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Note: To cover the US$500,000 deductible in Allied Systems, Ltd.'s (Employer's) insurance policy issued by Kemper Insurance Companies (Insurer), Employer posted a standby LC in favor of Insurer in the amount of US$6,000,000 in the event that Employer was unable to pay the deductible. The total price of the insurance policy was US$6,460,000 of which Insurer retained US$460,000, and Haul Insurance Ltd. (Reinsurer) held the balance of US$6,000,000 as collateral for the standby LC.

After commencement of state court tort actions under the insurance policy by Angel and Brian Pennock (Victims), Employer sought federal bankruptcy protection and sought to remove the tort action from the state court to United States federal district court. When its motion was granted, Victims moved in federal court to remand the tort action to state court. The United States District Court for the Western District of New York, Foschio, J., granted Victims' motion to remand.

Employer argued that removal to federal court was proper, arguing that if Insurer is required to pay the deductible, "[Insurer] will likely seek reimbursement by drawing on the [LCs] caused to be issued by [Reinsurer]" thereby harming Employer's "ability to seek a return of Collateral from [Insurer]" in the Bankruptcy Estate. The court, however, noted that the Bankruptcy Stay Relief Order limited Victims' recovery to the amount of the insurance proceeds and that Insurer would not be required to pay Victims the deductible portion. As a result, there was no possibility that Insurer would draw on the standby LCs. Therefore, the court ruled that Employer's removal to federal court was not proper.

[JEB/al]

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