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Lincoln National Life Insurance Co v. Tcf National Bank

June 20, 2012

LINCOLN NATIONAL LIFE INSURANCE CO., PLAINTIFF,
v.
TCF NATIONAL BANK, DEFENDANT.
NATIONAL BANK, COUNTER/THIRD- PARTY PLAINTIFF,
v.
LINCOLN NATIONAL LIFE INSURANCE CO., THE KLARCHEK FAMILY TRUST, AND SUNSET VILLAGE LIMITED PARTNERSHIP, COUNTER-DEFENDANTS AND THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

This case arises out of a construction loan that Lincoln National Life Insurance Company made to Sunset Village Limited Partnership for construction at Sunset Village's mobile home community. The proceeds of the Loan were put on deposit with TCF National Bank, Sunset Village's banker. TCF administered the draws against the proceeds of the Loan that Sunset Village made as construction at the community progressed.

The proceeds of the Loan were secured by an Irrevocable Letter of Credit issued by TCF on behalf of Sunset Village and in favor of Lincoln National. The parties agreed to reduce, from time to time, the face amount of the Letter of Credit as the proceeds of the Loan were drawn down in order to reflect the balance of the proceeds of the Loan remaining on deposit at TCF. The face value of the Letter of Credit was reduced at least five times. This case revolves around the sixth and final attempt to reduce the Letter of Credit by Sunset Village before Lincoln National presented the Letter to TCF upon Sunset Village's default. The question in this case is whether the sixth reduction to the Letter of Credit was effectuated and what the remaining amount of the Letter of Credit was at the time it was presented to TCF by Lincoln National. TCF argues that Lincoln National is estopped from denying the sixth reduction in the Letter of Credit to $1,907,861.15 as a result of advances made to Sunset Village. Further, TCF argues that Lincoln National waived any right it may have had to mandate strict compliance with the terms of the agreement regulating the manner of reducing the Letter of Credit. The $1,907,861.15 sum represents the amount that TCF paid to Lincoln National when it presented the Letter of Credit to TCF for payment. This was the correct amount due on the Letter of Credit if the sixth reduction was made. Lincoln National, while not denying that the advances were made, argues that the sixth reduction to the Letter of Credit was invalid, and that the face amount of the Letter of Credit at the time it presented it to TCF was $3,189,693.69. If Lincoln National is correct then $1,281,832.54 remains outstanding and due from TCF.

This case is now before the Court on Cross-Motions for Summary Judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The Plaintiff, Lincoln National, brought suit in this Court against TCF, the Defendant, for the damages it incurred when TCF allegedly wrongfully dishonored the Letter of Credit. Upon being sued, TCF asserted affirmative defenses and counter-claims against Lincoln National, as well as against The Klarchek Family Trust and Sunset Village as Third-Party Defendants. Lincoln National previously moved for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). (Doc. 13). On March 7, 2011, this Court denied Lincoln National's motion on the grounds that the factual record was not adequately developed so as to entitle Lincoln National to judgment in its favor on the pleadings alone and enabled the parties to engage in discovery. (Doc. 31). Since that time, the parties have conducted extensive discovery and have established a fully developed record of facts. Both Lincoln National and TCF now move for summary judgment, asserting that each is entitled to judgment as a matter of law in their respective favors. For the reasons discussed below, TCF's Motion for Summary Judgment is denied and Lincoln National's Motion for Summary Judgment is granted.

I. The Material Undisputed Facts

The Lincoln National Life Insurance Company is a corporation organized under the laws of the State of Indiana with its principal place of business in Greensboro, North Carolina. (TCF 56.1 Resp. ¶ 1).*fn1 TCF National Bank is a national banking association with its principal office located in Wayzata, Minnesota. (Id. ¶ 2). Sunset Village Limited Partnership is a limited partnership organized under the laws of the State of Illinois. (LN 56.1 Resp. ¶ 3). Sunset Village Limited Partnership is the sole owner of Sunset Village Manufactured Home Community, located in Glenview, Illinois. (Id.).

