Letter of credit, guarantee dispute settles for $3.45 million

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A $3.45 million settlement was reached this month in an action filed in the U.S. District Court for the Eastern District of Wisconsin seeking declaratory relief and monetary damages regarding payment obligations under a letter of credit and guarantee.

Judge Rudolph Randa entered judgment Dec. 5, based on the parties’ settlement agreement, in favor of the defendant/counter-plaintiff JP Morgan Chase Bank N.A., and against the plaintiffs/counter-defendants Frank Andrews Jr. and David Stroud.

The lawsuit was originally filed in July 2009. According to the first amended complaint filed Feb. 4, 2004, Andrews, of Solano County, Calif., and Stroud, of Sacramento County, Calif., were investors in Milwaukee Mile Holdings LLC. Milwaukee Mile and the Wisconsin State Fair Park Board entered into a grandstand license agreement on Dec. 19, 2005, pursuant to which Milwaukee Mile and the board agreed to sponsor and promote automobile races.

To secure Milwaukee Mile’s payment obligations to the board under the 2005 license agreement, Milwaukee Mile obtained a line of credit from JP Morgan Chase. Milwaukee Mile subsequently executed an application and agreement for irrevocable standby letter of credit, also dated Dec. 19, 2005, identifying Milwaukee Mile as the applicant and the board as the beneficiary. The application and amendment specified that the purpose of the letter of credit was to secure Milwaukee Mile’s payment obligations to the board “under that certain license agreement, dated as of Dec. 19, 2005, by and between [Milwaukee Mile] and the board.”

Andrews and Stroud, as investors in Milwaukee Mile, reportedly entered into substantially identical continuing guarantee agreements with JP Morgan Chase pursuant to which Andrews and Stroud guaranteed payment of certain liabilities of Milwaukee Mile to JP Morgan Chase.

JP Morgan Chase then reportedly issued Letter of Credit No. CTCS-223226 on Dec. 29, 2005, identifying the board as beneficiary and Milwaukee Mile as applicant. JP Morgan Chase apparently issued Amendment No. 1 to the letter of credit on Feb. 3, 2006, again identifying the board as beneficiary and Milwaukee Mile as applicant, but Andrews and Stroud argued in the lawsuit that they did not consent to the terms of the amendment to the letter of credit.

Then, JP Morgan Chase reportedly sent a letter dated Dec. 17, 2008, notifying the board that Chase was electing not to extend the amendment to the letter of credit and that it would therefore expire Aug. 31, 2009. By letter dated July 9, 2009, the board reportedly made demand for payment under the amendment to the letter of credit. The board’s presentment letter, according to Andrews and Stroud, referenced the amendment and Chase’s Dec. 17, 2008 notice of nonextension. It also stated that Milwaukee Mile failed to provide alternate security acceptable to the board. The presentment apparently was based on certain language that had been added by the amendment to the letter of credit which was not in the original letter of credit.

Based on the presentment, Chase reportedly made payment to the board in the amount of $2,613,339. Chase contended in the lawsuit that Andrews and Stoud must reimburse it for the payment it made to the board under the amendment to the letter of credit. However, Andrews and Stroud argued they did not consent to the terms of the amendment and that the board based the presentment on unauthorized changes contained in the amendment, meaning the guarantors were not liable to Chase for the payment.

“The guarantees are unenforceable,” Jonathan Polland, attorney for Andrews and Stroud, said, “because . . . bank representatives failed to disclose facts that materially increased Mr. Andrews’ and Mr. Stroud’s risk beyond what the bank had reason to believe Mr. Andrews and Mr. Stroud intended to assume. . . . the Bank materially altered the obligation being guaranteed without Mr. Andrews’ and Mr. Stroud’s consent . . . and the Bank breached the implied covenant of good faith and fair dealing, which excuses Mr. Andrews’ and Mr. Stroud’s performance under the guarantees.”

The parties contended that a judicial declaration would be necessary and appropriate. The plaintiffs also sought to recover their costs, disbursements, expenses and attorney fees.

Chase brought a third-party complaint against Milwaukee Mile Holdings LLC and Milwaukee Mile Marketing LLC, alleging breach of contract on the line of credit. The third-party defendants asserted defenses of estoppel, waiver, unclean hands, laches, failure to mitigate, breach of duty and failure of consideration.

The parties had demanded a jury trial but eventually reached a settlement.