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Note: Kentucky Commons, LCC (Owner) issued US$12.5 million in bonds in connection with construction of a housing project in Louisville, Kentucky, U.S.A. To support the bond issue, PNC Bank, National Association (Issuer) issued an LC and opened a line of credit to finance the project. To assure reimbursement, the Providence Group and its principal, M.T. Person, (Sureties) entered into a reimbursement and guarantee arrangement with Issuer. When the project went over budget, Issuer refused drawing requests on the line of credit to pay suppliers and contractors, who then filed liens. Subsequently, Issuer declared the project to be in default due to failure to notify Issuer of changes to the budget and made demands on the guarantee.

When Sureties refused to pay, Issuer sued them on their guarantee in United States federal court. Subsequently, separate actions were filed in Kentucky state courts against Sureties by Issuer and several lien holders; these actions were consolidated.

Sureties moved to stay the federal action in light of the state action, arguing that the state proceeding was parallel to the federal proceeding. The US District Court for the Western District of Kentucky, Louisville Division, Coffman, J., denied Sureties' motion. The Court noted that different claims were asserted by Issuer in the federal case, making a stay of the federal proceedings improper.

In a subsequent hearing on Issuer's motion for summary judgment and Sureties' motion to transfer the proceedings to Bankruptcy Court, the court granted Issuer's motion and entered summary judgment in favor of Issuer. Sureties had argued that the Issuer breached its duty of good faith when it declared the loan to be in default. The court rejected this argument because Sureties offered no evidence of bad faith and failed to allege any specific breach of the contract by Issuer.

[JEB/gsp]

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