On or around October 1, 2001, Lincoln National made a construction Loan to Sunset Village for construction at its real property. (Id. ¶ 6). Lincoln National agreed to fund the Loan, and the proceeds were deposited with TCF secured by a Letter of Credit. (LN 56.1 Resp. ¶ 10). *fn2 On or around April 20, 2006, Lincoln National, through its affiliate Delaware Investments, committed to increase its Loan to Sunset Village by $8,200,000.00. (TCF 56.1 Resp. ¶ 5).*fn3 On or around June 20, 2006, Lincoln National funded to Sunset Village an additional $8,200,000.00 as an increase to an existing $16,000,000.000 Credit Facility. (Id. ¶ 6).*fn4 As part of the increased Loan, a First Amendment to Loan Agreement was executed between Lincoln National and Sunset Village. (Id. ¶ 7). The First Amendment to Loan Agreement required, as part of the transaction, that Sunset Village deliver to Lincoln National a $7,075,000.00 Irrevocable Letter of Credit No. 06-015 issued by TCF to Lincoln National as additional security for the Loan. (Id.). Lincoln National is the beneficiary of the Letter of Credit. (Id. ¶ 20). The applicant under the Letter of Credit is Sunset Village. (Id. ¶ 22).

In the course of issuing the Letter of Credit, TCF approved a Credit Facility to Sunset Village. (Id. ¶ 9). TCF's Credit Facility required $7,100,000.00 in cash to be deposited as collateral with TCF at closing. (Id. ¶ 10). As additional security, TCF also took a second mortgage behind Lincoln National's mortgage on the subject real property interests. (Id.). The $7,100,000.00 cash deposit was to be funded out of the Lincoln National Loan to Sunset Village. (Id. ¶ 11). The TCF Credit Facility called for the case collateral received from the proceeds of the Lincoln National Loan to be placed in a deposit account at TCF. (Id. ¶ 12). Funds would then be advanced to Sunset Village from the deposit accounts at TCF as Sunset Village submitted construction draw requests. (Id.).

Paragraph 10(e) of the First Amendment to Loan Agreement provides (with party designations inserted) that:

So long as no Default or Default Condition exists, and [Sunset Village] has delivered to [Lincoln National], with copies to [TCF], contractor's sworn statements, owner's sworn statements, copies of draw requests, lien waivers, project budget and amendments thereto and an affidavit of Richard Klarcheck as required by [TCF], the Letter of Credit shall be reviewed by [Lincoln National] and appropriate reductions made every six (6) months after capital improvements are made to the property upon written notice of the amount of the reduction to [Sunset Village] and [TCF], such written notice of reduction shall not be later than thirty (30) days after [Sunset Village's] request for reduction. (Id. ¶ 8). At the time TCF issued the Letter of Credit, it knew there was a risk of loss to it that would be equal to the deposit balance at any given point in time and the outstanding balance on the Letter of Credit at that same point in time. (Id. ¶ 14). TCF believed that its risk of loss was mitigated by a covenant limiting the potential variance between the deposit balance and the Letter of Credit balance to a maximum of $1,000,000.00, and by the second mortgage that TCF secured on the real property interests. (Id. ¶ 15).

The Letter of Credit was amended in writing on several occasions. (TCF 56.1 Resp. ¶ 24). A common procedure was used for each reduction in the Letter of Credit. (Id. ¶ 56). First, Capital First Realty, Inc., by letter addressed to NorthMarq Capital (Lincoln National's servicer of the Loan), requested a reduction in the Letter of Credit on behalf of Sunset Village, and submitted documentation to support the requested reduction. (Id. ¶ 56A). Personnel at NorthMarq then reviewed the request, and when it was in proper order, forwarded the reduction request in a letter to Lincoln National for its consideration. (Id. ¶ 56B). Lincoln National would then review the reduction request and the supporting documentation, and if it agreed that a reduction was in order, Lincoln National or its affiliate, Delaware Investments, would send a letter to TCF authorizing a reduction in the Letter of Credit to a specific amount. (Id. ¶ 56C). Thereafter, TCF by letter directed to Lincoln National, as the beneficiary of the Letter of Credit, and to Sunset Village, as the applicant, stated that the Letter of Credit had been reduced to a specific amount. (Id. ¶ 56D). When the TCF reduction letter was issued, an authorized person at TCF would complete a TCF Commercial Lending Letter of Credit Input directing that the Letter of Credit be reduced to the new stated amount. (Id. ¶ 56E). Finally, personnel who actually made the input on the TCF records system completed an ACDS Maintenance Entry Form for Sunset Village indicating that the Letter of Credit had been reduced to the new stated amount. (Id. ¶ 56F). Each Letter of Credit reduction request submitted by Sunset Village to Lincoln National included contractor's sworn statements, owner's sworn statements, lien waivers, and construction draw wiring instructions to Sunset Village's TCF account. (LN Add'l 56.1 Resp. ¶ 1).

