Money flashing through a New York correspondent bank in the twinkling of an eye can become the basis for personal jurisdiction over the ultimate recipient of the funds, according to a district court in New York.
The case involved Arcapita Bank BSC, a bank located in Bahrain with branches in Atlanta, London and Singapore. The bank filed a chapter 11 petition in New York in 2012 and confirmed a reorganization plan about one year later. The creditors’ committee assumed responsibility for filing lawsuits belonging to the estate.
One of the suits filed in bankruptcy court was a preference action against two foreign banks. The banks filed a motion to dismiss and won, having convinced the bankruptcy judge that the court lacked personal jurisdiction. District Judge George B. Daniels of Manhattan reversed on March 30.
The facts were critical to the outcome, since the passage of money through a New York bank is not always sufficient to establish personal jurisdiction.
The two foreign banks proposed transactions to Arcapita. The foreign banks required Arcapita to send U.S. dollars from Arcapita accounts abroad to their correspondent banks in New York, from which the funds would be forwarded to the foreign banks. The foreign banks then made investments for Arcapita abroad, thus, the only contact with the U.S. was the passage of the money through New York correspondent banks.
The outcome was determined by a 2012 case called Licci, where the Second Circuit certified a question to the New York Court of Appeals regarding the reach of that state’s long-arm statute.
Oversimplified, Licci stands for the proposition that there can be jurisdiction in New York as long as the use of a New York correspondent bank “was purposeful and not coincidental or adventitious.”
Because the foreign banks were the parties who demanded use of New York correspondent banks, courts in New York could have personal jurisdiction, Judge Daniels said. Were it the other way around and Arcapita demanded using New York banks, the judge said there would have been no personal jurisdiction because the contacts with New York would have been “adventitious.”
Judge Daniels’ opinion analyzes other steps in the process of deciding that the foreign institutions were subject to U.S. jurisdiction within the confines of due process and comity. Among other things, he said that requiring the use of New York banks meant that the foreign banks could “hardly claim that [they] could not have foreseen being hauled into court in the forum in which the correspondent bank” was located.