Topics: Bankruptcy

Note: As a condition for issuance of an insurance policy, Lott Surplus Materials (Applicant) agreed to provide its insurer, Amerisure Mutual Insurance Co. (Beneficiary), with a standby letter of credit to secure Applicant's "additional premium and loss reimbursement obligations to [Beneficiary]." When Texas First Bank (Issuer) issued the standby, Applicant and Applicant's principal executed promissory notes in the same amount as the LC in favor of Issuer to secure reimbursement if Issuer was required to pay Beneficiary.

Four days after Applicant filed for bankruptcy, Beneficiary drew the full amount of the LC but Issuer refused to honor. Issuer then filed an adversary proceeding in the bankruptcy proceedings, for declaratory judgment as to Issuer's rights and obligations under the LC. Beneficiary moved to dismiss for lack of subject matter jurisdiction and to remove the reference of the case from bankruptcy court.

The U.S. Bankruptcy Court for the Southern District of Texas, Paul, U.S. Bankruptcy Judge, denied the motion to dismiss and denied without prejudice the motion to withdraw the bankruptcy case. The Judge ruled that there was subject matter jurisdiction because "the outcome of this adversary proceeding affects the bankruptcy case because it determines which party, [Issuer] or [Beneficiary], may assert a claim against the estate, and, assuming that the claim is allowed, receive a distribution from the estate."

Comment: The opinion addresses the procedural issue of whether the case should proceed in the Bankruptcy Court or in the District Court. However, the question is whether the presentation complied. If it did, Texas First Bank should have honored notwithstanding Applicant's bankruptcy.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.