In re Rubin

• Decision Date: 19 October 1993
• Docket Number: Bankruptcy No. 92-46955 (TLB).
• Citation: 160 BR 269
• Parties: In re Pinhas RUBIN and Joseph Halevy, as Liquidators of The Israel Reinsurance Company, Ltd.
• Court: U.S. Bankruptcy Court — Southern District of New York

160 B.R. 269 (1993)

In re Pinhas RUBIN and Joseph Halevy, as Liquidators of The Israel Reinsurance Company, Ltd.

Bankruptcy No. 92-46955 (TLB).

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

October 13, 1993.

As Amended October 19, 1993.

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Fischbein Badillo Wagner & Itzler, New York City by Philip H. Kalban, and I. Gornitzky & Co., Tel Aviv, Israel, by Dr. Dalia Even, for petitioners.

Werner & Kennedy, New York City by John M. Nonna, Brendan Kennedy, for Samuel Fortunato in his Capacity as Liquidator of Integrity Ins. Co.

Adams, Duque & Hazeltine, New York City by Huhnsik Chung, for the Employers Reinsurance Union.

Leboeuf, Lamb, Leiby & Macrae, New York City by Ronald J. Gizzi, for Bankers Trust.

DECISION ON SECTION 304 PETITION AND OTHER RELATED RELIEF

TINA L. BROZMAN, Bankruptcy Judge.

Two liquidators of an Israeli reinsurance¹ company seek under 11 U.S.C. § 304 certain injunctive relief and to repatriate the corpus of a trust funded by a letter of credit for pro rata distribution to its American beneficiaries after determination of the beneficiaries' respective allowable claims. Under the terms of the trust, by contrast, the race of the swiftest would pay off. Thus, a beneficiary/creditor who has already commenced suit against the reinsurance company in order to establish his rights under the trust objects to the relief sought, for if it is granted, he will lose his headstart over other beneficiaries. Another beneficiary/creditor objects in part to the relief sought, agreeing that injunctive relief is appropriate to stymie the more aggressive beneficiary/creditor's pursuit of preferential treatment, but urging that turnover of the trust corpus to the liquidators is not.

I.

Pinhas Rubin and Joseph Halevy ("the Petitioners") are the liquidators of The Israel Reinsurance Company Ltd. ("Israel Re"), the reinsurance company alluded to above. Israel Re is organized under the laws of Israel, has its principal place of business in Tel Aviv, and currently is undergoing liquidation under the auspices of the Tel Aviv District Court. The Petitioners commenced a case ancillary to the Israeli liquidation on December 17, 1992. At that time they sought a temporary restraining order to enjoin the continuation of an action brought against Israel Re by Samuel Fortunato, as liquidator of Integrity Insurance Company ("Integrity"), which suit is pending before the District Court in this district (the "Fortunato action"). That requested relief was withdrawn, however, when the parties stipulated to stay further actions pending the hearing on the ancillary petition and the injunction sought therein.² As a further concession to civility in litigation, the parties agreed that the salient facts were undisputed and that I could look to their various affidavits for the necessary background.

II.

Israel Re is not licensed by any state in the United States as an insurance company and has never maintained an office here. It is, however, a participant in numerous reinsurance "treaties" with American insurance companies and has a trust fund in this district at Bankers Trust Company ("Bankers Trust"), consisting of a two million dollar letter of credit (the "Trust") for the benefit of domestic insurance carriers covered by the terms of the Trust ("American Policyholders"). The Trust agreement creates a first-come-first-paid priority scheme. The Fortunato action arises out of reinsurance treaties to which both Israel Re and Integrity are parties and seeks damages in the amount of $596,169, plus interest. Fortunato obtained an attachment of Israel Re's reversionary interest in the Trust for the amount of damages sought. This was not the sole method which Fortunato employed to collect the debt alleged to be due Integrity from Israel Re, for he earlier had filed a claim in the liquidation proceeding in Israel. There, he seeks an amount substantially in excess of, but including, the amount sought in the Fortunato action. As is now apparent, Fortunato is the aggressive beneficiary/creditor identified but not named in the opening paragraph of this decision.

Other American insurance companies have filed claims in Israel arising under reinsurance treaties with Israel Re. To the extent such claims are valid and arose during the period of the Trust, those companies too have potential claims against the Trust. The claims filed by American Policyholders far exceed the $2 million Trust but none of these claims (including Integrity's) is enforceable under the terms of the Trust because certain conditions which it mandates have not been fulfilled by any of the claimants. It bears mentioning that the Trust was "terminated" in accordance with its provisions as of December 3, 1988. What this means is that new losses occurring after the date of termination would not be covered by the Trust; it does not mean that rights are forfeited of beneficiaries whose claims arose during the life of the Trust.

