge ordered the property to be disconnected from the municipality. On 14 December, the beneficiary municipality enacted an ordinance to allow for drawings under letters of credit that were set to expire and had not been renewed pursuant to a request. After enacting the ordinance, the municipality drew the full amount of the credit ($250,000).

The applicant then filed suit against the municipality, the municipality's clerk and all the members of the municipality's board of trustees in their individual and official capacities. The applicant alleged that the enactment of the ordinance and the drawing under the credit constituted violations of its constitutional rights of procedural due process, substantive due process, equal protection and impairment of contract. The complaint also alleged claims based on fraud, conversion, money had and received, breach of warranty and defamation (all relating to the drawing).

The defendants/beneficiary moved to dismiss all counts for failure to state a claim upon which relief could be granted. The court dismissed all the actions against officials in their individual capacity, dismissed several other counts, and ordered the applicant to amend its pleading in a manner consistent with the court's decision.


Legal Analysis:

1. Procedural Due Process: The applicant had argued that it had a property interest in the letter of credit which was violated when the municipality drew on the credit. The court rejected this argument and dismissed the claim, noting that resolution of the applicant's claims turned on the underlying contract not the letter of credit. As an independent obligation of the issuer to the beneficiary, the applicant could not have a property interest in either the letter of credit or the funds covered by the letter of credit.

The court further found that even if the applicant had an interest in the underlying contract with the municipality, it was adequately protected by the process of litigation, and, therefore, no procedural due process violation had taken place.

2. Substantive Due Process: Under substantive due process the court looks to whether the beneficiary municipality's conduct was "arbitrary and irrational", and whether state law remedies are inadequate or an independent constitutional violation exists. The applicant argued that the beneficiary's acts were arbitrary and irrational because (1.) the applicant had complied with the underlying contract, (2.) under like circumstances the beneficiary had always returned letters of credit to other developers, (3.) the beneficiary was bitter over losing the disconnection litigation and was simply trying to recover the deposit it lost under the failed settlement, and (4.) when the beneficiary drew on the standby, the property was no longer located within the municipality.

The court denied the motion to dismiss this count because, while not "highly detailed", the applicant had properly pled the requisite facts.

3. Equal Protection:The court noted that the applicant had also demonstrated another independent constitutional violation, (equal protection), under the same facts. For an equal protection violation, the court must find that the applicant was subject to an "orchestrated campaign of official harassment directed at [it] out of sheer malice." The court ruled that the applicant had properly plead, in this case, allegations that the beneficiary enacted the ordinance in retaliation for the applicant's success in the detachment litigation. Additionally, the applicant presented evidence that, under like situations, the beneficiary had refunded or returned letters of credit to developers who completed the required improvements. Accordingly the court refused to dismiss this count.

4. Fraud: The applicant alleged that the drawing statement under the standby (that stated the applicant had failed to comply with the terms of the Subdivision Ordinance) was fraudulent. The beneficiary argued that the statement was a "legal opinion", and not a statement of fact, which could not amount to a fraudulent representation. Denying the motion to discuss, the court rejected the beneficiary's argument, noting that the issuer had "interpreted the certificate as a statement of fact." Since the beneficiary had not qualified the statement in the drawing certificate, it was actionable in a claim for fraud.

5. Conversion: The applicant alleged that the beneficiary had improperly converted the funds drawn under the standby. The court rejected this argument and dismissed, noting that the applicant misunderstood "the nature of a letter of credit transaction". Since the applicant did not have an immediate and unconditional right to the funds, it could not bring a claim for conversion.

6. Money Had and Received: To satisfy this claim, the applicant had to allege that it was compelled to pay money to the beneficiary; that the beneficiary had no right to demand the money; and that the applicant had to pay the money to avoid injury. The court dismissed, ruling that the applicant failed to satisfy even one of these requirements because (1.) the issuer, not the applicant, was compelled to pay the money, (2.) as the documents complied, the beneficiary had a right to the money, and (3.) any injury resulting from a failure to pay would fall on the issuer, not the applicant.

7. Breach of Warranty: Prior UCC - 5-111: The applicant alleged that the beneficiary municipality had breached its presentment warranty under prior UCC - 5-111 by presenting a drawing certificate containing a false statement about the applicant's performance of the underlying contract. The court noted that Illinois courts had interpreted prior - 5-111 as a warranty by the beneficiary that the documents facially complied with the terms of the letter of credit and that none of the exceptions in prior - 5-114 (2) applied. As the documents complied and prior - 5- 114 (2) contained no warranty as to the truthfulness of statements, the court rejected the applicant's argument. Accordingly, the court dismissed this claim.

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