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Thursday, May 15, 2014

Developer Entitled to Letter of Credit Proceeds

An appellate court recently required a municipality to refund a $43,000 escrow posted by a developer to secure the construction of public improvements that were required to be constructed under an annexation agreement. Squires Landing, LLC v. City of Rochelle, 2014 IL App (2d) 130818-U (May 9, 2014).

In 2005, Squires Landing, LLC entered into a 20 year annexation agreement with the City of Rochelle.  As part of the agreement, Squires was required to post a cash escrow in the amount of $43,000 to secure the construction of intersection improvements required for development of the property.  The agreement provided that if the $43,000 were not used before the agreement expired, it would be refunded to Squires or its successor.  In 2008, the parties agreed that Squires could post a letter of credit in lieu of the cash escrow. The letter of credit provided that if Squires refused or failed to renew the letter of credit, the City could draw on the letter of credit.  

In 2009, Squires sold the property to AKCK, LLC, and demanded the City release the letter of credit. The City refused to release the letter of credit, and it was renewed until October of 2012.  The City then sent a draw to the bank in the full amount of the letter of credit, on the basis that Squires failed to renew the letter of credit in violation of the terms of the annexation agreement.

Squires then filed suit, alleging that the City's draw on the letter of credit was improper.  The City responded by bringing in the successor property owner, AKCK, alleging that it would be obligated to post an escrow if Squires failed to do so as a successor in interest under the annexation agreement.  AKCK responded that Squires did not disclose the escrow requirement when it sold the property to AKCK.  

The City filed a motion for summary judgment, alleging that Squires had a continuing obligation to post the escrow, even after the sale to AKCK.  Squires responded that its obligation to post the escrow terminated when it sold the property to AKCK.  The trial court ruled in favor of the City, and Squires appealed.

On appeal, the appellate court reviewed the language of the annexation agreement to determine whether Squires' obligation to post an escrow continued after its sale to AKCK.  Based on the language in the annexation agreement that provided that upon assignment of the agreement, Squires would have no further obligations under the agreement, the appellate court reversed the trial court's ruling in favor of the City and ordered the City to refund the $43,000 to Squires.

The result is interesting for a few reasons.  First, requiring the City to turn over the $43,000 draw proceeds from the letter of credit would seem to result in a windfall to Squires, since Squires didn't post the $43,000 in cash but through a letter of credit.  Second, the court doesn't really discuss AKCK's obligation to post an escrow as the successor in interest under the annexation agreement - the clear language of the annexation agreement would seem to require that. Third, the agreement provided for a refund of the escrow only if (1) the property was not developed within the 20 year time frame or (2) a substitute escrow was posted by a successor in interest.  Here, agreement does not expire until 2025 and AKCK, the successor in interest, had not posted a substitute escrow with the City.  The result of this decision is to leave the City without any security for the public improvements required by the annexation agreement.

Post Authored by Julie Tappendorf, Ancel Glink


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