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Note: Kaiser Netherlands, B.V. (Applicant) agreed with Nova Hut (Beneficiary), a Czech steel manufacturer, to construct a steel mill ("minimill") in the Czech Republic. Pursuant to the contract, Applicant was required to provide Beneficiary with a US$11,100,000 standby LC which Applicant arranged for First Union Bank (Issuer) to issue. To ensure repayment of the standby by Applicant, Applicant's parent company, Kaiser Group International (Parent) provided funds in the face amount of the LC as collateral. It also provided a performance guarantee to International Finance Corporation (Company), a public international organization, which had financed US$168,500,000 for the first phase of the project.

The LC permitted Beneficiary to draw in the event of a breach or a failure to renew. When Beneficiary claimed that the project failed to pass a required four week integrated performance test, it gave Applicant notice that Applicant was in breach. This claim was disputed.

As the LC was about to expire, it was renewed with Parent's agreement. Parent claimed that Beneficiary and Company had agreed not to draw on the LC.

In any event, Beneficiary terminated the construction agreement and drew on the LC.

In the meantime, Parent had sought protection under Chapter 11 (reorganization) of the US Bankruptcy Code. Subsequently, Company filed a claim in this proceeding based on the performance guarantee, seeking US$46,000,000 based on an assignment of Beneficiary's rights.

After the drawing on the LC, Parent objected to Company's claims and filed an adversarial proceeding against Company and Beneficiary based on breach of the LC warranty and the contract between them. Company responded with a motion to dismiss for lack of subject matter jurisdiction based on the claim of sovereign immunity.

The Bankruptcy Court for the District of Delaware, Katz, J., denied Company's motion to dismiss, concluding that filing the claim constituted a waiver of immunity under the US Bankruptcy Code. On appeal, the District Court for the District of Delaware, Farnan, J., reversed, concluding that Parent's claims were outside the scope of the statutory provisions on waiver and dismissed the complaint. In re Kaiser Group Int'l, Inc., 307 B.R. 449 (D. Del.2004) noted at 2005 Annual Survey 348. On appeal, the US Court of Appeals for the Third Circuit, Hygaard, Garth, and Pollak, JJ., in an opinion by Garth, reversed and remanded for a ruling on the merits of the complaint as amended.

The appellate court noted that for the statutory waiver of sovereign immunity to apply, the claims must be related to the property of the bankruptcy estate and arise out of the same transaction or occurrence. The district court had concluded that Parent's breach of contract claims were with regard to LCs which were not the property of the estate. While recognizing the "well established" rule that neither the LC nor its proceeds were the property of the bankruptcy estate, the appellate court observed that in this case Parent is seeking damages against the Company for the loss of the collateral that it posted, as a result of an improper drawing on the LC. The appellate court noted that the collateral used to support the issuance of an LC is the property of the bankruptcy estate, citing In re Compton Corp., 831 F.2d 586 (5th Cir. 1987) among other decisions. Taking as true the claim that Parent posted the collateral, the appellate court concluded that the collateral was the property of the bankruptcy estate for purposes of the applicable statute concerning the waiver of sovereign immunity.

The appellate court also noted that there were allegations of the breach of separate agreements between the Parent on one hand and Beneficiary and Company on the other, specifically that the LC would not be drawn down, which LC it concluded was clearly the property of the estate. The appellate court also concluded that the claims arose out of the same transaction or occurrence, thereby satisfying the statutory requirements for the waiver of sovereign immunity.

[JEB/at]

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