When both sides to a transaction use correspondent banks in New York to send and receive funds, the recipient of a transfer cannot invoke comity or the presumption against extraterritoriality to defeat the jurisdiction of the bankruptcy court, even though both parties are foreign entities, according to New York Bankruptcy Judge Sean H. Lane.
Judge Lane handed down his decision on Oct. 13 following confirmation of the chapter 11 plan for 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.
Under the plan, the creditors’ committee assumed responsibility for prosecuting claims belonging to the estate. One suit asserted preference, turnover and stay violation claims against two foreign banks. In April 2015, Judge Lane dismissed the suit on the banks’ motion, convinced there was no personal jurisdiction. District Judge George B. Daniels of Manhattan reversed in March 2016, finding that the two banks had sufficient minimum contacts with the U.S. to make them subject to personal jurisdiction. Official Committee v. Bahrain Islamic Bank, 549 BR. 56 (S.D.N.Y. March 30, 2016). For ABI’s discussion of Judge Daniels’ opinion, click here.
The Foreign Banks and the Transfers
One bank was from Yemen and the other from Bahrain, like Arcapita. Less than a month before its bankruptcy, Arcapita made two $10 million investment transactions with the two banks in compliance with Islamic law. For its side of the transaction, Arcapita used a correspondent bank in New York to send funds. The two banks also used correspondent banks in New York to receive funds from Arcapita.
Both transactions matured within a month after bankruptcy, but the two banks refused to pay what they owed Arcapita, claiming rights of setoff.
The creditors’ committee sued, asserting preference claims under Section 547, violation of the automatic stay under Section 362(a), and turnover under Sections 541, 542 and 550 for failure to turn over assets wrongfully withheld.
Judge Lane’s Oct. 13 decision is required reading for anyone confronted with avoidance of a cross-border transaction. He cites and categorizes virtually every significant decision on comity and extraterritoriality since 1895.
The Banks’ New Motion to Dismiss
Undeterred by failing to win dismissal for lack of personal jurisdiction, the two banks went back to the well, this time seeking dismissal based on comity and the presumption against extraterritoriality. In substance, Judge Lane said that his decision to deny the motions to dismiss was preordained by Judge Daniels’ opinion last year finding personal jurisdiction over the foreign banks in the same lawsuit.
Judge Lane alluded to Judge Daniels’ conclusion that the defendant banks’ decision to use New York correspondent banks established the minimum contacts required for submission to personal jurisdiction. The district judge also said that the defendants’ New York banks were at the heart of the creditors’ preference claims.
On the question of comity, Judge Lane declined to dismiss, in significant part because there was no foreign bankruptcy proceeding in which the creditors could press their claims. He also said the banks “cannot be surprised” by litigating in New York. Furthermore, he said the “potential application of Bahraini law does not mandate abstention based on comity given that the [Bankruptcy] Court is competent to apply foreign law.”
Significantly, Judge Lane distinguished Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Bernard L. Madoff Investment Securities LLC), 513 B.R. 222 (S.D.N.Y. 2014), where New York District Judge Jed Rakoff dismissed an avoidance action brought against a subsequent recipient of an allegedly fraudulent transfer. Judge Lane said that Madoff was inapplicable because the challenged transfer was made to a subsequent recipient offshore. In Arcapita’s case, the transfer was made in the U.S. to the defendant’s U.S. correspondent bank.
The banks fared no better by relying on the presumption against extraterritorial application of U.S. statutes, because Judge Lane concluded that the claims were either based on domestic conduct or on statutes that apply extraterritorially.
On the preference claim, the targeted transfers in New York were at the “heart of this cause of action,” Judge Lane said, quoting Judge Daniels.
Having decided that the transfer was domestic, not foreign, Judge Lane said he had no reason to address the question of whether avoidance statutes apply extraterritorially, an issue where the courts are split.
The statutes underpinning the creditors’ other claims — for turnover and violation of the automatic stay — apply extraterritorially because the suits aim to recover property that is already property of the estate under Section 541. He said it “is clear that Congress intended to apply extraterritorially the provisions of the Bankruptcy Code that relate to property of the estate, such as Section 542(b).”
The same, he said, is true for claims under Section 362(a), which incorporates the concept of property “wherever located.”