Banque De Financement, S. A. v. First Nat. Bank of Boston

• Decision Date: 30 August 1977
• Docket Number: D,No. 447,447
• Citation: 568 F.2d 911
• Parties: In the Matter of Banque de Financement, S. A., Debtor. BANQUE de FINANCEMENT, S. A., Appellant, and Firestone Tire and Rubber Company, Intervenor in support of Appellant, v. The FIRST NATIONAL BANK OF BOSTON, and The Chase Manhattan Bank, N. A., Appellees. ocket 76-5026.
• Court: U.S. Court of Appeals — Second Circuit

Page 911

568 F.2d 911

In the Matter of Banque de Financement, S. A., Debtor.

BANQUE de FINANCEMENT, S. A., Appellant, and Firestone Tire and Rubber Company, Intervenor in support of Appellant, v. The FIRST NATIONAL BANK OF BOSTON, and The Chase Manhattan Bank, N. A., Appellees.

No. 447, Docket 76-5026.

United States Court of Appeals, Second Circuit.

Argued Dec. 17, 1976.

Decided Aug. 30, 1977.

Paul B. Bergman, New York City (Ford Marrin Esposito Witmeyer & Bergman, New York City, on the brief), for debtor-appellant Banque de Financement, S. A.

James C. Blair, New York City (Cleary, Gottlieb, Steen & Hamilton, New York City, on the brief), for intervenor Firestone Tire & Rubber Company in support of appellant.

Thomas A. Shaw, Jr., New York City (Thomas H. Walsh, Jr., and Breed, Abbott & Morgan, New York City, on the brief), for appellee The First National Bank of Boston.

Peter A. Copeland, New York City (Milbank, Tweed, Hadley & McCloy, New York City, on the brief), for appellee The Chase Manhattan Bank, N. A.

Before MULLIGAN, TIMBERS and VAN GRAAFEILAND, Circuit Judges.

TIMBERS, Circuit Judge:

On this appeal from a judgment entered July 29, 1976 in the Southern District of New York, Robert J. Ward, District Judge, affirming an order entered January 13, 1976 by Roy Babitt, Bankruptcy Judge, which dismissed as improvidently filed the debtor's petition under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. (1970), the essential question is whether under the circumstances of this case it was appropriate for the bankruptcy court to exercise its inherent power to dismiss a Chapter XI petition as improvidently filed. We hold it was not. We reverse and remand with instructions.

I. FACTS

Debtor-appellant Banque de Financement, S. A. (Finabank) is a Swiss banking corporation. It neither does business nor maintains any office in the United States. In late December 1974 Finabank sustained a $46,000,000 loss when Edilcentro International Ltd. (Edilcentro), a Bahamian subsidiary of an Italian banking corporation, Societa Generale Immobiliare (SGI), defaulted on certain outstanding foreign exchange contracts with Finabank. This precipitated Finabank's insolvency. On January 10, 1975 Finabank filed with the Court of Justice of the Canton of Geneva a petition for a "sursis bancaire", or postponement of maturity. Under the applicable Swiss statute the filing of this petition resulted in an interlocutory moratorium period and the appointment by the Court of Justice on January 20, 1975 of a provisional commissioner, FIDES Societe Fiduciare (FIDES), a Swiss accounting corporation, to review Finabank's affairs and determine the feasibility of rehabilitation. ¹

After the appointment of FIDES as provisional commissioner, Finabank's Swiss counsel entered into negotiations with SGI with a view to settling Edilcentro's obligation to Finabank. Until mid-May 1975 counsel entertained a serious hope that the negotiations would result in a recovery sufficient to permit Finabank to effect a successful reorganization and reenter the banking business. But then the outlook became discouraging. As a result on June 19 Finabank withdrew its January 10 petition for a "sursis bancaire" and substituted a petition for a "sursis concordataire", a banking moratorium. The Court of Justice granted this petition on July 14.

This action did not necessarily foreclose Finabank's rehabilitation. The "sursis concordataire" moratorium procedure contemplated either rehabilitation or liquidation depending on subsequent events. Accordingly the Court of Justice, in its opinion of July 14 which explicitly recognized the possibility of successful reorganization, appointed two additional commissioners to serve with FIDES and directed the commissioners to take the steps necessary to effect an arrangement with Finabank's creditors. ²

Thereafter matters stood in abeyance while another round of negotiations was conducted with SGI. On July 9, 1976 the commissioners, having determined that no rehabilitation could be expected, filed a petition for a "concordat par abandon d'actifs", a court-supervised liquidation. The Court of Justice ordered Finabank's liquidation in December 1976.

Backing up for a moment to the time of Finabank's insolvency in December 1974, we turn to the events in the United States which resulted in the instant Chapter XI petition.

