540 F.2d 548 (2nd Cir. 1976), 1071, Miller v. Wells Fargo Bank Intern. Corp.

Docket Nº:1071, Docket 76-5004.
Citation:540 F.2d 548
Party Name:Alan B. MILLER, Trustee in Bankruptcy of American IBC Corp., Bankrupt, Appellee, v. WELLS FARGO BANK INTERNATIONAL CORP., Appellant.
Case Date:July 15, 1976
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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540 F.2d 548 (2nd Cir. 1976)

Alan B. MILLER, Trustee in Bankruptcy of American IBC Corp.,

Bankrupt, Appellee,



No. 1071, Docket 76-5004.

United States Court of Appeals, Second Circuit

July 15, 1976

Argued May 21, 1976.

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Charles L. Stewart, Dunnington, Bartholow & Miller, New York City, (Roger R. Crane, Jr., Dunnington, Bartholow & Miller, New York City), for appellant.

Harvey R. Miller, Weil, Gotshal & Manges, New York City, (Robert A. Weiner, Frederick J. Leffel, Weil, Gotshal & Manges, New York City), for appellee.

Before LUMBARD, ANDERSON and OAKES, Circuit Judges.

OAKES, Circuit Judge:

Arbitrage in foreign exchange the simultaneous purchase and sale of foreign currency in order to profit from discrepancies between the sales price and the purchase price in separate markets is a relatively sophisticated form of investment, and properly conducted may be entirely risk-free to the investor. Such a transaction

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may be equally risk-free, though even more exotic, when it includes the following steps:

(A) the arbitrager borrows dollars from a New York bank;

(B) these dollars are used to purchase Swiss Francs, which are deposited in the arbitrager's time deposit account at a European bank;

(C) simultaneously with step (B), the arbitrager contracts with a Swiss bank to sell the Swiss Francs it has deposited in the European bank (plus the interest, payable in Swiss Francs, accruing in that account) at a date six months in the future the contractual terms are such that the arbitrager will receive more dollars for his Francs when he sells to the Swiss bank after six months than he paid to obtain the Francs at the date the contract was made; 1

(D) after six months the Swiss Francs in the time deposit at the European bank (plus interest) are sold to the Swiss bank for dollars in accordance with the contract, and the proceeds are remitted by the Swiss bank to the arbitrager's account at the New York bank;

(E) the New York bank then deducts the principal amount of the sum lent, plus accrued interest, from the arbitrager's account;

(F) the difference between the amount deposited in the arbitrager's New York account in step (D) and the amount deducted from that account in step (E) represents the arbitrager's profit on the transaction.

Involved in this appeal are two such transactions initiated when appellant, Wells Fargo Bank International Corp. ("the New York Bank"), loaned $1,000,000 in each case to an international currency dealer, American IBC Corp. (AIBC), which used the proceeds to conduct the two arbitrage transactions in the more exotic form just suggested. The money earned from the foreign currency on the European time deposit, coupled with the price discrepancy on the simultaneous purchase and future sale of Swiss Francs, was to offset the total interest to be paid on the loan and leave the arbitrager, AIBC, with a profit of approximately 2/10 of one per cent on the overall transaction. 2 This was a profit that was, financially speaking, risk-free, note 1 supra. Similarly, the lending bank, the New York Bank, was to obtain a relatively good rate of interest in these transactions which it thought would "automatically unwind" so that in the end it would be repaid its principal and the interest out of the proceeds of the future sale back of the Swiss Francs, purchased and placed on time deposit by AIBC.

Unfortunately, the arbitrager or currency dealer went bankrupt less than four months after the loans were repaid to the lending bank out of the proceeds of the future sales of the Swiss Francs. The United States District Court for the Southern District of New York, Milton Pollack, Judge, held that the payments should be set aside as preferential transfers under Section 60(a)(1) of the Bankruptcy Act, 11 U.S.C. § 96(a)(1). 3

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The court found that the New York Bank had reasonable cause to believe that AIBC was insolvent at the time of the two loan repayments, Section 60(b), 11 U.S.C. § 96(b), 4 and that the six statutory prerequisites to a Section 60(a) preference was all fulfilled in this case. 5 Miller v. Wells Fargo Bank International Corp., 406 F.Supp. 452 (S.D.N.Y.1975). While we agree with much of Judge Pollack's quite comprehensive opinion, this opinion is made necessary because appellant's line of attack on appeal varies from that in the district court.

The two arbitrage transactions involved in this case are somewhat different factually and involve different legal questions on appeal. We will therefore describe and discuss them separately.

