Case Title: Holiday Isle, LLC v. Beth Adkins et al.

Citation: 

Docket Number: 1070202

State: alabama

Court: Alabama Supreme Court

Date: 2008-05-23T00:00:00Z

Document:
REL: 05/23/20008
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter.  Readers are requested to notify the Reporter of Decisions,
Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334)
229-0649), of any typographical or other errors, in order that corrections may be made
before the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
 OCTOBER TERM, 2007-2008
_________________________
1070202
_________________________
Holiday Isle, LLC
v.
Beth Adkins et al.
Appeal from Mobile Circuit Court
(CV-07-886.51)
LYONS, Justice.
Holiday Isle, LLC, a developer of condominiums, appeals
from a preliminary injunction entered by the Mobile Circuit
Court preventing Holiday Isle from negotiating irrevocable
letters of credit issued on behalf of J&R Investments, LLC,
1070202
2
and Beth Adkins.  See Rule 4(a)(1), Ala. R. App. P.  Because
the trial court exceeded its discretion in entering the
injunction, we reverse and remand with instructions to
dissolve the injunction.
I. Facts and Procedural History
On March 4, 2005, J&R Investments, LLC, agreed to
purchase unit 105 and on March 7, 2005, Beth Adkins, David
Adkins, and Nancy Whitten agreed to purchase unit 104 in a
condominium complex being developed by Holiday Isle.  J&R
Investments, on the one hand, and Beth Adkins, David Adkins,
and Nancy Whitten, on the other (hereinafter J&R Investments
and the individual purchasers are referred to collectively as
"the purchasers"), then entered into preconstruction purchase
and escrow agreements with Holiday Isle for the condominium
units, which were to be completed within two years of April 1,
2005.  The purchase agreements provided that the earnest-money
deposit could be satisfied by letters of credit issued to
Holiday Isle in lieu of cash.  The purchasers selected this
option; J&R Investments delivered a letter of credit to
Holiday Isle, and Beth Adkins, David Adkins, and Nancy Whitten
delivered a letter of credit to Holiday Isle.  The purchase
1070202
3
agreements provided that upon default by the purchasers,
Holiday Isle and/or an escrow agent "shall draw on the
existing Letter of Credit in whole and create with the
proceeds thereof a cash Deposit to be placed with Escrow
Agent, with said funds to be delivered to [Holiday Isle] as
liquidated damages."
On March 28, 2007, the Town of Dauphin Island issued the
certificate of occupancy for the condominiums.  On April 2,
2007, the purchasers conducted a pre-closing inspection of
their respective condominium units.  Within the following week
the purchasers informed Holiday Isle that they would not close
on their condominium units because, they said, Holiday Isle
had not completed the condominiums by April 1, 2007, as
required by the purchase agreements.  The purchasers also
requested that their letters of credit be returned to them.
In response, Holiday Isle contended that it had met its
obligations under the purchase agreements, and it set the
closing date for the purchasers' condominium units for April
30, 2007.
On April 27, 2007, Beth Adkins and J&R Investments
requested that the Mobile Circuit Court issue a temporary
1070202
4
restraining order ("TRO") preventing Holiday Isle from drawing
on the letters of credit.  Contemporaneously with the filing
of the application for the TRO, Beth Adkins, David Adkins,
Nancy Whitten, and J&R Investments also sought a judgment
declaring 
their 
rights under the purchase agreements,
rescission of the purchase agreements, and an injunction
preventing Holiday Isle from drawing on the letters of credit.
On June 8, 2007, Holiday Isle moved to compel arbitration and
dismiss or stay the proceedings.  After a hearing on the
motion on June 27, 2007, the trial court ordered the case to
arbitration on July 30, 2007.  
On October 11, 2007, Holiday Isle objected to the request
for a TRO and an injunction by Beth Adkins and J&R
Investments.  Holiday Isle argued that the trial court lacked
jurisdiction to enter an injunction against it because, it
said, the arbitrator now had jurisdiction over all the
disputes in the case.  In the alternative, Holiday Isle argued
that the purchasers could not satisfy the requirements for
obtaining a TRO or an injunction.  The purchasers replied that
the trial court retained jurisdiction to enter an injunction
1070202
5
and that the requirements for obtaining injunctive relief had
been satisfied.
On October 18, 2007, the trial court appointed an
arbitrator to resolve all the disputes between the parties and
issued a preliminary injunction to prevent Holiday Isle from
negotiating the letters of credit.  The trial court's order
states that "[b]ecause the Letters of Credit are inextricably
intertwined with the arbitration issues, the Court hereby
ENJOINS the negotiation of the Letters of Credit by whoever is
holding 
them, 
until 
this 
matter 
is 
resolved 
by 
the
arbitrator."  (Capitalization in original.)  Holiday Isle
appealed the trial court's entry of the preliminary injunction
to this Court.
