Article

Note: First Home Savings Bank (Issuer) issued three standby LCs in the amounts of US$375,000, US$380,000, and US$580,000 to Acstar Insurance Company (Beneficiary) at the request of Courtney Excavating and Construction Co. (Applicant). The LCs were a condition precedent to the issuance and payment of performance bonds by Beneficiary as surety on behalf of Applicant to secure Applicant's performance of bonded construction contracts.

Following Applicant's filing for Chapter 11(reorganization) bankruptcy, Beneficiary presented sight drafts drawn on the first two LCs in the amounts of US$375,000 and US$380,000 respectively. Issuer dishonored the "sight drafts on the basis that [Beneficiary] had not proved actual loss sustained. "Issuer paid US$439,706.72 on the third LC.

Issuer filed this complaint in an adversary proceeding in bankruptcy court to determine the validity of its debt to Beneficiary, the extent of the debt owed, and for an injunction. Beneficiary filed a motion for summary judgment or, alternatively, motion to dismiss for lack of subject matter jurisdiction.

The U.S. Bankruptcy Court for the Western District of Missouri, Federman, J., ruled in favor of Beneficiary, granting the motion to dismiss for lack of subject matter jurisdiction.

Issuer argued the court had jurisdiction because "the amount it is forced to pay to [Beneficiary] will determine the amount of its unsecured claim" The court rejected this argument, ruling that the jurisdictional grant of the bankruptcy court was "not that broad."

The court noted that Section 157(b)(1) of the Bankruptcy Code authorizes bankruptcy judges to " hear all core proceedings arising under title 11" and matters otherwise related to the case. A proceeding is related to a case if the property matters, no matter how attenuated qualify as core proceedings. However, the court noted that the parties do not claim that the LCs are the property of the bankruptcy estate. The court observed that the dispute is between two non-debtors, Issuer, and Beneficiary regarding the terms of the LC.

[JEB/rlf]

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