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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1997 LC CASE SUMMARIES 210 Bankr. 556 (Bankr. N.D. Ill. 1997)
Topics:
Bankruptcy; Jurisdiction.
Type of Lawsuit:
Beneficiary sued issuer for wrongful dishonor. The issuer removed the suit to bankruptcy court (where the applicant was involved in Chapter 11 proceedings), but failed to join the applicant.
Parties:
Applicant- Christopher Green
Plaintiff/Beneficiary- City of Joliet
Defendant/Issuer- Bank One, Chicago
Counsel
For Plaintiff: Jeffrey S. Plyman, City of Joliet, and Corey D. Lund, Hinshaw & Culbertson, Joliet, IL.
For Defendant: Mark O. Beem, Miller Shakman Hamilton Kurtzon & Schlifke, Chicago, IL.
Underlying Transaction:
Guaranty of obligation of developer to install improvements.
LC:
Standby letter of credit for US$ 100,000. Silent as to the UCP.
Decision:
The U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, Schmetterer, J., remanded the case to the Twelfth Judicial Circuit, Will County, Illinois.
Rationale:
Because the party which did not prevail in the wrongful dishonor suit would have a claim for the same amount against the applicant in bankruptcy, the outcome of this case would not have a material effect on the bankruptcy estate. Thus, the bankruptcy court did not have jurisdiction over the wrongful dishonor case.
Factual Summary:
Article
Factual Summary: To guaranty its obligation to install and pay for land improvements required by the beneficiary city in connection with a development, a standby letter of credit was issued.
After a presentation was refused, the beneficiary city sued the issuer for wrongful dishonor. Subsequently, the issuer sought leave to file a third-party complaint against the applicant, alleging that the applicant was the guarantor of any sums paid under the letter of credit. Before the court could consider the motion, however, an involuntary petition was filed against the applicant in bankruptcy court under Chapter 7. Subsequently, the case was converted to Chapter 11. The issuer then removed the action to bankruptcy court and never joined the applicant as a third-party defendant.
The applicant, prior to the involuntary motion under Chapter 7, won millions of dollars in the Illinois lottery. Subsequently, a plan was confirmed in Chapter 11 proceedings to pay his creditors with his winnings.
The beneficiary moved to have the proceeding remanded back to the state court on several grounds, including lack of subject matter jurisdiction. The bankruptcy court granted the motion.
Legal Analysis:
1. Bankruptcy Jurisdiction: The court set forth the legal test for when it had jurisdiction over a removed case: those actions arising from or related to actions brought under the bankruptcy code. The court then noted that the letter of credit was not part of the bankruptcy estate and was an independent obligation of the issuer. As such, for the court to have jurisdiction, the issuer would have to demonstrate that the outcome of its case would have a "material effect" on the bankruptcy estate (the court noted that it previously had rejected the broader test used in another circuit whereby the issuer would only have to demonstrate a conceivable effect on the estate).
After pointing out that the issuer had failed to attach any indemnification or guaranty from the applicant to its complaint or join the applicant, the court assumed that even had it done so, the issuer could not demonstrate a "material effect" on the estate. Under the court's reasoning, if the issuer lost the suit against the beneficiary, it would have a claim against the applicant for approximately $93,000; and if the beneficiary lost the suit, it would have a contractual claim against the estate for roughly the same amount. Thus, under either outcome "the amount of money available for distribution to creditors [would] remain unaffected."
©1998 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.