Official Committee of Unsecured Creditors of Arcapita, Bank B.S.C. v. Bahrain Islamic Bank

Citations: 549 B.R. 56; 2016 WL 1276459Docket: 15-cv-03828 (GBD); 15-CV-03829 (GBD)

Court: District Court, S.D. New York; March 30, 2016; Federal District Court

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The official committee of unsecured creditors for a chapter 11 bankruptcy case initiated adversary proceedings against Bahrain Islamic Bank (BisB) and Tadhamon Capital B.S.C. (Tadhamon), seeking to avoid a preferential transfer. The Bankruptcy Court dismissed the proceedings with prejudice, citing a lack of personal jurisdiction over the Banks, and also denied the Committee's request for jurisdictional discovery. The Committee appealed the dismissal and the denial of jurisdictional discovery. Upon reviewing the case, the Court found that the Bankruptcy Court erred in its determination of personal jurisdiction, resulting in the vacating of the dismissal orders and the remanding of the adversary proceedings for further proceedings. Prior to the bankruptcy filing on March 19, 2012, Arcapita Bank B.S.C.(c) engaged BisB and Tadhamon for investment transactions under Placement Agreements, which detailed the investment mechanics, including transfer amounts, bank accounts, and expected returns. Notably, BisB has correspondent accounts in the U.S., while Tadhamon does not.

On March 14, 2012, Arcapita transferred $10 million to a BisB-designated account, allowing BisB to purchase 14,245 troy ounces of palladium on Arcapita's behalf, with an investment maturity date of March 29, 2012. Prior to this transfer, Arcapita owed BisB $9,774,096.15. On March 15, 2012, Arcapita accepted two investment offers from Tadhamon, transferring an additional $20 million to a Tadhamon-designated HSBC account, which was subsequently used to purchase Bahraini securities. These investments were set to mature on March 30, 2012, and April 16, 2012, while Arcapita's debt to Tadhamon was $18,497,734.48. Arcapita filed for bankruptcy on March 19, 2012, just days after these transactions. On maturity dates, both banks failed to return the expected proceeds, and by April 30, 2012, Arcapita issued demand letters to the banks, asserting that the funds were part of its bankruptcy estate. The banks responded by withholding funds as setoffs for Arcapita's debts. In December 2012, Tadhamon returned approximately $2 million to Arcapita, but BisB did not return any funds. In June 2013, the Bankruptcy Court confirmed Arcapita's reorganization plan and granted the Committee authority to pursue claims against the banks, which led to adversary proceedings initiated on August 26, 2013. These proceedings alleged that the placements were made while Arcapita was insolvent, occurred within ninety days prior to bankruptcy, and were intended to settle existing debts to the banks.

On November 18, 2013, the Banks filed motions to dismiss adversary complaints, arguing that the Bankruptcy Court lacked personal jurisdiction over them, that the Committee’s claims were barred by extraterritoriality, and that principles of international comity applied. On April 17, 2015, the Bankruptcy Court ruled that transfers to New York correspondent bank accounts were insufficient to establish specific personal jurisdiction, stating that while these accounts constituted a contact with the U.S., this contact was too weak to meet due process requirements. The court noted that the accounts were not central to the alleged wrongdoing, as the actions were based on the Banks' setoff and the transfers were not improper at the time they took place.

The standard of review for dismissal due to lack of personal jurisdiction is de novo, requiring the plaintiff to make a prima facie case for jurisdiction. The court may consider materials outside the pleadings but must accept the plaintiff's claims as true. The jurisdictional inquiry involves determining the defendant's minimum contacts with the U.S. and whether those contacts relate to the underlying controversy. Additionally, the court assesses whether exercising jurisdiction aligns with notions of fair play and substantial justice, considering the burden on the defendant, the forum's interest, and the plaintiff's need for effective relief.

The document also references previous cases where courts assessed whether the use of correspondent bank accounts warranted personal jurisdiction over foreign banks, indicating an ongoing legal discourse on this issue.