II. Standard of Review
We have often stated:  "The decision to grant or to deny
a preliminary injunction is within the trial court's sound
discretion.  In reviewing an order granting a preliminary
injunction, the Court determines whether the trial court
exceeded that discretion."  SouthTrust Bank of Alabama, N.A.
v. Webb-Stiles Co., 931 So. 2d 706, 709 (Ala. 2005).  
1070202
6
A preliminary injunction should be issued only when the
party seeking an injunction demonstrates:
"'(1) that without the injunction the [party] would
suffer irreparable injury; (2) that the [party] has
no adequate remedy at law; (3) that the [party] has
at least a reasonable chance of success on the
ultimate merits of his case; and (4) that the
hardship 
imposed 
on 
the 
[party 
opposing 
the
preliminary injunction] by the injunction would not
unreasonably outweigh the benefit accruing to the
[party seeking the injunction].'" 
 
Ormco 
Corp. 
v. 
Johns, 
869 
So. 
2d 
1109, 
1113 
(Ala.
2003)(quoting Perley v. Tapscan, Inc., 646 So. 2d 585, 587
(Ala. 1994)).
To the extent that the trial court's issuance of a
preliminary injunction is grounded only in questions of law
based on undisputed facts, our longstanding rule that we
review an injunction solely to determine whether the trial
court exceeded its discretion should not apply.  We find the
rule applied by the United State Supreme Court in similar
situations to be persuasive:  "We review the District Court's
legal rulings de novo and its ultimate decision to issue the
preliminary injunction for abuse of discretion."  Gonzales v.
O Centro Espirita Beneficente Uniao do Vegetal, 546 U.S. 418,
428 (2006); see also Justice Murdock's special writing while
sitting as a judge on the Court of Civil Appeals in City of
1070202
Chief Justice Cobb's challenge in her dissent to the
1
fairness of the majority's sua sponte clarification of the
standard of review proceeds on the false premise that
adherence to the former standard would yield a different
result. 
7
Dothan v. Eighty-Four West, Inc., 871 So. 2d 54, 60 (Ala. Civ.
App. 2003) (Murdock, J., concurring specially on application
for rehearing) (cited with approval in McGlathery v.
Richardson, 944 So. 2d 968, 970 (Ala. Civ. App. 2006)).  To
the extent they conflict with our holding today, previous
expressions such as the one found in TFT, Inc. v. Warning
Systems, Inc., 751 So. 2d 1238, 1241-42 (Ala. 1999) ("The
applicable standard of review [of injunctive relief] depends
on whether the trial court entered a preliminary injunction or
a permanent injunction. A preliminary injunction is reviewed
under an abuse-of-discretion standard, whereas a permanent
injunction is reviewed de novo.") are hereby overruled.  
1
III. Analysis
A. Jurisdiction
We must first determine whether the trial court had
jurisdiction to issue the preliminary injunction after it
ordered the dispute to arbitration.  Holiday Isle contends
that the trial court retained only limited jurisdiction once
1070202
8
it compelled arbitration because, it says, the arbitration
clause, which is identical in all the purchase agreements,
does not reserve to the trial court any jurisdiction for
temporary or preliminary equitable relief.  Holiday Isle
relies on the decision of the United States Court of Appeals
for the Eighth Circuit in Manion v. Nagin, 255 F.3d 535, 538-
39 (8th Cir. 2001), holding that "[i]n a case involving the
Federal Arbitration Act (FAA), courts should not grant
injunctive relief unless there is 'qualifying contractual
language' which permits it."  Because, Holiday Isle asserts,
the purchase agreements do not contain "qualifying contractual
language" permitting the trial court to grant injunctive
relief, the purchase agreements provide no grounds for the
trial court to issue the preliminary injunction.
The purchasers respond by arguing that because, when the
trial court entered the preliminary injunction, the case was
not under the jurisdiction of any arbitration association and
an arbitrator had not been selected, "[t]he trial court, in
essence, was the only forum by which these matters could be
resolved."  Purchasers' brief at p. 23.  The purchase
agreements expressly provide that any arbitration proceedings
shall not be conducted through the American Arbitration
1070202
9
Association ("AAA").  However, the purchasers note that the
purchase agreements also provide that disputes are to be
submitted to arbitration under the Commercial Rules of the AAA
or as the parties may later agree in writing.  The purchasers
further note that the Commercial Arbitration Rules of the AAA
allow a party to seek interim measures from a judicial
authority.  Rule R-34(c) of the AAA's Commercial Rules
provides: "A request for interim measures addressed by a party
to a judicial authority shall not be deemed incompatible with
the agreement to arbitrate or a waiver of the right to
arbitrate."  Nothing before us indicates that the parties, by
agreement 
entered 
into after 
the purchase agreements,
displaced the choice of the AAA's Commercial Rules set forth
in the purchase agreements.  
