In re Arcapita Bank B.S.C.(C)

Decision Date03 February 2023
Docket NumberCase No. 12-11076 (SHL)
Parties IN RE ARCAPITA BANK B.S.C.(C), et al. Reorganized Debtors.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

MILBANK LLP, Counsel for the Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c), et al., 55 Hudson Yards, New York, New York 10001, By: Dennis F. Dunne, Esq., Evan R. Fleck, Esq., -and- 1850 K Street, NW, Suite 1100, Washington, D.C. 20006, By: Andrew M. Leblanc, Esq., Samir L. Vora, Esq.

K&L GATES LLP, Counsel for Bahrain Islamic Bank, 599 Lexington Avenue, New York, New York 10022, By: John A. Bicks, Esq., -and- 1601 K Street, NW, Washington, D.C. 20006, By: Brian D. Koosed, Esq.



Before the Court is the motion of the official committee of unsecured creditors in the above-captioned case (the "Committee") to hold Bahrain Islamic Bank ("BisB") in contempt for willful violation of the automatic stay imposed by Sections 362(a)(3) and 362(a)(7) of the Bankruptcy Code. See Off. Comm. of Unsecured Creditors’ Mot. For an Order Holding Bahr. Islamic Bank and Tadhamon Capital B.S.C. in Civil Contempt [ECF No. 2223]1 (the "Contempt Motion").2 The Committee asks that the Court hold BisB in civil contempt under Section 105(a) of the Bankruptcy Code and the Court's inherent contempt powers. The Committee seeks sanctions in the amount of its reasonable attorneys’ fees and costs incurred as a result of BisB's violation of the stay, including fees and costs related to the Contempt Motion. BisB opposes the Contempt Motion, asserting that its actions were not objectively unreasonable under the circumstances. For the reasons set forth below, the Contempt Motion is granted.


The legal dispute between BisB and the Committee has been lengthy, involving numerous decisions from this Court, and at the appellate level, that culminated in the issuance of an extensive decision on summary judgment holding in favor of the Committee on all counts. See Off. Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahr. Islamic Bank (In re Arcapita Bank B.S.C.(c)) , 628 B.R. 414 (Bankr. S.D.N.Y. 2021), aff'd 640 B.R. 604 (S.D.N.Y. 2022).3 While familiarity with the underlying facts of this matter is presumed, a brief review of the main facts is essential to understanding the merits of the Contempt Motion.

Prior to its Chapter 11 filing, Arcapita Bank B.S.C. and certain of its affiliates ("Arcapita" or the "Debtors") were 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 alternative investments. See id. at 423. BisB is a Bahraini corporation that operates as an Islamic commercial bank and is headquartered in Bahrain. See id.

Arcapita maintained a prepetition business relationship with BisB, through which Arcapita and BisB made several Shari'a-compliant short-term investments with one another. See id. at 423-29 ; see also Exh. A to Decl. of Samir L. Vora in Supp. of the Off. Comm. of Unsecured Creditors’ Mot. for an Order Holding Bahrain Islamic Bank and Tadhamon Capital B.S.C. in Civil Contempt [ECF No. 2224] (the "Vora Declaration"). Upon its bankruptcy filing in March 2012, Arcapita attempted to recover the transaction proceeds of certain of its investments with BisB. See In re Arcapita, 628 B.R. at 429. These attempts included a letter sent by Arcapita's bankruptcy counsel to BisB in April 2012, citing to the automatic stay imposed by Arcapita's bankruptcy filing under Section 362 of the Bankruptcy Code. See id . ; see also Letter of Gibson Dunn, dated April 30, 2012, attached as Exh. D to Vora Decl. The letter demanded payment of the investment proceeds as property of Arcapita's bankruptcy estate under Section 542 of the Bankruptcy Code. See id.

But BisB did not return the funds. Instead, counsel to BisB responded by letter in June 2012, asserting that BisB was exercising a purported right to a setoff of the transaction proceeds under Bahraini law against the debts owed to it by Arcapita. See In re Arcapita, 628 B.R. at 429–31 ; see also Letter of K&L Gates, dated June 28, 2012, attached as Exh. F to Vora Decl. This setoff totaled approximately $10,002,291.66. See id . Despite taking place after Arcapita's bankruptcy filing, BisB neither sought nor obtained approval from this Court to exercise a setoff of any kind. See In re Arcapita , 628 B.R. at 429.