The first transaction. AIBC had a business relationship with the New York Bank, which is an international bank wholly owned by but operated independently from Wells Fargo Bank, N.A., of San Francisco. In April, 1973, AIBC approached the New York Bank with a proposal for a currency arbitrage transaction with the Swiss Credit Bank in Zurich (the Swiss Bank). The New York Bank approved the proposal and on May 3, 1973, loaned AIBC $1,000,000 at 8 per cent interest, to be repaid on November 2, 1973. On May 3, AIBC used the $1,000,000 to purchase 3,240,000 Swiss Francs from the Swiss Bank and simultaneously agreed to resell 3,308,850 Swiss Francs to the Swiss Bank on November 2, 1973, for $1,042,814.37. The difference of 68,850 Swiss Francs in the amount purchased and sold by AIBC was exactly equal to 4.25 per cent per annum interest earned on the six-month time deposit of the 3,240,000 Swiss Francs, a deposit made in Wells Fargo Luxembourg (the Luxembourg Bank), which is a European branch of Wells Fargo Bank, N.A. The time deposit contract was entered into simultaneously with the loan and with the separate purchase and resale agreement with the Swiss Bank.

Everything went smoothly. On November 2, 1973, the Swiss Bank forwarded the resulting $1,042,814.37 to the New York Bank, which credited the AIBC account in the New York Bank with the transfer and debited it with the sum of $1,040,666.67, representing the $1,000,000 principal and 8 per cent interest due on the six-month loan. AIBC's profit on the entire transaction was thus a mere $2,147.70.

On appeal, the New York Bank has employed what might be called a shotgun approach. It claims that it had a valid assignment of a security interest in the Luxembourg time deposit either by virtue of the exchange of correspondence between AIBC and it on April 30 and May 2, respectively, 6

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or by virtue of a prior so-called 1970 General Pledge Agreement 7 entered into between AIBC and the New York Bank. Appellant also claims that the loan in the first transaction was secured by a pledge of the Luxembourg time deposit. Alternatively, appellant claims that AIBC's time deposit at the Luxembourg Bank should be treated as a "special deposit," similar to a trust, running in appellant's favor.

The second transaction. The second transaction involving a loan from the New York Bank to AIBC on May 17, 1973, and repayment, via the Swiss Bank on November 19, 1973, raises quite different issues than the first. While the terms of the two transactions were essentially identical, 8 the

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underlying documentation and the routing of the funds were different. The purchase and future sale of Swiss Francs in both cases were from and to the Swiss Credit Bank. But the bank with which the time deposit was made in the second transaction was not the Luxembourg Bank affiliate of the New York Bank but was the entirely independent United California Bank, London (United California). United California did not act as the New York Bank's agent, nor was it requested to do so; there is thus no possibility here, as there may have been with the first transaction, that the time deposit bank held funds in the deposit for appellant as a pledge from AIBC. Further unlike the first transaction, there is no letter from AIBC to the New York Bank "lodging" any collateral to or with the New York Bank. In sum, there is no internal bank documentation indicating that AIBC was providing collateral by way of pledge, assignment, special deposit or otherwise with regard to this transaction. Indeed, the New York Bank did not even obtain a promissory note in connection with the second loan, much less an "advance account agreement" as had been obtained in the earlier transaction. 9 As a result, quite understandably, on this appeal the New York Bank does not make the claim it had raised in the district court that it had a security interest in respect to the second transaction.

Appellant's claim on appeal is, rather, that repayment of its loan did not result in a diminution of the bankrupt's estate because at the time the funds were transferred to the New York Bank they were not the property of the debtor, but of the Swiss Bank. This claim stems from the fact that on August 29, 1973, AIBC wired a Telex to the Swiss Bank directing it to ignore prior instructions to transfer the dollar proceeds of the currency exchange to the New York Bank, and instead to retain the proceeds in repayment of advances the Swiss Bank had previously made to AIBC in wholly unrelated transactions (and as to which the AIBC president was evidently personally liable). While the Swiss Bank apparently intended to comply with these instructions, it mistakenly transferred the dollars to the New York Bank as per its original directions. Appellant claims that the August Telex constituted an assignment of the funds to the Swiss Bank, thereby divesting AIBC of title and right to control over the funds upon receipt by the Swiss Bank. Since the claimed assignment occurred more than four months before the date of bankruptcy, appellant maintains that the transfer to the Swiss Bank was not a voidable preference under Section 60(a). And, since the funds were therefore the property of the...

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