The purchasers also note that in Drago v. Holiday Isle,
L.L.C., 537 F. Supp. 2d 1219 (S.D. Ala. 2007), Holiday Isle
also relied upon Nagin to argue that the federal district
court lacked jurisdiction to issue an injunction because the
case had been stayed pending arbitration.  The court in Drago
found that Nagin reflected a minority view and noted that the
"majority of federal courts ... have concluded that in limited
situations a binding arbitration clause does not bar a
1070202
10
plaintiff from seeking emergency injunctive relief or other
provisional remedies in court."  537 F. Supp. 2d at 1221.  The
court in Drago specifically adopted the reasoning of the
Fourth Circuit Court of Appeals in Merrill Lynch, Pierce,
Fenner & Smith, Inc. v. Bradley, 756 F.2d 1048, 1052 (4th Cir.
1985), as a basis for concluding that it may order equitable
relief "where an arbitral award could not return the parties
substantially to the status quo."  537 F. Supp. 2d at 1222.
Here, if the trial court's preliminary injunction was
appropriately issued, it could be said that an arbitral award
would not return the parties to the status quo where the
proceeds of the letters of credit had previously been
disbursed to the beneficiary.
We therefore apply the Commercial Rules of the AAA
pursuant to the express terms of the purchase agreements and
conclude that the trial court had jurisdiction to enter a
preliminary injunction to order equitable relief to preserve
the status quo.  Whether the trial court erred in entering
that injunction under the facts of this case is a separate
issue. 
B. Merits
1070202
11
A letter of credit exists independently of the underlying
contract between a buyer and seller.  See Benetton Servs.
Corp. v. Benedot, Inc., 551 So. 2d 295, 299 (Ala. 1989);
Southern Energy Homes, Inc. v. AmSouth Bank of Alabama, 709
So. 2d 1180, 1185 (Ala. 1998).  "A letter of credit is a
financing engagement by an issuing bank, made at the request
of an applicant (or customer), to honor demands for payment by
the beneficiary of the credit, provided the terms and
conditions of the letter of credit are met."  Southern Energy
Homes, Inc., 709 So. 2d at 1184 (citing § 7-5-103(1)(a), Ala.
Code 1975 (definition for "letter of credit" now found at § 7-
5-102(a)(10))).  "The beneficiary of the standby credit
reasonably expects to receive payment from the issuer promptly
upon demand and before any litigation between the applicant
and the beneficiary may occur."  709 So. 2d at 1184 (citing
John Dolan, The Law of Letter of Credit: Commercial and
Standby Credits ¶¶ 3.06 & 3.07 (rev. ed. 1996).  Thus, parties
choose a letter of credit over other types of financing "so
that they may have the benefit of prompt payment before any
litigation occurs."  709 So. 2d at 1185 (emphasis added). 
Holiday Isle contends that the trial court erred in
enjoining it from negotiating the letters of credit because,
1070202
12
it says, Alabama law is well settled that the unique nature of
letters of credit and their role in the financial community
makes enjoining a letter of credit inappropriate.  Holiday
Isle asserts that this Court has reversed every injunction
issued by a trial court preventing a beneficiary from drawing
on a letter of credit.  See SouthTrust Bank of Alabama, N.A.,
931 So. 2d at 709, Textron Fin. Corp. v. Hayes, 619 So. 2d
1363 (Ala. 1993), Benetton Servs. Corp., 551 So. 2d at 299.
Holiday Isle also notes that in Southern Energy Homes, Inc.,
709 So. 2d at 1185-86, this Court held:
"We recognize that, as a general rule, letters of
credit cannot exist without independence from the
underlying transaction. [John Dolan, The Law of
Letter of Credit: Commercial and Standby Credits] at
¶ 2.09[5] [(rev. ed. 1996)].  Thus, when courts
begin 'delving into the underlying contract, they
are impeding the swift completion of the credit
transaction.'  Id.  'The certainty of payment is the
most important aspect of a letter of credit
transaction, and this certainly encourages hesitant
parties to enter into transactions, by providing
them with a secure source of credit.'  AmSouth v.
Martin, 559 So. 2d [1058] at 1062 [(Ala. 1990)]." 
In Southern Energy Homes, Inc., this Court went on to note
that in a letter-of-credit transaction the parties "bargain
for the advantages and disadvantages of the credit" and held
that the trial court did not exceed its discretion by denying
the applicant's motion for a preliminary injunction preventing
1070202
13
the issuer from paying the letter of credit. 709 So. 2d at
1187-88.
