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Note: To secure any claims under a surety bond issued by Bankers Insurance Company (Surety/Beneficiary) in favor of CCP International Shipping (Obligor/Applicant), Obligor/Applicant obtained a USD 50,000 letter of credit in favor of Surety/Beneficiary issued by Bank of American (Issuer). The surety bond was procured to settle any claims related to Obligor/Applicant’s shipping business.

When Surety/Beneficiary learned that the letter of credit would not be renewed while its obligations as surety would continue, it made a full demand on the letter of credit, which was apparently honored in 2015. In 2018, negotiations between the parties collapsed when Obligor/Applicant rejected Surety/Beneficiary’s compromise-offer to return half of the LC proceeds as Surety/Beneficiary argued that it was entitled to hold the USD 50,000 as collateral until its obligations as surety ceased in December 2019. Obligor/Applicant sued Surety/Beneficiary and its parent company, Bankers Financial Corporation (Parent), for breach of contract and unfair business practices in Massachusetts state court. Subsequently, Surety/Beneficiary and Parent removed the case to federal court and moved to dismiss the complaint due to insufficient service of process and for failure to state claims. The United States District Court for the District of Massachusetts, Burroughs, J., dismissed the complaint without prejudice.

Surety/Beneficiary argued that it had not been properly served prior to removal because the summons Obligor/Applicant filed with the court was only directed to Parent. While Obligor/Applicant argued that it believed that Surety/Beneficiary and Parent were the same entity, citing a document it received with a letterhead stating “Bankers Financial Corporation/Banker Insurance Company”, the Judge rejected that argument noting that the assertion was “belied by the fact that [Obligor/Applicant] presented certified mail receipts for purported service on” Surety/Beneficiary and Parent. Ultimately, the Judge exercised the court’s discretion to “retain jurisdiction” but ruled that the purported service on Surety/Beneficiary and Parent was “ineffective.”

As for the remaining motions to dismiss for failure to state claims, the Judge noted that Obligor/Applicant “purportedly served each entity separately, which evidences a recognition that they are separate entities, and [Obligor/Applicant] ha[s] not made allegations that would support the piercing of the corporate veil.” Because the claims went to the issuance of the surety bond and draw down of the LC, neither of which involved Parent, the Judge dismissed the claims against Parent without prejudice, and ordered Obligor/Applicant to filed an amended complaint within 21 days precisely stating the entity or entities against whom Obligor/Applicant intended to proceed.

Comment: Assuming Obligor/Applicant amends its complaint and makes proper service, it is unclear whether the statutory limitations period has run and whether the federal court could properly exercise subject matter jurisdiction.

[MJK]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.