IML Municipal Attorneys Seminar Friday, March 19, 2010 Nancy S. Harbottle 847.843.2900 nsharbottle@arnstein.com Tips on Drafting & Reviewing Letters of Credit & Performance Bonds Letters of Credit in the Municipal Context 1. Municipal Attorneys: Familiar with the use of performance guarantees, surety bonds, letters of credit, or cash escrow in connection with a subdivision or development of property 2. Illinois Municipal Code - Two statutes 65 ILCS 5/11-12-8 - general statute re: subdivisions HANDOUT 1 and 65 ILCS 5/11/39-3 - the more specific statute re: performance guarantees HANDOUT 2 3. Letters of Credit - HANDOUT 3 A. What they are and are not B. How to draft Evergreen Clause C. How to make a presentation for drawing upon the Letter of Credit 4. Letters of Credit are subject to: A. Article 5 of Uniform Commercial Code of the State of Illinois HANDOUT 4 B. Uniform Customs and Practice for Documentary Credits Publication No. 500 or the recent (2007) International Chamber of Commerce Brochure 600. UCP No. 500 or UCP No. 600 HANDOUT 5 1
5. Types of Letters of Credit: A. Irrevocable Standby Letters of Credit - issued in connection with the construction and installation of public improvements almost always the type of Letter of Credit used in the municipal context for development. B. Straight Credit Letters of Credit C. Direct Pay Letters of Credit D. Clean Letters of Credit E. Negotiating Credit 6. Parties to a Letter of Credit A. Issuer - a bank B. Applicant - Subdivider or the Developer; C. Beneficiary Village 7. Three independent obligations: A. Rights and obligations of an issuer to a beneficiary B. Applicant reimbursement agreement with the Issuer. C. Beneficiary entitled to receive payment as set forth in the provisions of the letter of credit 8. Drawing on a Letter of Credit What the village must do - A. Must have original letter of credit and amendments B. Review to make sure that it has not expired (evergreen clause) and that the Village has not received any notices from the issuer (Bank) - (In the event that the Village receives a notice, then the Village and the Village Engineer need to determine if the Village should proceed to draw on the letter or any amounts remaining immediately.) C. If required, Notice of Default letters sent. D. Resolution or Motion of the Board of Trustees to draw down on the Letter of Credit. (Good idea not essential) 2
E. Draft Demand letter to Issuer - This letter must strictly comply with the terms and provisions of the Letter of Credit word for word - the Letter of Credit will set forth who needs to sign the Demand letter could be Village Engineer, Village Manager or Village President. F. Sight Draft HANDOUT 6 G. Presentation The letter of credit should state the time, place and location, and person to whom and medium in which presentation should be made. H. If the issuer or bank is located in Illinois and if at all feasible, the Village Attorney or other responsible person, should physically take the original Letter of Credit, the Demand Letter and the Sight Draft to the Bank the presentation get a receipt for the original Letters of Credit. I. This starts the clock ticking as the issuer under UCP 500 only has seven days to pay out on a Letter of Credit (under UCP 600 five business days) under UCC Article 5 a reasonable time after presentation but not beyond the end of the seventh business day after the receipt of documents. However, the above assumes that the language of the demand letter strictly complies with the terms of the Letter of Credit. If there is not strict compliance with the correct language the issuer will so notify the presenter and essentially kick it back with instructions on precisely the discrepancies between the Demand Letter and the terms of the Letter of Credit. Redo and re present. 9. Remember A letter of credit is not a guaranty A guaranty requires payment upon default as a fact and a letter of credit requires payment against solely the documents presented. 10. Please note: Some parts of this presentation substantially relied upon an article Letters of Credit written by Kenneth A. Latimer of Duane Morris for the IICLE book Advising Illinois Financial Institutions in 2002 and updated in 2006 with the consent of Mr. Latimer 3