The purchasers argue that the fact that the present case
deals with the purchase of condominium units, which is
governed by the Alabama Uniform Condominium Act, § 35-8A-101
et seq., Ala. Code 1975 ("the AUCA"), distinguishes it from
this Court's precedent holding that it is inappropriate to
enjoin the negotiation of letters of credit.  The purchasers
note that the letters of credit satisfied the earnest-money
deposit on the purchase of the condominium units and note that
§ 35-8A-410, Ala. Code 1975, titled "Escrow of deposits,"
provides that a deposit for the purchase of a condominium unit
is held by an escrow agent until "(i) delivered to the
declarant at closing; (ii) delivered to the declarant because
of purchaser's default under a contract to purchase the unit;
or (iii) refunded to the purchaser."  The purchasers further
contend that an escrow account established under the AUCA, and
the rights created by it, differ from a letter-of-credit
situation in which there is a simple contractual agreement
that the letter of credit will be paid upon demand.  The
purchasers contend that under the AUCA the letter of credit is
deposited into an escrow account that is similar to a trust
1070202
14
fund and can be drawn up only if the developer of the
condominium has shown that the buyer has defaulted.  Thus, the
purchasers assert that their letters of credit do not exist
independently of the underlying transaction to purchase the
condominiums and note that the Alabama Commentary to § 35-8A-
410 states: 
"The act provides that the account holder shall
deliver these funds to the developer only at a sale
closing or 'because of the purchaser's default under
a contract to purchase the unit.' Thus, the
depository party has a duty of some care in being
persuaded by a developer that the buyer has
defaulted, at least where the buyer has notified the
depository party of a conflicting position." 
(Emphasis added.)  The purchasers argue that allowing Holiday
Isle to draw on the letters of credit when they contest their
default would violate § 35-8A-410.
Holiday Isle responds by arguing that the purchasers'
argument that their letters of credit are different from an
escrow deposit under § 35-8A-410 because the underlying
transaction involves the sale of condominium units is
meritless and has no legal support.  We agree.  Section 35-8A-
410 provides that "[a]ny deposit made in connection with the
purchase of a [condominium] unit" shall be held in escrow "by
a licensed title insurance company, an attorney, a licensed
1070202
Chief Justice Cobb's dissenting opinion accepts the
2
purchasers' contention that the letters of credit are
tantamount to trust funds, relying on the Alabama Commentary
to § 35-8A-410 dealing with protection of creditors of the
developer such as "the construction lender, material suppliers
or contractors."  Of course, the purchasers are not within
that category.
15
real estate broker, or an institution whose accounts are
insured by a governmental agency or instrumentality until (i)
delivered to the declarant at closing; (ii) delivered to the
declarant because of the purchaser's default under a contract
to purchase the unit; or (iii) refunded to the purchaser."
Such language does not operate to preclude the parties from
entering into an agreement in which, in lieu of an earnest-
money deposit, a standby letter of credit is issued by a
neutral bank and is payable to the beneficiary upon the
purchaser's default.  
2
The well-reasoned jurisprudence of this Court condemning
injunctions against drawing upon letters of credit is
fundamental and applies to the purchasers' failure to close on
the sale of the condominium units.  If the proceeds of the
letters of credit are disbursed and the purchasers' default
cannot later be established, the purchasers' remedy is an
action at law against the beneficiary of the letters of credit
1070202
The dissenting opinion recites factual disputes that are
3
germane to the merits of the underlying controversy that gives
rise to the request for injunctive relief.  The relevance of
these contested facts to a proceeding to enjoin the issuer
from honoring a letter of credit is limited to the
circumstances set forth in § 7-5-109, Ala. Code 1975,
authorizing an injunction to prevent a material fraud by the
beneficiary. 
 
This 
Court 
is 
committed 
to 
a 
narrow
interpretation of the fraud exception to the general rule
against the issuance of injunctions in letter-of-credit
transactions.  See Southern Energy Homes, Inc., 709 So. 2d at
1186 ("The extensive use of the fraud exception may operate to
transform the credit transaction into a surety contract.").
The commentary to § 7-5-109 describes extreme fact patterns
illustrative of when the fraud exception applies, such as
"'[w]here the circumstances "plainly" show that the underlying
contract forbids the beneficiary to call a letter of credit;
where they show that the contract deprives the beneficiary of
even a "colorable" right to do so; where the contract and
circumstances reveal that the beneficiary's demand for payment
has "absolutely no basis in fact"; where the beneficiary's
conduct has "so vitiated the entire transaction that the
legitimate purposes of the independence of the issuer's
obligation would no longer be served."'" (quoting Ground Air
Transfer v. Westates Airlines, 899 F.2d 1269, 1272-73 (1st
Cir. 1990) (citations omitted)).  No allegation of fraud is
presented here.  Further, the trial court's sole justification
for issuing the injunction was based on its conclusion that
"the Letters of Credit are inextricably intertwined with the
arbitration issues."  Consequently, the mere presence of
factual disputes as to the merits of the underlying
controversy in this proceeding does not justify affirming the
award of injunctive relief. 
  
16
or perhaps against the depository party for want of due care
in honoring the demand for payment as suggested by the Alabama
Commentary to § 35-8A-410, an issue not before us.   Any other
3
construction of the terms of the standby letters of credit
1070202
17
would constitute judicial redrafting of the terms of the
purchase agreements, which we decline to do.  
