The federal agency that insures deposits in US banks has refused requests from a municipal authority to pay out the value of a standby letter of credit (L/C) put up by a property developer in Colorado.

One of the US' many failed banks issued the L/C, but the Federal Deposit Insurance Corporation (FIDC) says that it is not obliged to pay out on claims on L/Cs issued by such banks.

Infrastructure work

The FIDC reported 92 bank failures in 2011, one of which was FirsTier Bank.

It had issued standby L/Cs for two developers who agreed to build streets and pavements in the Longmont municipality.

Bank failure

A condition of the agreement was that the developers put up standby L/Cs that could be cashed if the works were not completed.

The developers have not completed the work as agreed, but the municipality was unable to cash L/Cs issued by FirsTier Bank because it had failed.

Request rejected

The municipality then requested funds equivalent to the value of one of the L/Cs from the FIDC, but it said that the request was not a valid claim and refused to pay.

Longmont municipality reckons that it may have to find up to US$450,000 to pay for work that should have been funded by standby L/Cs issued by FirstTier bank.

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