In re Deak & Co., Inc.

• Citation: 63 BR 422
• Decision Date: 24 July 1986
• Docket Number: Bankruptcy No. 84 B 11680,Adv. No. 85-6788A.
• Parties: In Re DEAK & CO., INC., et al., Debtor. DEAK & CO., INC., Plaintiff, v. Ir. R.M.P. SOEDJONO, a/k/a Dama, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

63 B.R. 422 (1986)

In Re DEAK & CO., INC., et al., Debtor.

DEAK & CO., INC., Plaintiff, v. Ir. R.M.P. SOEDJONO, a/k/a Dama, Defendant.

Bankruptcy No. 84 B 11680, Adv. No. 85-6788A.

United States Bankruptcy Court, S.D. New York.

July 24, 1986.

As Amended July 24, 1986.

Levin & Weintraub & Crames by Herbert S. Edelman, Cindy Ellen Tzerman, New York City, for debtor.

Anderson, Russell, Kill & Olick, P.C. by Arthur S. Olick, Laurence Y. Solarsh, New York City, for Creditors Committee.

Fox, Glynn & Melamed by John R. Horan, Richard N. Chassin, New York City, for Ir. R.M.P. Soedjono a/k/a DAMA.

Milbank, Tweed, Hadley & McCloy by Risa Rosenberg, New York City, for Chan Cher Boon.

Harold D. Jones, by John Campo, New York City, U.S. trustee.

Davis, Polk & Wardwell by Laureen Bedell, New York City, for Morgan Guar. Bank.

Howard, Darby & Levin by Jack P. Levin, Jerome C. Roth, New York City, for Carol Sui-Han Leo.

DECISION AND ORDER DENYING DEFENDANT'S MOTION TO DISMISS COMPLAINT

BURTON R. LIFLAND, Bankruptcy Judge.

At all times relevant herein the debtor, Deak & Co., Inc. ("Deak") and its affiliates, were heavily engaged in the trading of international currency and gold. When Deak filed its Chapter 11 petition under the Bankruptcy Reform Act of 1978 ("Code") in 1984, creditors and other parties in interest worldwide were affected. Throughout the ensuing and often contentious reorganization, which has culminated in a confirmed plan, challenges to this court's jurisdiction rarely surfaced. However, one Ir. R.M.P. Soedjono a/k/a DAMA ("DAMA"), a defendant in an adversary proceeding commenced by Deak, did raise a jurisdictional challenge, which is the subject of this decision.

In the proceeding against DAMA, Deak seeks to invalidate a pledge claimed by DAMA on 8,000 shares of stock in Foreign Commerce Bank ("FOCO"), a bank located in Zurich, Switzerland and substantially owned and controlled at all material times by the debtor. Deak claims that the pledge constitutes a preference and a fraudulent conveyance which is voidable under the Code and New York Debtor and Creditor Law. In its amended complaint, Deak also seeks to enjoin DAMA from prosecuting an action instituted by DAMA in a Zurich District Court to enforce his alleged pledge. DAMA has moved to dismiss the instant proceeding, contending that this court lacks jurisdiction over him.

I. FACTS

The DAMA pledge, the relationship between DAMA and Deak, and DAMA's contacts with this court are set forth in detail below because they form the foundation for this court's holding. The pledge claimed by DAMA ("pledge" or "alleged pledge") has its roots in an earlier transaction between DAMA and a Deak affiliate. DAMA maintained an account or accounts at Deak-Perera Finance, Ltd. or Deak-Perera Far East, Ltd., two non-debtor affiliates of Deak located in Hong Kong, prior to the time Deak filed its petition for reorganization. DAMA purchased international certificates of deposit from one or both of these affiliates. When a certificate of deposit for approximately U.S. $4,000,000 matured on June 29, 1984, DAMA invested these proceeds with another Deak affiliate, Deak & Co. (Macau) Ltd. ("Deak Macau"), a non-debtor partnership organized under the laws of Portuguese Macau. In exchange, Deak Macau issued an international certificate of deposit for approximately U.S. $4,000,000 to DAMA.

Deak Macau did not secure or collateralize the certificate of deposit issued to DAMA. However, the Board of Directors of Deak, the parent company, adopted a resolution in New York on July 27, 1984, authorizing a pledge of 8,000 of Deak's FOCO shares to DAMA even though the underlying obligation was that of Deak Macau. Deak allegedly pledged the 8,000 shares to DAMA sometime in October of 1984.

On December 6, 1984, Deak and two of its wholly-owned subsidiaries, Deak-Perera International Banking Corporation and Deak-Perera Wall Street, Inc., filed petitions for reorganization in the Bankruptcy Court for the Southern District of New York.¹ The debtors asserted that the filings were, in large part, a response to the worldwide decline in the value of foreign currency in relation to the increasing strength of the U.S. dollar. This decline resulted in large losses for Deak and its subsidiaries on their foreign currency inventory and in reductions in earnings generated by their foreign exchange business. Deak saw its principal asset, its interest in the capital stock of FOCO, decreasing in value. As part of its reorganization efforts and attempts to provide creditors with the greatest distribution possible, it was concluded that everyone's best interests would be served if Deak sold its interest in FOCO.