 
We hold that the trial court's rationale that the
negotiation of the letters of credit should be enjoined
because "the Letters of Credit are inextricably intertwined
with the arbitration issues" is contrary to the well-settled
law that letters of credit exist independently from the
underlying transaction.  See Benneton Servs. Corp., 551 So. 2d
at 298-99,  Southern Energy Homes, Inc., 709 So. 2d at 1185-
86. 
The 
purchasers 
bargained 
for 
the 
advantages 
and
disadvantages of electing to use a letter of credit in lieu of
cash to satisfy their earnest-money deposit on the purchase of
the their condominium units, and the fact that the AUCA
provides that a deposit for a condominium unit is kept until
default occurs does not protect a purchaser from the universal
rule that an injunction preventing a beneficiary from drawing
on a letter of credit is inappropriate.  "The certainty of
payment is the most important aspect of a letter of credit
transaction, and this certainty encourages hesitant parties to
enter into transactions, by providing them with a secure
source of credit."  AmSouth Bank, N.A. v. Martin, 559 So. 2d
1058, 1062 (Ala. 1990).  Accordingly, we hold that the trial
1070202
The record contains a letter from counsel for Surety Land
4
Title, Inc., which states that Surety had come into possession
of the purchasers' letters of credit at some point after Bay
Title Insurance Company, the escrow agent described in the
purchase agreements, had resigned.  No document from Bay Title
corroborating Surety's assertion of Bay Title's resignation
appears in the record.  The dissenting opinion states: "With
Holiday Isle in possession of the letters of credit instead of
Bay Title, the 'licensed title insurance company' agreed upon
by the parties, the purchasers have lost the benefit of a
neutral escrow agent, the entity charged with maintaining the
escrow trust fund with due care.  This scenario creates the
need for the preliminary injunction prohibiting Holiday Isle
from negotiating the letters of credit without a favorable
ruling from the arbitrator." __ So. 2d at __.  Even assuming
Bay Title had in fact resigned as escrow agent, the
controversy over the status of Bay Title or the authority of
Surety as its successor is immaterial because the purchase
agreements provide that the letters of credit were to be
delivered to Holiday Isle and were merely "assignable" to the
escrow 
agent. 
 
The 
purchase 
agreements 
state: 
"At
Purchaser'[s] election, in lieu of cash for satisfaction of
the Earnest Money Deposit, Purchaser, simultaneously with the
execution of this Agreement, may deliver to Developer (as
beneficiary), and assignable by Developer to Escrow Agent, a
standby letter of credit ...."  The terms of the letters of
credit issued by the purchasers' respective banks authorized
Holiday Isle to make demand for payment directly upon the
banks.  Holiday Isle now has possession of the letters of
credit.  The dissenting opinion assumes, without foundation in
the purchase agreements, that Holiday Isle was required to use
the services of an escrow agent and that otherwise the
purchasers have no neutral party, when the banks that issued
the letters of credit have such status.
18
court erred in granting the purchasers' motion for a
preliminary injunction.  
4
IV. Conclusion 
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19
The order of the trial court entering the preliminary
injunction is reversed, and the case is remanded with
instructions to dissolve the preliminary injunction.
REVERSED AND REMANDED WITH INSTRUCTIONS.
See, Woodall, Stuart, Smith, Bolin, and Parker, JJ.,
concur.
Murdock, J., concurs in the result.
Cobb, C.J., dissents.
1070202
For example, principles of fundamental fairness and due
5
process required this Court to limit the well-settled rule
that this Court may affirm a summary judgment it determines is
correct even when the trial court has based the summary
judgment on an incorrect legal analysis to those situations in
which both sides have received notice and an opportunity to
address the bases of the summary judgment.  See Liberty Nat'l
Life Ins. Co. v. University of Alabama Health Servs. Found.,
P.C., 881 So. 2d 1013, 1020 (Ala. 2003).  In this case, the
parties could not reasonably have anticipated that this Court
would change the standard of review for a preliminary
injunction; they have had no opportunity to frame their
arguments in light of the new standard.  Similarly, the change
in the standard of review implemented by the Court in the
majority opinion cannot be applied fairly to the parties in
this case, even if the Court chooses to apply that change
prospectively.
20
COBB, Chief Justice (dissenting).
I respectfully dissent.  Although I agree with the
majority that we should entertain reviewing a trial court's
preliminary injunction under a de novo rather than excess-of-
discretion standard, the circumstances in this case do not
warrant such a change.  Fundamental fairness is denied the
parties in this case by not allowing them to brief and argue
their respective positions with an understanding of the
appropriate standard of appellate review.   The parties did
5
not know that this Court would conclude that the facts
presented here would be deemed undisputed and that the
preliminary injunction would be subjected to a de novo review.
