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Note: To cover a pre-construction contract between Holiday Isle, LLC (Beneficiary) and Lewis H. Bryant (Applicant), Applicant obtained an LC purportedly issued by Clarion Mortgage Capital, Inc. (Issuer) and signed by Jeffrey A. Sloop as branch manager of Issuer. Apparently, Applicant failed to close the contract and Beneficiary drew on the LC. On receipt of documents under the LC, Issuer refused to honor the LC, claiming that it had not issued the standby, whereupon Beneficiary brought an action against it in Alabama state court for wrongful dishonor.

As permitted under U.S. federal law, Issuer removed the case from state to federal court on the basis that the two parties were from separate states, thereby giving federal courts jurisdiction on the basis of diversity of citizenship. Issuer also filed a motion to dismiss, claiming that the LC was forged and that there was no relationship between it and the named issuer, Clarion Mortgage Capital Bank. Given this defense, Beneficiary amended its complaint, seeking to add Applicant and the Branch Manager as defendants.

Because this amendment would have defeated full diversity since the defendants newly named in the amendment were citizens of the same state as Beneficiary, Beneficiary also moved to remand the case to the Alabama state courts. The U.S. District Court for the Southern District of Alabama, Granade, J., granted the motion and remanded the case.

Noting that granting a motion to amend that would destroy diversity jurisdiction is discretionary, the Judge discussed various factors, concluding that the purpose of the amendment was not to defeat diversity but to include in the action those persons who would be liable if the LC was fraudulently issued. The Judge also noted Beneficiary's lack of awareness of the claim of fraudulent issuance, the inefficiency of proceeding in separate cases in parallel forums, and the prejudice to the Beneficiary resulting from such proceedings.

Comment:

Non-Bank LCs. Because this case is at a preliminary stage, the allegations that the LC was fraudulent are not detailed. It should be noted, however, that the putative issuer is not a bank but a mortgage company which probably would be loosely classified as a financial institution. Nor is it clear from the opinion how the LC was supposedly issued and whether the fraud was fraud in the inducement, the result of a rogue employee, or a forgery. However the case may turn out, the possibility of a fraudulent LC is greater when the LC is handled outside of the traditional interbank LC operations system.

[JEB/krp]

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