In Licci v. Lebanese Canadian Bank, SAL, the plaintiffs accused the bank of providing wire transfer services to Hizbollah, enabling terrorist attacks against them in Israel. Initially, the plaintiffs' claims were dismissed due to lack of personal jurisdiction, prompting an appeal. The Second Circuit examined whether the bank’s use of a New York correspondent account for international wire transfers constituted a “transaction of business” under New York’s long-arm statute (N.Y. C.P.L.R. 302(a)(1)). The court found uncertainties in New York law regarding this applicability and certified two questions to the New York Court of Appeals. The first question asked if maintaining a correspondent account and executing numerous wire transfers qualifies as a transaction of business in New York. The second question addressed whether the plaintiffs' claims arose from this business transaction. The New York Court of Appeals accepted these questions and analyzed relevant precedents, particularly Amigo Foods Corp. v. Marine Midland Bank-N.Y., which established that passive receipt of funds, without purposeful engagement, does not satisfy the standard for conducting business in New York.

The defendant did not meet the criteria for having “transacted business” under the first prong of New York's long-arm statute, as established in the case of Amigo Foods. The court clarified that jurisdiction could arise from a defendant's purposeful use of a correspondent bank account in New York, regardless of the number of transactions or whether funds were received or transferred. Specifically, repeated use of such an account could indicate purposeful availment of New York’s banking system. However, the court emphasized the need for a fact-specific examination to determine if the account usage was purposeful or coincidental, rejecting the notion that merely having repeated transactions was necessary to establish jurisdiction. 

The court further explained that the relationship between the business transaction and the legal claim must not be entirely disconnected for jurisdiction to apply. Even a single connection could suffice if related to the claims asserted. It highlighted that the focus should be on the defendant's conduct rather than the plaintiff's injuries, as personal jurisdiction centers on the court's authority over the defendant. Applying these principles, the court found that the plaintiffs' claims against LCB arose from its transaction of business in New York, specifically through allegations of terrorist financing via its correspondent account.

LCB potentially breached its duties to the plaintiffs under various statutes relevant to subject matter jurisdiction. Although not all elements of the claims were tied directly to LCB's use of its New York correspondent account, the court found that there was a sufficient connection between these uses and the plaintiffs' claims to establish personal jurisdiction. The court noted that LCB intentionally utilized its New York bank account rather than doing so accidentally. Upon review by the Second Circuit, it affirmed that jurisdiction over LCB was consistent with constitutional due process, emphasizing that it would be unusual for a defendant to conduct business in New York and not be subject to jurisdiction if the claims arose from that business activity. The Second Circuit highlighted that LCB's deliberate choice to process wire transfers through a New York account demonstrated purposeful availment of the forum. The court ultimately concluded that it was foreseeable for LCB to face litigation in New York given its banking activities there. Furthermore, the court determined that exercising jurisdiction would not violate traditional notions of fair play and substantial justice, noting the modern ease of communication and transportation, as well as the interests of the U.S. and New York in overseeing banking practices. Thus, the court upheld the assertion of jurisdiction over LCB in New York.

The use of New York correspondent bank accounts by the Banks constitutes “minimum contacts” for asserting personal jurisdiction under New York's long-arm statute. Purposeful selection of these accounts, even without other New York contacts, satisfies the first prong of the statute, as established in Licci cases. The second prong requires that the defendant’s use of the account need not directly relate to the plaintiff's claim but should not be entirely disconnected from it. The jurisdictional analysis under the New York long-arm statute and constitutional due process is closely aligned, particularly concerning N.Y. C.P.L.R. 302(a)(1). When a defendant intentionally selects a New York correspondent bank account for a transaction related to a lawsuit, they can anticipate being subject to jurisdiction in that forum. In the context of a chapter 11 bankruptcy reorganization, the Banks' deliberate use of New York accounts for transactions, including the selection of U.S. dollars and directing funds into those accounts, reinforces the notion of conducting business in New York. Unlike the passive contacts seen in other cases, the Banks took active steps in establishing these New York connections, confirming their engagement with the state's banking system.

The Committee's claim to avoid a preferential transfer is based on the Banks' use of New York correspondent bank accounts. To establish this claim, the Committee must demonstrate that: 1) a transfer was made to a creditor, and 2) this transfer was in satisfaction of a prior debt owed by the debtor. The Banks' receipt of transferred funds in New York is central to this claim. Specific jurisdiction under N.Y.C.P.L.R. 302(a)(1) is supported by the Banks' deliberate engagement with New York's banking system, indicating constitutional due process compliance. Historically, courts have not ruled that jurisdiction under § 302(a)(1) would violate due process. The necessary minimum contacts for jurisdiction exist as the Banks purposefully availed themselves of New York's business environment, which they could foreseeably be subjected to litigation. Although the Banks did not use the funds for U.S. transactions, their choice to receive U.S. dollar transfers in New York establishes sufficient contacts. Consequently, any preferential transfers are tied to these New York transactions, making jurisdiction over the Banks constitutional, as they chose to process significant funds through New York, similar to the defendant in the cited case, Licci.