1070202
21
Indeed, the parties are likely to be as surprised as I am that
the majority, with little discussion and no fanfare, finds the
facts to be undisputed.  Logic dictates that if the facts were
undisputed, Holiday Isle would have, instead of filing a
motion to compel arbitration and dismiss or stay the
proceedings, filed a motion for a summary judgment, which in
the absence of a genuine issue of material fact, would have
presented the query whether Holiday Isle was entitled to a
judgment as a matter of law.  The trial court would not have
ordered this case to arbitration or enjoined the negotiation
of the letters of credit had it not concluded that the facts
are in dispute, particularly with respect to the underlying
issue -- whether the condominium units were completed within
two years of April 1, 2005, in accordance with the terms of
the purchase agreements.     
The parties have not presented this Court with any
definitive findings or conclusions about the record, and
significant material differences exist about the facts to
dissuade me from applying a de novo review to the preliminary
injunction.  On April 2, 2007, a date that was already beyond
the two-year completion term, when the purchasers conducted
the pre-closing inspection of their respective units, they
1070202
22
were instructed upon their arrival to wear hard hats or they
would not be allowed to enter the premises.  Once inside the
condominium complex, the purchasers were met with a reception
area that was not glassed in, an elevator that did not appear
in working condition, and an incomplete parking deck.  When
they reached their designated units, 104 and 105, the
purchasers found laborers still performing work.  Holiday Isle
does not deny that the construction tasks noted by the
purchasers were not finished or that as of April 2, 2007, no
unit owner had been permitted to occupy the condominium or
even allowed ingress or egress without an escort and a hard
hat.  Holiday Isle refused to return the letters of credit
after the purchasers notified it that because the units had
not been completed within two years of April 1, 2005, the
purchase agreements were void.  The purchasers demanded the
return of their earnest-money deposit, i.e., their letters of
credit.  Holiday Isle refused to return the letters of credit
and instead scheduled a closing date for April 30, 2007.
Holiday Isle contends that the work remaining to be done on
the units consisted only of "punch list items."     
The purchasers performed another inspection of Holiday
Isle on April 23, 2007.  They found unit 105 in much the same
1070202
23
condition as it had been on April 2, 2007.  At this time, the
inspection of unit 105 also revealed problems with paint and
other defects.  As for the condominium complex itself, the
purchasers noted that the pool and parking garage were
incomplete and that there were no permanent handrails on the
stairs. The purchasers were asked to leave the premises before
they could complete their inspection.      
The facts concerning the ultimate holder of the letters
of credit are also troubling. Section 4 of the purchase
agreements provides that "Bay Title Insurance Company, Inc.
shall be the Escrow Agent." On April 27, 2007, counsel for the
purchasers wrote the escrow agent, Bay Title, informing it
that the purchasers were contesting any finding that they had
defaulted under the purchase agreements.  Subsequently, the
purchasers became aware that Bay Title had resigned as escrow
agent, and the letters of credit were being held by Surety
Land Title, Inc.  On July 13, 2007, Surety Land Title
delivered the letters of credit to Holiday Isle "since it did
not have any written authority to hold the letters of credit
nor any authority to draw on them."  The purchasers dispute
that the purchase agreements or letters of credit were
modified in any way so as to authorize the appointment of a
1070202
24
new escrow agent, including Surety Land Title.  It is
undisputed that Holiday Isle now possesses the letters of
credit.  In support of the motion for a preliminary
injunction, the purchasers submitted evidence to the trial
court supporting the reasons for their concern about the
financial viability of Holiday Isle.  The trial court was
provided information about subcontractors' liens and other
lawsuits 
and/or 
arbitration 
proceedings 
pending 
and/or
threatened against Holiday Isle in connection with the
condominium complex.      
Although precedent establishes that a letter of credit
generally exists independently of the underlying contract
between a buyer and a seller, none of the cases the majority
discusses involve a factual scenario, such as this one, that
is governed by the Alabama Uniform Condominium Act, § 35-8A-
101 et seq., Ala. Code 1975 ("the AUCA").  As the majority
acknowledges, a deposit for the purchase of a condominium
unit, whether cash or a letter of credit, is to be held by an
escrow agent until closing, until the purchaser defaults, or
until the deposit is refunded to the purchaser.  The trial
court entered the preliminary injunction in this case
enjoining Holiday Isle from negotiating the letters of credit
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25
until after the factual disputes are resolved by the appointed
arbitrator in arbitration requested by Holiday Isle and
compelled by the trial court.  I agree with the trial court
that the letters of credit "are inextricably intertwined with
the arbitration issues." By holding that the trial court erred
in 
granting 
the 
purchasers' 
motion 
for 
a 
preliminary
injunction, the majority has also effectively interfered with
the arbitration of the ultimate issue. The letters of credit
in this case were "in lieu" of the earnest-money deposit for
the purchase of the condominium units under §  2(B) of the
purchase agreements. According  to §  35-8A-410, Ala. Code
1975, titled "Escrow of deposits," deposits in connection with
the purchase of a condominium unit shall be held in escrow "by
a licensed title insurance company, an attorney, a licensed
real estate broker or an institution whose accounts are
insured by a governmental agency or instrumentality until (i)
delivered to the declarant at closing; (ii) delivered to the
declarant because of the purchaser's default under a contract
to purchase the unit; or (iii) refunded to the purchaser."