In July 2012, the Central Bank of Bahrain (the "CBB"), which regulates Bahrain's financial sector,4 issued a formal direction to BisB.5 See Formal Direction, dated July 4, 2012, attached as Exh. H to Vora Decl. The CBB provided its formal direction to BisB through a letter to BisB's then-CEO, dated July 4, 2012. See In re Arcapita , 628 B.R. at 430. The formal direction stated that the CBB:

hereby directs your Bank to exercise one of the following options: (i) that your Bank complies with the request to release the funds and returns the funds immediately to Arcapita Bank B.S.C. (c), or (ii) that your Bank seeks permission from the US Bankruptcy Court (in accordance with the US Bankruptcy Code), prior to affecting any set-off, and if such permission is not granted, that your Bank returns the funds that it holds for the account of Arcapita Bank B.S.C. (c) immediately.

Formal Direction, dated July 4, 2021, attached as Exh. H to Vora Decl.; see also In re Arcapita , 628 B.R. at 429-30. BisB did not comply with the CBB's formal direction and the funds were not turned over to Arcapita. See In re Arcapita , 628 B.R. at 428-30.

In August 2013, the Committee filed an adversary proceeding against BisB [Adv. No. 13-01434] (the "Adversary Proceeding"), seeking, among other things, turnover of the investment proceeds in question, damages for breach of contract and violation of the automatic stay, and claims disallowance. See id. at 430–31.6 After extensive motion practice that included one appeal,7 this Court issued a Memorandum of Decision in the Adversary Proceeding in April 2021 (the "Summary Judgement Decision"), which granted the Committee's request for summary judgment and denied BisB's cross-motion for summary judgment. See generally In re Arcapita, 628 B.R. 414. The Summary Judgment Decision granted judgment on the Committee's claims for breach of contract under Bahraini law and for turnover of the transaction proceeds under Section 542(b) of the Bankruptcy Code, and rejected BisB's cross-motion for summary judgment, including BisB's arguments that, among other things, its setoff was authorized under Bahraini law and that it was entitled to protection under the safe harbors of the Bankruptcy Code. See id .

Of particular relevance to the present Contempt Motion, the Summary Judgment Decision also granted summary judgement on the Committee's claim for violation of the automatic stay under Section 362(a) of the Bankruptcy Code. See id. at 479–481. More specifically, the Summary Judgement Decision held that BisB had violated Section 362(a)(3) of the Bankruptcy Code, which provides that the filing of a bankruptcy petition "operates as a stay, applicable to all entities, of ... any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate...." In re Arcapita, 628 B.R. at 479-80 (quoting 11 U.S.C. § 362(a)(3) ).8 Specifically, the Court found that BisB's declaration of a setoff and its refusal to return the receivables to Arcapita upon request was an improper exercise of control over property of Arcapita's estate. See id. at 480. The Court also found that BisB was fully aware of the existence of the automatic stay at the time the setoff was taken, having previously received and responded to a letter from Arcapita's bankruptcy counsel discussing the imposition of the stay by Arcapita's bankruptcy filing and demanding payment of the investment proceeds as property of Arcapita's bankruptcy estate. See id . Additionally, the Court noted that BisB had advice of U.S. bankruptcy counsel at the time it asserted the setoffs and exercised its setoffs without first seeking this Court's approval. See id. at 480-81. BisB also continued to maintain the setoffs in direct contravention of the CBB's formal direction that required it to either return the funds to Arcapita or obtain this Court's approval to retain them. See id .

But while the Court found BisB's stay violation was willful, the Court also observed that relief under Section 362(k) was limited to natural persons and unavailable to corporate debtors. See id. (citing Maritime Asbestosis Legal Clinic v. LTV Steel Co., Inc. (In re Chateaugay Corp.) , 920 F.2d 183, 184-87 (2d Cir. 1990) ("We now hold that a bankruptcy court may impose sanctions pursuant to [ Section] 362(h) [now Section 362(k) ] ... only for violating a stay as to debtors who are natural persons.... For other debtors, contempt proceedings are the proper means of compensation and punishment for willful violations of the automatic stay."); Ames Dep't Stores, Inc. v. Lumbermens Mut. Cas. Co. (In re Ames Dep't Stores, Inc.) , 542 B.R. 121, 141 n.83 (Bankr. S.D.N.Y. 2015) ("In the Second Circuit, corporate debtors do not have a private right of action for stay violations under [S]ection 362(k) (formerly [S]ection 362(h)), and seek and obtain relief for automatic stay violations by means of contempt."). Accordingly, the Court denied the Committee's request for damages and attorneys’ fees under Section 362(k) of the Bankruptcy Code. See id. at 481.

In the aftermath of the Summary Judgment Decision, the Committee filed the Contempt Motion seeking attorneys’ fees and costs for violation of the automatic stay, this time relying on a different legal theory—civil contempt—for its request. After the Contempt Motion was filed, the Summary Judgment Decision was affirmed by the District Court. See Bahr. Islamic Bank v. Arcapita Bank B.S.C.(c) (In re Arcapita Bank B.S.C.(c)) , 640 B.R. 604 (S....

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