Deak had attempted to sell its FOCO shares prior to the bankruptcy filing and had negotiated toward a purchase agreement with Dow Banking Corporation ("Dow"). The terms of the agreement were not finalized until after the filing and thus became subject to the approval of the bankruptcy court and to higher and better offers. Higher offers were made and were evaluated by a European investment banker retained to help market the FOCO shares.

On July 6, 1985, Deak entered into a Stock Purchase Agreement for the FOCO shares ("Agreement") with an individual named Chan Cher Boon ("Chan"), on behalf of his then undisclosed principal Carol SuiHan Leo ("Leo"). Of the 100,000 shares of FOCO stock which were issued and outstanding when the petition was filed, Deak owned 82,478 and was deemed to own an additional 12,644 for a total of 95,122 shares (collectively the "FOCO shares"). The Agreement provided that Chan on behalf of Leo would acquire all of Deak's shares or approximately 95% of the capital stock of FOCO for a purchase price equivalent to U.S. $52,000,000.² Section 4(a) of the Agreement provided that Leo would acquire the shares of FOCO "free and clear of all interests of any other entity including all liens, claims and encumbrances of any nature whatsoever," notwithstanding the parties' knowledge of DAMA's claim.

On February 11, 1985, just two months after Deak filed its petition, DAMA through his attorneys Fox Glynn & Melamed filed a notice of appearance and request for all notices and other papers. The notice states:

PLEASE TAKE NOTICE that the undersigned appear for M.P. SOEDJONO DAMA, Scheveningen, Holland, a party in interest and equity security holder in these proceedings and pursuant to Bankruptcy Rule 2002(f) and (g) request that all notices and other papers in these proceedings be mailed or delivered to:

FOX GLYNN & MELAMED One Broadway New York, New York 10004

(Emphasis added).

Pursuant to his request, DAMA received, inter alia, actual notice of the hearing on Deak's application for an order approving the Agreement scheduled for August 6, 1985. See Affidavit of Service to Notice of Hearing to Consider Approval of Stock Purchase Agreement, filed July 17, 1985, listing Fox Glynn & Melamed, counsel for DAMA, as having been served on July 16, 1985. DAMA did not file an objection to or otherwise contest the allegations made in Deak's application, although his interest in the DAMA shares was clearly sought to be affected.

At the August 6th hearing, Deak alleged that DAMA's pledge and two others claimed by the Hong Kong receiver of Deak-Perera Far East Limited and one of the Deak debtors, Deak-Perera International Banking Corporation, were in bona fide dispute and that these parties could be compelled to accept a money satisfaction of their security interest in the FOCO shares. Deak stated on the record that "by selling for the highest price available we believe that the attachment of their liens to the proceeds of sale give them the indubitable equivalent of what they otherwise have a lien on." Transcript, August 6, 1985, at 19. Deak further stated that it was "aware of no objection by any of the three lienors one of whom was DAMA with respect to this prong of the application." Id. Deak contends, and it has not been contradicted, that DAMA's counsel was present in court, although he neither objected nor formally noted his appearance on the record. Debtor's Memorandum in Opposition to DAMA's Motion to Dismiss at 3-4. The Hong Kong receiver (represented by counsel), who like DAMA claimed to have a pledge, stated that "on the present state of this record, and I am adverting to the remarks made by the debtor and the Creditors Committee with regard to the existence of the dispute as to all liens which will attach to the proceeds, I am withdrawing my objections to the sale of the shares." Transcript, Aug. 6, 1985, at 90.

This court, after hearing and considering the papers and arguments presented, entered an order pursuant to §§ 363(b) and (f) of the Code authorizing the sale of all of Deak's interest in the FOCO shares, including the DAMA pledge.³ The order mirrored the language of the Agreement by ordering that the sale be "free and clear of all liens, claims, pledges, and other encumbrances (collectively the "Liens")," and added that the "Liens shall attach to the proceeds of such sale with the same force, validity and effect which they now have against the FOCO shares." Order Approving Stock Purchase Agreement and Granting Other Relief at 5. The order also provided that FOCO was to deliver the FOCO shares to Chan. Order at 5. These provisions, in part, were designed to protect DAMA from any prejudice which could result from the sale.

Nevertheless, immediately after this court issued its August 6, 1985 order, but before the actual closing of the Agreement in Switzerland or the physical transfer of the FOCO shares, DAMA with knowledge of these proceedings and premised upon his alleged pledge, sought and obtained ex parte an injunction from a Swiss District Court in Zurich restraining FOCO from transferring the DAMA shares to Chan. Because Deak, Chan and Leo desired the transaction to close promptly to prevent further diminution in the value of the FOCO shares, they entered into an...