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Refusing To Step Aside And Seizing A Letter Of Credit A Landlord, Whose Lease With A Bank Was Disaffirmed By FDIC In A Bank Takeover, Has To Return Asset And Is Now On Hook For Attorney Fees.

September 30, 2013 by Leave a Comment

Letter Of Credit In an imminent bank takeover, the Federal Deposit Insurance Corporation [FDIC] sold the assets of a failed bank to a takeover bank. Among the assets was a $500,000 letter of credit which had been demanded by the failed bank’s landlord to cover any future rents. As part of the takeover, the FDIC disaffirmed the failed bank’s lease. Despite the sale of the failed bank’s assets and the disaffirmance of its lease, the landlord drew down on the $500,000 letter of credit, and the takeover bank’s account was debited $500,000. The takeover bank brought an action against the landlord, and the trial court entered judgment in favor of the landlord, awarding $395,000 in attorney fees and costs to the landlord. The appellate court reversed. In its opinion, the court pointed out that the landlord’s “real gripe” is the FDIC’s disaffirmance of the lease and its right to collect future rents, and stated: “Simply put, once [the failed bank’s] lease was disaffirmed, leaving no unpaid rent, [the landlord] had no claim for breach of lease and no claim for damages. It therefore was not entitled to claim the proceeds of the letter of credit, which served as security in case of breach of the lease. The $500,000 securing the letter of credit belonged to [the takeover bank] and [the landlord], in essence, wrongfully acquired it.” The appellate court also stated “that if a landlord who was not permitted to seize a pledged asset in the hands of the FDIC as receiver were permitted to seize that asset as soon as the FDIC transferred it to a healthy bank, the FDIC’s options would be limited and it would be hamstrung in its efforts to maximize the return of the failed bank’s assets. This would not be consistent with FIRREA [Financial Institutions Reform, Recovery and Enforcement Act of 1989; 12 U.S.C. § 1821(d)].” With regard to the takeover bank’s argument it is entitled to attorney fees against the landlord, the appellate court applied general assignment principles in the context of the letter of credit, and concluded the landlord breached its warranty to the letter of credit applicant under Commercial Code section 5110, subsection (a)(2). The opinion states the landlord “violated the terms of the lease . . . . when it drew upon the letter of credit based on a claim for future rents that was not permitted under the law.” California Bank & Trust v. Piedmont Operating Partnership  (Cal. App. Fourth, Div. 3; August 16, 2013) 218 Cal.App.4th 1322.

Filed Under: Appellate Law News, Attorney's Fees News, Banking Law News, Landlord Tenant Law News, Legal News, Procedural Law News, Real Estate Law News, Uniform Commercial Code Law News

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