Affirming Bankruptcy Judge Martin Glenn without oral argument, a district judge in New York held that a bankruptcy proceeding abroad for a foreign “branch” of a U.S. bank isn’t eligible for recognition under chapter 15, even if the banking business had terminated abroad and foreign liquidators were appointed.

The appeal arose from the insolvency of Silicon Valley Bank, which led to the appointment of the FDIC as receiver in March 2023. The bank had a branch in the Cayman Islands.

Although licensed to do business in the Caymans, the branch was not separately incorporated and was prohibited from taking deposits from residents of the island. There were no officers or employees in the Caymans, only a mail drop.

Exercising discretion, the Federal Reserve declared a “systemic risk exception,” allowing the FDIC to pay all depositors in full, not just the ordinary limit of $250,000 per account. The FDIC determined that deposits of $476 million at the Caymans branch were not eligible for payment from FDIC insurance.

Instead, the FDIC declared that the branch’s depositors would have unsecured claims in the FDIC receivership. As District Judge Lorna G. Schofield of New York said in her February 10 opinion, the decision by the FDIC meant that “the depositors in [the Caymans’ branch] are unlikely to receive any recovery.”

Not being paid by the FDIC, some of the branch’s depositors initiated winding-up proceedings in the Cayman Islands. The court in the Caymans appointed liquidators who applied for foreign main recognition in New York under chapter 15.

The FDIC opposed recognition and won. See In re Silicon Valley Bank (Cayman Islands Branch), 658 B.R. 75 (Bankr. S.D.N.Y. Feb. 22, 2024). To read ABI’s report on the decision by Bankruptcy Judge Glenn, click here.

The Caymans liquidators appealed.

Banks Are Excluded from Chapter 15

Judge Schofield described Bankruptcy Judge Glenn as having decided that the branch was ineligible for chapter 15 because it was an “inseparable part” of the bank that was subject to the FDIC. She devoted the bulk of her opinion to explaining why Judge Glenn’s conclusions were correct.

Eligibility for relief in chapter 15 is governed by Section 1501(c)(1), which provides that chapter 15 “does not apply” to “a proceeding concerning an entity, other than a foreign insurance company, identified by exclusion in section 109(b).”

Section 109(b)(2) describes entities that may not be debtors under the Bankruptcy Code as including “a domestic insurance company, bank, savings bank . . . credit union, or industrial bank or similar institution which is an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act.”

Judge Schofield noted that the court in the Caymans had “concluded that [the branch] was a branch of [the bank] and not a separate legal entity.” Similarly, she noted how the liquidators had “acknowledge[d] [that the bank] and [the branch] were not separate corporations or legal entities, and [the branch] operated as a branch of [the bank].”

With little more than the recitation of the governing statutes, Judge Schofield decided that Bankruptcy Judge Glenn “correctly held” that “[the branch] is excluded from eligibility for Chapter 15 relief because it is a branch of a domestic bank insured by the FDIC.”

In Liquidation, a Bank Is Still a Bank

On appeal, the liquidators elaborated on arguments to which they had made only passing reference in bankruptcy court. None were persuasive.

According to Judge Schofield, the liquidators argued “that [the branch] ha[d] been severed from [the bank] and [was] no longer the foreign branch of a domestic bank.” The liquidators advanced the idea that the bank was no longer a bank and that the branch had become an insolvency estate or a trust under Caymans law.

Judge Schofield said that the liquidators “cite[d] no legal authority to support this extraordinary proposition.”

To the contrary, Judge Schofield said that the bank “did not cease to exist as a bank for purposes of the Bankruptcy Code when the FDIC placed it in receivership.” Rather, she said, the bank “continued to be an FDIC-insured bank subject to exclusion pursuant to § 109(b) so that [the bank’s] liquidation was subject to the procedures of the FDIC and not the bankruptcy court.”

Even though the bank “may no longer have existed as an entity capable of being named as a party to litigation,” Judge Schofield said, “the FDIC stepping into [the bank’s] shoes and succeeding to [the bank’s] rights does not transform [the branch] into a new legal entity that is something other than the foreign branch of a domestic, FDIC-insured bank.”

Judge Schofield saw her conclusion as “consistent with the overarching purpose of FDIC receiverships to give the FDIC exclusive powers to administer failed banks and their assets and liabilities.” She added,

It would run counter to this legislative purpose to hold that the initiation of an FDIC receivership converts former branches into separate entities that may then independently pursue relief through the bankruptcy process, outside of the FDIC’s control.

* * * * *

[The liquidators] want Chapter 15 to compete and interfere with the FDIC’s treatment of [the bank], which is exactly what the exclusion of FDIC-insured banks from Chapter 15 was trying to avoid.

Judge Schofield likewise rejected the idea that the branch ceased being a bank and had become an insolvency trust.

Even if Caymans law created an insolvency trust, Judge Schofield said,

[T]he creation of an insolvency trust does not give that trust new or different property rights from those originally held by the branch, nor does it change the nature of [the branch] as a branch of [the bank]. Instead, the [liquidators] are, at most, stepping into the shoes of [the branch], which remains a bank branch without a separate legal existence or rights from [the bank].

Judge Schofield affirmed dismissal of the chapter 15 petition.

Observation

It’s refreshing to see an Article III judge buttress her conclusion on policy, rather than rest on a slavish adherence to the language of a statute.