Pursuant to a written amendment issued by TCF, and in accordance with the specific procedure outlined above for reducing the Letter of Credit, on May 2, 2007, the Letter of Credit was reduced to $5,890,914.43. (TCF 56.1 Resp.¶ 25). On May 8, 2008, pursuant to a written amendment issued by TCF, and again in accordance with the procedure for reducing the Letter, the Letter of Credit was further reduced to $5,464,537,01. (Id. ¶ 26). On January 16, 2009, the Letter was again reduced to $4,873,458.49 pursuant to a written amendment by TCF and in accordance with the formal procedure for reducing the Letter.

(Id. ¶ 27). On June 24, 2009, less than six months after its prior request for a reduction in the Letter of Credit, Sunset Village requested another reduction. (LN 56.1 Resp. ¶ 30). Pursuant to a written amendment issued by TCF on August 13, 2009, and in accordance with the procedure for reducing the Letter, the Letter was reduced to $4,187,357.30. (TCF 56.1 Resp.¶ 28). The agent responsible for approving the request testified that the timing of the fourth reduction request did not concern her. (LN 56.1 Resp. ¶ 35). Less than six months later, on November 16, 2009, Sunset Village again requested a reduction in the Letter of Credit. (Id. ¶ 39). On January 18, 2010, the Letter of Credit was accordingly reduced pursuant to a written amendment issued by TCF and in accordance with the procedure for reducing the letter to $3,189,693.69. (TCF 56.1 Resp.¶ 29). Lincoln National never raised any objection to Sunset Village's fifth request for a reduction in the Letter of Credit, despite the fact that it occurred less than six months after the fourth reduction request was approved on August 12, 2009. (LN Add'l 56.1 Resp. ¶ 3). Each of these amendments were further acknowledged by TCF in a receipt it delivered to Lincoln National on August 30, 2010. (TCF 56.1 Resp. ¶ 30).

TCF made three draws for improvements to the Sunset Village property that took place between January 26, 2010 and March 8, 2010, totaling $937,333.09. (LN 56.1 Resp. ¶ 47). By a letter to NorthMarq Capital dated March 8, 2010, Sunset Village requested a sixth reduction in the Letter of Credit from $3,189,693.69 to $2,252,360.60 to reflect these construction disbursements. (TCF 56.1 Resp.¶ 31). By e-mail dated April 6, 2010, Elizabeth Goff-Plourd, on behalf of Lincoln National, denied Sunset Village's sixth request for a reduction in the Letter of Credit. (Id. ¶ 32). Goff-Plourd's stated reason for denying the reduction was the fact that, under Lincoln National's interpretation of Paragraph 10(e) of the First Amendment to Loan Agreement, Sunset Village was only entitled to obtain a reduction in the Letter of Credit once every six months, and Sunset Village was last approved for a reduction on January 18, 2010, less than six months prior to the March 2010 request. (Id.). In the same e-mail, Goff-Plourd indicated that she had reviewed all the documentation submitted in connection with the request for a reduction in the Letter of Credit and that Lincoln National agreed with Sunset Village's figures, but that the timing requirement only entitled Sunset Village to a reduction once every six months. (LN 56.1 Resp. ¶ 50). No subsequent request for a reduction in the Letter of Credit was made by Sunset Village. (TCF 56.1 Resp.¶ 33).

In April 2010, Sunset Village made a draw request against the Loan proceeds on deposit with TCF. (LN 56.1 Resp. ¶ 52). David Veurink, an Executive Vice President and Manager of the Commercial Banking Division at TCF, was responsible for overseeing the Letter of Credit and Sunset Village's Loan. (Id. ¶ 53). Veurink refused to approve Sunset Village's April 2010 draw because Lincoln National had not ...


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