Finanz Ag Zurich v. Banco Economico S.A.

Citations: 192 F.3d 240; 1999 U.S. App. LEXIS 24977; 1999 WL 958509Docket: 1998

Court: Court of Appeals for the Second Circuit; October 7, 1999; Federal Appellate Court

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Finanz AG Zurich (Finanz) appealed a judgment from the U.S. District Court for the Southern District of New York, which dismissed its complaint against Banco Economico S.A. (BESA) based on the doctrine of international comity. The District Court ruled in favor of an ongoing extrajudicial liquidation proceeding in Brazil involving BESA, which Finanz argued was an abuse of discretion that violated U.S. policy interests and due process principles. However, the Court of Appeals affirmed the lower court's decision. 

The case centers on a forfaiting transaction, where Finanz sought to recover on promissory notes allegedly guaranteed by BESA. In such transactions, a forfaiter finances sales to importers, relying on an unconditional guarantee from a bank, typically evidenced by a two-word endorsement known as 'per aval' on the notes. This endorsement represents a binding commitment despite its brevity. The notes are usually payable in established financial centers, like New York, where regularity in transactions is expected. The court underscored the legitimacy and binding nature of the 'aval' within the forfaiting industry.

On May 2, 1995, Brazilian importer Delba Comercio Importacao e Exportacao Ltda. issued six promissory notes totaling over $5.6 million to Deutsche Morgan Grenfell Trade Finance Ltd., guaranteed by BESA's Grand Cayman branch. Each note specified that it was payable at BESA's New York branch, which was also identified as the payment domicile. On May 19, 1995, BESA's International Division confirmed via telex that the Grand Cayman branch had guaranteed the notes and stated they should be presented for payment at the New York branch upon maturity. On May 24, 1995, Finanz purchased three of these notes, totaling $3 million, from Morgan Grenfell on a non-recourse basis. Morgan Grenfell subsequently provided Finanz with documentation of the transaction, confirming the authenticity of signatures and agreeing to present the notes for payment on Finanz's behalf.

However, on August 11, 1995, Brazil's Central Bank intervened in BESA due to financial instability, appointing an intervenor with full management authority. This intervention led to an extrajudicial liquidation in August 1996, which operates similarly to a bankruptcy proceeding in the U.S., involving asset liquidation and distribution to creditors while staying all claims against the entity. Claims in foreign currency were to be converted to the Brazilian real, and notice of the liquidation was published rather than sent individually to creditors.

In response to the intervention, the U.S. Office of the Comptroller of the Currency (OCC) initiated cease-and-desist proceedings against BESA's New York branch. The branch's general manager eventually agreed to an Amended Consent Order, which mandated maintaining sufficient assets for liabilities and developing a contingency plan for liquidation. The branch subsequently announced its voluntary liquidation and cessation of operations on July 19, 1996.

On May 2, 1996, Morgan Grenfell, representing Finanz, attempted to present promissory notes for payment at BESA's New York Branch, which refused payment. Pessoa, in a response to Finanz's counsel, stated that the notes were issued with the 'avals' of BESA's Cayman Island Branch and clarified that the New York Branch was merely a paying agent with no funds to cover the notes. Pessoa suggested that Finanz could pursue claims against Delba or participate in BESA's liquidation proceedings in Brazil once the Central Bank announced the claims process.

On May 16, 1997, BESA's liquidator published a notice in The New York Times regarding claims procedures, and Finanz timely filed a claim in the Brazilian liquidation. Subsequently, on December 3, 1997, Finanz initiated a lawsuit in New York State Supreme Court for $3,000,000 in notes guaranteed by BESA's Grand Cayman Branch. BESA removed the case to federal court, arguing that its liquidator was a foreign state entity, thus establishing federal jurisdiction. BESA then moved to dismiss the case in favor of the Brazilian liquidation proceeding, citing forum non conveniens.

The District Court, without addressing the forum non conveniens argument, dismissed the case in favor of the Brazilian proceedings on April 28, 1998. It found that deference to the Brazilian liquidation would not undermine U.S. interests in enforcing debts, as foreign bankruptcy proceedings are typically respected. The court rejected Finanz's claims that the dismissal violated U.S. interests regarding domestic debt resolution and concluded that the notes, although payable in New York, did not qualify as liabilities of the New York Branch since the avals were from the Grand Cayman Branch.

Furthermore, the District Court dismissed Finanz's concerns about due process and fairness regarding the Brazilian proceedings, stating that the published notice provided sufficient awareness of the proceedings and that currency conversion risks did not constitute a fundamental fairness violation.

Finanz appeals following a District Court ruling. The court confirmed its subject matter jurisdiction over the case, as both parties acknowledged its validity. However, the court did not previously address this issue, prompting the appellate court to independently evaluate jurisdiction. BESA removed the action under 28 U.S.C. 1330(a), which grants original jurisdiction for nonjury civil actions against foreign states if they are not entitled to immunity. BESA claimed its liquidator, appointed by Brazil's Central Bank, qualifies as an "agency or instrumentality of a foreign state" under 28 U.S.C. 1603(b). This assertion is undisputed and supported by evidence, as the liquidator acts in the public interest and represents the bankrupt estate in court. Previous cases have affirmed similar jurisdictional findings under comparable circumstances. Consequently, the appellate court concluded that the jurisdictional requirements were met, validating the District Court's jurisdiction. Regarding international comity, the appellate court reviews the district court's decisions for abuse of discretion, referencing established precedents.