     The escrow deposits mandated by §  35-8A-410 do not
present an ordinary letter-of-credit situation. According to
the Alabama Commentary to §  35-8A-410, the funds held in
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escrow are similar to a trust fund: "Equally important, the
funds on deposit should be regarded in a manner somewhat
similar to a trust fund, such that creditors of the developer,
whether the construction lender, material suppliers or
contractors, may not reach these funds to satisfy their claims
against an insolvent developer." (Emphasis added.)  If Holiday
Isle is allowed, as the majority holds, to negotiate the
letters of credit before arbitration is completed, the purpose
of the Alabama Legislature in enacting § 35-8A-410 will be
frustrated.  The possibility exists that, before the parties
can arbitrate their dispute, creditors of Holiday Isle may
make a claim on the letters of credit as soon as they are
converted to cash.  As argued throughout the purchasers'
brief, the injunction in this case provides a close  analogy,
both legally and equitably, to a constructive trust.  The
constructive-trust-fund nature of the letters of credit will
be lost as soon as the preliminary injunction is dissolved. 
     In questionable violation of §  35-8A-410 of the AUCA,
Holiday Isle is now acting as the escrow agent. This
undisputed fact makes the need for a preliminary injunction,
in order to avoid irreparable harm to the purchasers, of
paramount importance. Under the express terms of the purchase
1070202
27
agreements and § 35-8A-410, Holiday Isle is not an authorized
escrow agent.  An escrow agent is generally considered to be
the agent of both parties to an escrow agreement. See Fisher
v. Comer Plantation, Inc., 772 So. 2d 455 (Ala. 2000); Gurley
v. Bank of Huntsville, 349 So. 2d 43 (Ala. 1977).  With
Holiday Isle in possession of the letters of credit instead of
Bay Title, the "licensed title insurance company" agreed upon
by the parties, the purchasers have lost the benefit of a
neutral escrow agent, the entity charged with maintaining the
escrow trust fund with due care. This scenario creates the
need for the preliminary injunction prohibiting Holiday Isle
from negotiating the letters of credit without a favorable
ruling from the arbitrator. 
Because Holiday Isle has appealed the order of the trial
court issuing the preliminary injunction, as soon as the trial
court dissolves the preliminary injunction on remand, Holiday
Isle will presumably negotiate the letters of credit in its
possession before arbitration is completed.  If the arbitrator
finds a genuine and material factual dispute over whether
Holiday Isle completed the condominium units within the
defined two-year period and then rules in favor of the
purchasers, the dissolution of the preliminary injunction may
1070202
28
have caused irreparable harm to the purchasers.  The majority
chooses not to address this potential outcome other than to
propose "the purchasers' remedy is an action at law against
the beneficiary of the letters of credit [Holiday Isle] or
perhaps against the depository party for want of due care in
honoring the demand for payment as suggested by the Alabama
Commentary to §  35-8A-410." ___ So. 2d at ___.  This
conclusory statement by the majority does not address the
legitimate concern of the purchasers that Holiday Isle may not
be able to pay a future monetary judgment in their favor if
Holiday Isle is allowed to negotiate the letters of credit
before arbitration is completed.  Nor does the majority
address the quandary presented by the fact that Holiday Isle,
rather than the agreed upon escrow agent, Bay Title, is in
possession of the letters of credit. 
     Inadequacy of a remedy at law justifying an injunction
may arise from the insolvency of the defendant.  Martin v.
First Federal Sav. & Loan Ass'n of Andalusia, 559 So. 2d 1075
(Ala. 1990)(preliminary injunction issued against a mortgage
servicing company in financial difficulty that was continuing
to collect mortgage payments after its servicing contract was
terminated); Shelton v. Shelton, 238 Ala. 489, 192 So. 55
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(1939).  When a defendant, as here, is the holder of a
property interest and its holding of that interest is disputed
as unjust, unconscionable, or unlawful, a constructive trust
can be imposed. See Ex parte Morton, 261 Ala. 581, 75 So. 2d
500 (1954).  However, in order to obtain a constructive trust,
it is not essential to prove the inadequacy of a remedy at
law.  261 Ala. at 592, 75 So. 2d at 511. The issue whether  a
constructive trust results is one of fact. Pollution Control-
Walther, Inc. v. Belzer, 406 So. 2d 372 (Ala. 1981).
Constructive trusts can and have been imposed.  See Holman v.