The Petitioners seek to have the Trust administered in such a way that all American Policyholders having rights as beneficiaries under the Trust will share pro rata in its proceeds. Indeed, to this end they have obtained an order of the Israeli court that the funds in the Trust be distributed on a pro rata basis solely to the American Policyholders until they are paid in full. Only if those beneficiaries' claims are satisfied will the remainder revert to the Petitioners for distribution to Israel Re's general creditors. With that declaration from the Israeli tribunal in place, the Petitioners seek an order

(a) declaring that the Israeli liquidation proceeding is a foreign proceeding and that the Petitioners are foreign representatives of Israel Re within the meaning of sections 101(23), (24) and 304 of the Bankruptcy Code;

(b) enjoining the commencement or continuation, including, without limitation, the enforcement of any attachment or judgment or the execution on any assets, of any judicial, administrative or other action or proceeding against Israel Re, the Trust, any other Israel Re property in the United States, or Petitioners in their capacity as liquidators of Israel Re;

(c) enjoining the creation, perfection or enforcement of any attachment, lien, judgment or other claim against Israel Re, and vacating the attachment in the Fortunato action;

(d) directing that the $2 million Trust, after payment of any fees and expenses found to be owing to Bankers Trust, be transferred to and maintained in a segregated account to be held by Petitioners in trust for the benefit of all beneficiaries under the Trust agreement to be distributed pro rata only to the United States beneficiaries of the Trust after final determination by the Petitioners or the Tel Aviv District Court of the allowable claims of such beneficiaries.

The relief set out in subparagraph (a) above is not contested. The balance of the relief is. Fortunato contends that the Trust is not property of the Israel Re estate for bankruptcy purposes and, for four independent reasons, is therefore beyond the reach of the Israeli liquidation court and the Petitioners. He claims, first, that under the Bankruptcy Code and Israeli law, trusts are not considered property of a debtor's estate. Second, he says, the Trust agreement expressly contemplated the potential insolvency of Israel Re, providing that the security furnished by the Trust survive such an event. Third, he states, the Trust's sole asset is a letter of credit in which Israel Re holds no interest. Fourth, he urges, the McCarran-Ferguson Act, 15 U.S.C.A. 1011 et seq., precludes application of section 304 because an injunction would invalidate, impair, or supersede the applicable laws of New York and New Jersey.

III.

A. Section 304

The purpose of a section 304 filing is to prevent piecemeal distribution of assets in the United States by means of legal proceedings initiated in domestic courts by local creditors. In re Koreag, Controle et Revision S.A., 961 F.2d 341, 348 (2d Cir.), cert. denied, ___ U.S. ___, 113 S.Ct. 188, 121 L.Ed.2d 132 (1992); Victrix S.S. Co. S.A. v. Salen Dry Cargo A.B., 825 F.2d 709, 713-14 (2d Cir.1987); Cunard S.S. Co. v. Salen Reefer Services, A.B., 773 F.2d 452, 454-55 (2d Cir.1985). Section 304(a) authorizes a "foreign representative" in a "foreign proceeding" to commence a case ancillary to that proceeding in a United States bankruptcy court to protect the administration of the foreign proceeding. Here, it is conceded that the Israel Re winding up is a foreign proceeding and that the Petitioners are foreign representatives appointed by the Tel Aviv court.

In enacting section 304, which had no predecessor under the former Bankruptcy Act, Congress provided a mechanism for the courts in this country to aid foreign courts and accommodate the increasing number of foreign insolvency proceedings having extra-territorial effects within the United States. Universal Casualty & Surety Co. Ltd. v. Gee (In re Gee), 53 B.R. 891, 896 (Bankr. S.D.N.Y.1985). Congress commanded that the court explore certain enumerated factors to decide whether relief ought be granted under the section. If I find that those factors contained in section 304(c) militate in favor of granting an ancillary petition to best assure an economical and expeditious administration of the foreign estate, I may enjoin commencement or continuation of an action against the foreign debtor with respect to property involved in the foreign proceeding or against the property. 11 U.S.C. § 304(b)(1). That the factors in section 304(c) point to the propriety of granting an ancillary petition does not mean in and of itself that I am free to grant any conceivable type of relief. For I may order turnover only of property of the foreign estate³ or its proceeds, whereas I may enjoin actions against the property of the foreign estate and also against property involved in the foreign proceeding. Compare 11 U.S.C. § 304(b)...