Bahr. Islamic Bank v. Arcapita Bank B.S.C. (C), (In re Arcapita Bank B.S.C. (C))

Decision Date23 May 2022
Docket Number21 Civ. 8296 (AKH)
PartiesIN RE ARCAPITA BANK B.S.C. (C), Debtor, v. ARCAPITA BANK B.S.C. (C), Appellee. BAHRAIN ISLAMIC BANK, BisB,
CourtU.S. District Court — Southern District of New York

ORDER AND OPINION AFFIRMING JUDGMENTS OF BANKRUPTCY COURT

ALVIN K. HELLERSTEIN UNITED STATES DISTRICT JUDGE

This appeal arises out of the Chapter 11 proceedings for Appellee-Debtor Arcapita Bank B.S.C. (C) (“Arcapita”). Prior to its bankruptcy filing Arcapita was licensed as an Islamic wholesale bank by the Central Bank of Bahrain and operated as an investment bank and global manager of Shari'a compliant investments. Arcapita maintained a pre-Petition business relationship with BisB Bahrain Islamic Bank[1] (“BisB”), through which Arcapita and BisB made several Shari'a-compliant short-term investments with each another. Upon its bankruptcy filing, Arcapita attempted to recover the proceeds of certain investments made just days before the Petition Date. However, Bisb refused to turn over the proceeds, asserting that it exercised a purported right to a setoff under Bahraini law, reconciling the debts owing between them. Thereafter, Appellee Official Committee of Unsecured Creditors of Arcapita Bank B.S.C. (c) (the “Committee”) instituted adversary proceedings against Bisb, asserting claims for breach of contract and violation of the automatic stay, and seeking turnover of the investment proceeds and claims disallowance.

BisB mightily fought to avoid litigating before the Bankruptcy Court. It first moved to dismiss based on lack of personal jurisdiction. The motion was granted by the Bankruptcy Court but reversed on appeal to the District Court. BisB next moved to dismiss on grounds of international comity. The Bankruptcy Court denied that motion and BisB's subsequent request for reconsideration. Finally, the parties cross-moved for summary judgment. The Bankruptcy Court granted the Committee's motion and denied BisB's motion, entered judgment in favor of the Committee, and awarded prejudgment interest at New York's statutory rate of 9 percent.

BisB now appeals from five orders[2] of the Bankruptcy Court of the Southern District of New York. See Appellant's Brief (“A.B.”), ECF No. 12-1. It identifies fourteen issues for resolution, which can be summarized briefly as follows. BisB challenges the Bankruptcy Court's refusal to revisit the issue of personal jurisdiction, raised again in BisB's motion for summary judgment and after the remand from the District Court; the Bankruptcy Court's failure to dismiss on international comity grounds; the Bankruptcy Court's ruling that BisB was not entitled to setoff, as a matter of Bahraini law or under the safe harbor provisions of the Bankruptcy Code and, therefore, was in violation of the automatic stay; and, the Bankruptcy Court's award of prejudgment interest and use of the New York statutory rate. For the reasons discussed below, I find BisB's arguments without merit, affirm the challenged orders of the Bankruptcy Court, and dismiss the appeal.

BACKGROUND[3]

Prior to its bankruptcy filing on March 19, 2012, Arcapita was an Islamic wholesale bank licensed by the Central Bank of Bahrain (“CBB”) and headquartered in Bahrain. It operated as an investment bank and global manager of Shari'a-compliant investments. BisB is an Islamic commercial bank licensed and headquartered in Bahrain, but which also maintains and uses correspondent banks in New York. The CBB is the sole regulator of Bahrain's financial sector and is in charging of licensing, regulation and supervision of parties carrying out regulated financial services in Bahrain.

Arcapita maintained a pre-Petition business relationship with BisB, through which Arcapita and BisB made Shari'a-compliant investments with each other. Islamic banking and finance is a revival of faith-based rules governing how commercial and financial transactions are executed. One of the religiously mandated rules is a prohibition of interest; thus, a Shari'a-compliant investment cannot technically return interest. This prohibition impacts the manner in which Islamic banks and investments funds manage liquidity, comply with applicable foreign and domestic regulations, and operate in the financial markets. It also means that such entities do not borrow or lend in the traditional sense, instead employing Shari'a-compliant investments.