Kruk, 485 So. 2d 715 (Ala. 1986) (constructive trust imposed
upon minor's Social Security funds that sister had spent);
Snellings v. Builders' Supply Co., 228 Ala. 47, 152 So. 459
(1934) (constructive trust imposed upon proceeds of mortgage
created for benefit of plaintiffs).  
The preliminary injunction issued by the trial court in
the instant case is tantamount to a constructive trust over
the letters of credit, especially in light of the fact that
Holiday Isle, instead of a neutral escrow agent as required by
§ 35-8A-410, exercises control over the letters. A preliminary
injunction has been found to be appropriate to preserve the
status quo and to prevent dissipation of funds in a
1070202
30
constructive trust when there are specific identifiable funds
that the defendant has refused to turn over. See Georgia
Banking Co. v. GMC Lending & Mortgage Servs. Corp., 923 So. 2d
1224 (Fla. Dist. Ct. App. 2006).  The letters of credit at
issue involve specific identifiable funds of the purchasers,
akin to "trust funds," as explained by the Alabama Commentary
to §  35-8A-410.   
     Under our precedent, a preliminary injunction may be
issued when: (1) the requesting party would suffer irreparable
harm without the injunction;  (2) the requesting party has no
adequate remedy at law;  (3) the requesting party has at least
a reasonable chance of success on the ultimate merits; and (4)
the 
hardship 
imposed 
on 
the 
adverse 
party 
would 
not
unreasonably outweigh the benefit accruing to the requesting
party.  Southtrust Bank of Alabama, N.A. v. Webb-Stiles Co.,
931 So. 2d 706, 708  (Ala. 2005) (quoting Ormco Corp. v.
Johns, 869 So. 2d 1109, 1113 (Ala. 2003), quoting in turn
Perley v. Tapscan, Inc., 646 So. 2d 585, 587 (Ala. 1994)). 
In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bradley, 756
F.2d 1048, 1052 (4th Cir. 1985), the United States Court of
Appeals for the Fourth Circuit held that equitable relief is
appropriate when an arbitral award could not return the
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31
parties substantially to the status quo, particularly if the
enjoined conduct would render the arbitration process a
"hollow formality," i.e., "'the arbitral award when rendered
could not return the parties substantially to the status quo
ante.'" (Quoting Lever Bros. v. International Chem. Workers
Union, Local 217, 554 F.2d 115, 123 (4th Cir. 1976).) The
majority of federal courts to  rule on the question have
concluded that in limited situations a binding arbitration
agreement does not bar a plaintiff from seeking emergency
injunctive relief or other provisional remedies.  Performance
Unlimited, Inc. v. Publishers, Inc., 52 F.3d 1373 (6th Cir.
1995).   Clearly, in the instant case, the only way to
preserve the status quo is to enjoin Holiday Isle from
negotiating the letters of credit until after the arbitrator
rules on the ultimate issue -- whether either party violated
the purchase agreements.          
The majority's conclusion is in conflict with the purpose
and intent of the AUCA. Because of the length of time needed
to complete a new condominium complex, it is common practice
for letters of credit rather than cash deposits to be used to
secure preconstruction agreements.  The majority's holding
that such letters of credit are not directly tied to the
1070202
32
underlying purchase agreements may thwart the use of such
financing arrangements in the future. Thus, I disagree that
this case warrants a change in the standard of review for a
preliminary injunction. In determining if a trial court
properly issued a preliminary injunction, the standard of
review is whether the trial court exceeded its discretion in
doing so.  Baldwin County Elec. Membership Corp. v. Catreet,
942 So. 2d 337, 344 (Ala. 2006) ("'[I]f it cannot be shown
that the trial court exceeded its discretion in either
granting or refusing to grant a preliminary injunction, the
court's "action will not be disturbed on appeal."'"  (quoting
Johnson v. Willis, 893 So. 2d 1138, 1141 (Ala. 2004), quoting
in turn Teleprompter of Mobile, Inc. v. Bayou Cable TV, 428
So. 2d 17, 19 (Ala. 1983))). A trial court exceeds its
discretion when it "exceed[s] the bounds of reason, all the
circumstances before the lower court being considered." Valley
Heating, Cooling, & Elec. Co. v. Alabama Gas Corp., 286 Ala.
79, 82, 237 So. 2d 470, 472 (1970).  
     The record before this Court establishes that the
purchasers have a reasonable chance of success on the ultimate
merits and that Holiday Isle has not set forth evidence of any
undue hardship it will endure by waiting for arbitration, a
1070202
33
proceeding affirmatively sought by Holiday Isle, to be
completed. In light of the material facts in dispute, which
are inextricably intertwined with the letters of credit,
combined with the possibility of irreparable harm to the
purchasers if the status quo is not maintained, I cannot
conclude that the trial court exceeded its discretion in
issuing the preliminary injunction pending the outcome of
arbitration.  Accordingly, I dissent.