Comity is defined as the recognition that one nation grants to the legislative, executive, or judicial acts of another, balancing international responsibilities with the rights of its own citizens. U.S. courts generally refrain from reviewing foreign government actions and defer to foreign proceedings, provided those courts have proper jurisdiction and do not infringe on U.S. citizen rights or violate domestic public policy. This principle is especially significant in foreign bankruptcy cases, where the orderly distribution of a debtor's assets necessitates that all claims are addressed in a single forum. U.S. courts typically extend comity to foreign bankruptcy proceedings unless they conflict with U.S. laws or public policy and must observe fundamental standards of procedural fairness.

In this context, the case examines whether to defer to a Brazilian extrajudicial liquidation of BESA, contingent upon compliance with U.S. public policy and procedural fairness. Finanz argues that granting comity undermines U.S. interests in maintaining New York as a commercial hub and conflicts with U.S. policy requiring federal branches to meet their liabilities. Additionally, Finanz claims that the Brazilian process lacks due process, as creditors do not receive individualized notice, and it is fundamentally unfair due to currency conversion risks. The court will assess these arguments while recognizing the importance of extending comity to foreign bankruptcy proceedings.

Payment in New York for the forfaiting transaction does not hinder the granting of comity, as established in prior rulings that forum selection and choice of law clauses do not negate comity considerations. Concerns that this decision might deter forfaiters from using New York as a payment hub are unfounded; forfaiters are expected to take precautions, such as having the New York entity act as a guarantor, to secure collections.

Finanz argues that granting comity to the Brazilian liquidation contradicts U.S. interests in enforcing Federal branch liabilities regulated by the OCC. The New York Branch of BESA is undergoing voluntary liquidation and addressing claims from third-party creditors. U.S. policy, emphasized in the International Banking Act and OCC regulations, supports enforcing these obligations during liquidation. However, the legitimacy of Finanz's argument hinges on whether the avals are considered liabilities of the New York Branch under the Amended Consent Order.

The Amended Consent Order specifies that the New York Branch must pay certain liabilities during liquidation, explicitly excluding liabilities to the bank’s head office or other branches. The District Court determined that the avals were not liabilities "agreed to by the Branch," which Finanz does not contest. Instead, Finanz interprets the term "checks" in the definition to imply that it includes other contingent liabilities, asserting that the avals issued by the Grand Cayman Branch and confirmed by BESA's International Division qualify as such liabilities eligible for payment by the New York Branch.

The District Court appropriately interpreted the Amended Consent Order to include only liabilities explicitly agreed to by the New York Branch, as the language of the Order, despite being unclear, supports this interpretation. Since the New York Branch did not agree to the avals, it cannot be held liable for the related notes under the Order. Additionally, even if the New York Branch's agreement was unnecessary for the payment of checks issued outside the U.S., two key points affirm that U.S. policy is not violated. First, the term 'checks' does not encompass 'any other contingent liabilities' such as the avals, as the additional types of liabilities listed do not alter the plain meaning of 'checks.' Second, the avals were issued by the Grand Cayman Branch, not the New York Branch, and the Amended Consent Order consistently differentiates between the Bank and its branches. It defines 'Bank' as Banco Economico, S.A. Salvador, Bahia, Brazil, and 'Branch' as Banco Economico, S.A. New York, New York. Therefore, the avals cannot be considered liabilities issued by the Bank. Furthermore, Finanz's argument that the avals are obligations of 'the Bank' due to confirmation by the International Division lacks support, as the International Division did not issue or certify the obligation; it only transcribed a message from the Grand Cayman Branch, which confirmed the avals. Ultimately, the District Court's conclusion that deferral to the Brazilian liquidation does not violate U.S. policy interests stands affirmed.

Finanz contends that granting comity to the Brazilian bankruptcy proceeding would breach due process due to the lack of individualized notice to creditors under Brazilian law. The evaluation of procedural fairness in foreign bankruptcy proceedings considers factors such as equal treatment of creditors, accountability of liquidators, the right for creditors to submit claims, notice requirements for potential claimants, provisions for creditors' meetings, potential biases in favor of local citizens, centralized asset distribution, and the existence of automatic stays. Finanz argues that only the notice factor is unsatisfied; however, since it received actual notice from the New York Branch's general manager and filed a claim, the District Court found no due process violation. Actual notice, which allows a party to respond, satisfies due process requirements. Furthermore, Finanz's concern regarding inadequate notice to other creditors does not preclude comity. Lastly, Finanz's objection to the conversion of its claims into Brazilian reals is dismissed, as this practice is similar to U.S. bankruptcy procedures and does not render the process fundamentally unfair, especially since Finanz does not claim that such conversion would make its debts unenforceable or valueless. The District Court's conclusion regarding the fairness of the conversion procedure is upheld.

The District Court's judgment is affirmed. Judge Neal P. McCurn presided over the case by designation. Finanz argues that the District Court misinterpreted the precedent set in Pravin, claiming that granting comity to the Brazilian bankruptcy process is inappropriate due to the ongoing complexities of the BESA liquidation, which could hinder their ability to collect on the notes. However, the court clarifies that Finanz misinterprets Pravin, which involved a refusal to defer to voluntary negotiations related to Peru's foreign debt under the Brady Plan. In Pravin, the negotiations were strictly voluntary and lacked a defined timeline, distinguishing them from the current foreign bankruptcy proceeding. The court emphasizes that, unlike the Brady Plan negotiations, the Brazilian bankruptcy does not jeopardize the long-term enforceability of the debt, despite its potential duration.