One such Shari'a-compliant investment employed by the parties is the commodity murabaha investment. The commodity murabaha is a tool for short-term liquidity management. It works as follows. A placing party transfers funds to a receiving party (a party in need of funds). The receiving party, acting as an agent for the placing party, purchases specified commodities on the placing party's behalf. The receiving party immediately agrees to repurchase those commodities from the placing party on a cost-plus basis to be paid on an agreed future date. The transactions are documented by form offers, acceptances, and confirmations exchanged by the parties over the course of a day. As utilized by Arcapita and BisB, the placements were organized so that the placing party would retain title to the commodities for seconds or minutes in order to remove the risk of commodity volatility.[4] The commodity murabaha is Shari'a-compliant because it does not technically provide for interest but nevertheless creates a transparent analogy to principal (the cost price) and interest (the fixed profit added to the cost price), from which one can infer an interest rate and credit margin. The interest rate is not tied to market. The murabaha creates an obligation to repurchase by the receiving party, and the placing party expects to receive the agreed-upon repurchase price.

BisB's Placements with Arcapita

Starting in April 2002, BisB entered into a Master Placement Agreement (the “BisB Placement Agreement”), pursuant to which BisB would make murabaha placements with Arcapita (“BisB Placements”). In July 2003, Arcapita entered into an agreement with BisB, (the “Arcapita Master Agreement”), whose terms mirrored those in the BisB Placement Agreement and under which Arcapita would make placements with BisB (“Arcapita Placements”).

The debts owed by Arcapita to BisB, and that form the basis for BisB's purported right to setoff, originated from two investments (BisB Placements) made on December 1, 2011 under the BisB Placement Agreement. In those related transactions, BisB deposited approximately $9.8 million with Arcapita with the expectation that it would be returned in just over a month. Those deposits were rolled over continually by agreement, and were set to expire on March 15 and 16, 2012, leaving Arcapita indebted to BisB for approximately $9.8 million.

Arcapita's Placements with BisB

In addition to investments by BisB with Arcapita, Arcapita made investments with BisB (Arcapita Placements). Although Arcapita filed for Chapter 11 protection on March 19, 2012 it executed three placements, discussed in greater detail below, with BisB on March 13, 14, and 15, 2012, each in the amount of $10 million, with respective maturity dates of March 27, 29, and 26, 2012. Arcapita proposed making these placements in U.S. Dollars, which BisB accepted and directed that Arcapita send the funds to BisB's correspondent bank accounts in New York.

Although BisB now claims it was unaware of the imminent bankruptcy filing, Arcapita's financial difficulties were known throughout the Bahraini banking community. BisB's internal memoranda confirm that BisB was generally aware of Arcapita's financial difficulties. For example, Arcapita proposed a placement on January 10, 2012, but BisB's then Senior Manager forwarded the proposal to other BisB employees with an accompanying message that recommended: “Outright decline is my response based on execution issues, risky exit avenue, and the general situation with Arcapita.” Another employee responded that Arcapita was “just trying their luck. It seems that the fund company is desperate.” Additionally, on March 12, 2012, an Arcapita representative called BisB claiming it needed more money from BisB. BisB refused, stating that Arcapita was “unable to repay [its] loans, so how we can increase it to you!” BisB refused to renew any investments, stating, “No. You have to pay, ” and noted that Arcapita was no longer “bringing good business of large deals.”

On March 13, 2012, just before the two BisB Placements were set to expire on March 15 and 16, Arcapita asked BisB to roll over the investments again. BisB was reluctant, citing the absence of good deals. An Arcapita representative promised that Arcapita would “conclude with [BisB] a good deal within this week[] [that] might be over 5 million.” BisB stated that it was looking for a good deal, something that exceeded $10 million. That same day, Arcapita made a $10 million placement with BisB, set to mature on March 27, 2012. On March 14, 2012, BisB also agreed to rollover the BisB Placements set to expire on March 15 and 16, 2012, but only for a week. In addition, Arcapita made another $10 million placement on March 14, 2012, set to mature on March 25, 2012. Finally, on March 15, 2012, Arcapita made a third $10 million placement set to mature on March 26, 2012. Thus, just prior to Arcapita's filing for Chapter 11, it had a total of $30 million in placements with BisB, and was likewise indebted to BisB for approximately $9.8 million.

Arcapita filed for Chapter 11 protection on March 19, 2012, causing an automatic stay on its estate imposed under Section 362 of the Bankruptcy Code. Also on March 19, 2012, Arcapita called BisB and explained the consequences of the automatic stay-that Arcapita could not withdraw any funds from the estate, and therefore, could not repay its loans....

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