Finabank had $12,500,000 on deposit at Continental Bank International (CBI) in New York City at the time Edilcentro defaulted. The Edilcentro default caused Finabank in turn to default on its foreign exchange contracts with appellees The First National Bank of Boston ^BB and The Chase Manhattan Bank, N. A. (Chase). In January 1975 FNBB and Chase commenced separate breach of contract actions against Finabank in the Southern District of New York. FNBB claimed $9,176,375, Chase $491,000. In these actions both banks obtained orders of attachment in the amounts claimed. Chase levied on January 6, FNBB on January 20, ³ the dates the respective actions were commenced.

On May 5, only a few hours before the expiration of the four month limitation period provided for the avoidance of a preferential transfer by Bankruptcy Act § 60a(1), 11 U.S.C. § 96(a)(1) (1970), with respect to the Chase attachment, Finabank filed a petition for an arrangement under Chapter XI. There followed a series of protracted proceedings which resulted in Judge Babitt's order of January 13, 1976 granting the motions by FNBB and Chase to dismiss the petition. Finabank had requested the bankruptcy court to bide its time in the hope that a plan of rehabilitation could be effected in Switzerland; and that such plan, if submitted and approved in the Chapter XI proceeding, would result in the joint administration of all assets of Finabank. But nothing came of the negotiations with SGI during the summer and fall of 1975. Finabank was unable to submit to the bankruptcy court a plan of arrangement, the confirmation of which of course is the objective of a Chapter XI proceeding. At hearings held on June 10, July 8, and August 19, Judge Babitt expressed growing doubt as to whether Finabank ever would be able to obtain rehabilitation in the bankruptcy court. Finabank's counsel responded to the judge's queries with a realistic assessment of Finabank's proceedings in Switzerland; he stated that, while a plan still might be formulated successfully, only a "slim" likelihood remained. On August 19 the judge ordered Finabank to file its plan of arrangement by September 3. No plan was filed by that date. Thereafter four further extensions were granted but no plan was ever filed.

Finabank's inability to submit a plan of arrangement was not its only difficulty in the bankruptcy court. Among other things, its petition failed to include a complete list of creditors as required by Bankruptcy Act § 324(1), 11 U.S.C. § 724(1) (1970), and Bankruptcy Rule 11-11(b). ⁴ Finabank did disclose the names of those foreign and domestic banks which were its creditors. But, constrained by the Swiss banking secrecy laws and their criminal penalties, it included neither the names nor the addresses of its individual depositors. According to FNBB's expert on Swiss law, the Swiss banking secrecy laws "effectively prohibit . . . Finabank . . . from furnishing to a foreign court, or from directly or indirectly making public, the names and addresses of its depositors or creditors or divulging information concerning their dealings with Finabank, even after the filing of a plan for composition with creditors or a bankruptcy." Finabank does not dispute this.

In his opinion of January 12, 1976 granting the motion of FNBB and Chase to dismiss the Chapter XI petition, Judge Babitt rested his decision on two grounds. First, he held that Finabank was a "banking corporation" within the meaning of Bankruptcy Act § 4a, 11 U.S.C. § 22(a) (1970), which could not seek relief under the Bankruptcy Act. Second, with respect to Finabank's default in filing a plan and its failure to file a complete list of creditors, the judge concluded that because "this Chapter XI cannot comply with the most elementary and preliminary provisions of the Act, much less with successful end result," there was "neither purpose to achieve the desired result nor likelihood of doing so." Accordingly the judge granted the motion to dismiss in the exercise of the bankruptcy court's inherent power to dismiss a Chapter XI petition where no prospect of rehabilitation appears, citing Ira Haupt & Co. v. Klebanow, 348 F.2d 907 (2 Cir. 1965) (per curiam). See also SEC v. United States Realty and Improvement Co., 310 U.S. 434 (1940).

On Finabank's petition to review the order of the bankruptcy court, Judge Ward in his opinion of July 28, 1976 affirmed the dismissal of the petition. By the time Finabank's petition to review was heard, the first ground upon which the bankruptcy court had rested its decision had become foreclosed by our decision of May 25, 1976 in In re Israel-British Bank (London), Ltd., 536 F.2d 509 (2 Cir.), cert. denied, sub. nom. Bank of the Commonwealth v. Israel-British Bank (London) Ltd., et al., 429 U.S. 978 (1976), which held that a foreign bank is not a "banking corporation" within the meaning of Bankruptcy Act § 4a. Judge Ward affirmed the bankruptcy court on its second ground, holding that it properly had exercised its discretion in dismissing the petition. From the

judgment entered on Judge Ward's opinion, Finabank has taken

this appeal. II. BANKRUPTCY COURT'S INHERENT POWER

TO DISMISS A CHAPTER XI PETITION

The "inherent power" upon which the bankruptcy court relied in dismissing Finabank's petition draws in question the debtor's good faith in petitioning for relief under Chapter XI. The Supreme Court's decision in SEC v. United States Realty and Improvement Co., supra, is the principal source of authority. There, relying on the equitable principles which temper the exercise of jurisdiction by the...