Asserting jurisdiction over the Banks does not rely solely on the maintenance of correspondent accounts in the U.S. for personal jurisdiction in related controversies. If Arcapita, rather than the Banks, had chosen to use U.S. dollar accounts in New York for the Placements, then the Banks’ U.S. contacts would have been incidental, negating jurisdiction. However, since the Banks engaged in purposeful activities within the U.S., they established sufficient minimum contacts for jurisdiction, even if the effects were felt outside the country. The Banks could have avoided jurisdiction by offering Arcapita alternative non-U.S. accounts for the Placements.

To challenge the reasonableness of jurisdiction, a defendant must demonstrate compelling reasons that would render jurisdiction unreasonable. The Second Circuit considers factors such as the burden on the defendant, the forum state's interest in the case, and the plaintiff's interest in effective relief. The burden on the Banks is lessened by modern communication and transportation conveniences. The U.S. has a compelling interest in adjudicating claims under its Bankruptcy Code, ensuring fair treatment for both creditors and debtors. Additionally, the Committee seeks effective relief, which may not be attainable in a foreign forum. Although the Banks face challenges in a U.S. legal setting, this alone does not negate jurisdiction. Ultimately, the balance of factors supports the constitutional exercise of personal jurisdiction over the Banks, based on their use of correspondent accounts in New York.

The Court vacates the Bankruptcy Court's orders that dismissed the Committee's adversary proceedings against the Banks with prejudice and remands the cases for further proceedings. The Court affirms that the Bankruptcy Court has personal jurisdiction over the Banks but refrains from commenting on the Committee's appeals related to the dismissal decisions or the request for jurisdictional discovery. Both parties agree the facts are undisputed, with the Banks acknowledging this in their brief. Key factual elements include the execution of Placement Agreements between Arcapita and BisB in July 2003, and between Arcapita and Tadhamon in March 2012, which involved the rollover of $10 million placements. The Committee's claims include breach of contract, turnover, violation of the automatic stay, and claim disallowance. The Court also notes that while specific jurisdiction can be asserted, general jurisdiction over foreign corporations requires a finding that their affiliations with the State are "continuous and systematic." The Committee admitted that its Complaint did not establish a prima facie case for general jurisdiction. Determining personal jurisdiction involves examining the forum state's laws, with references to relevant case law.

Proof of a single transaction in New York can establish jurisdiction over a defendant who has not entered the state, provided the defendant's activities were purposeful and there is a substantial connection between the transaction and the claim. In bankruptcy cases, personal jurisdiction must first be assessed under the forum state's law. The Bankruptcy Court noted that the Banks asserted the correspondent accounts were used to facilitate Arcapita's transactions in U.S. dollars, but the evidence did not support this claim. The court emphasized the need to interpret pleadings favorably for the plaintiff, highlighting that BisB initiated the dollar transaction. The Tadhamon Placement Agreement indicated joint control over transaction currency between Arcapita and Tadhamon, making Tadhamon equally accountable for the dollar decision. The Banks argued they acted as agents for Arcapita, suggesting the New York accounts were Arcapita's contacts. However, the Banks independently chose to use New York accounts for receiving funds, which should be attributed to them. The Bankruptcy Court concluded that Tadhamon's choice not to maintain a U.S. correspondent account negated establishing specific jurisdiction, but this court disagrees with that finding.

Tadhamon directed Arcapita to execute two wire transfers totaling $20 million to designated accounts in New York, utilizing Khaleeji's correspondent account. This action underscores Tadhamon's strategic use of the U.S. banking system to its advantage, as it received funds in New York before transferring them to its Bahrain account. The receipt of these funds is a significant contact attributable to Tadhamon. Furthermore, Khaleeji functioned as Tadhamon’s agent in this transaction, allowing the receipt of funds in New York to be imputed to Tadhamon. The Bankruptcy Court noted that mere knowledge of the funds' receipt by the Banks at a correspondent account does not suffice for jurisdiction. However, it highlighted that the Banks actively selected and directed the funds to the New York accounts, establishing a more than passive connection. The Bankruptcy Court also indicated that while the use of the correspondent account alone does not establish jurisdiction, there exists a clear nexus between the preferential transfer cause of action and the Banks’ use of these accounts, aligning with due process as outlined in N.Y. C.P.L.R. 302(a)(1).