In re The INTERNATIONAL BANKING CORPORATION B.S.C.

• Decision Date: 23 November 2010
• Docket Number: No. 09-17318 (SMB).,09-17318 (SMB).
• Parties: In re The INTERNATIONAL BANKING CORPORATION B.S.C., Debtor in a Foreign Proceeding.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

439 B.R. 614

In re The INTERNATIONAL BANKING CORPORATION B.S.C., Debtor in a Foreign Proceeding.

No. 09-17318 (SMB).

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

Nov. 23, 2010.

COPYRIGHT MATERIAL OMITTED.

Holland & Knight LLP, New York, NY, Barbara R. Parlin, Esq., H. Barry Vasios, Esq., Warren E. Gluck, Esq., James H. Hohenstein, Esq., of counsel, for Trowers & Hamlins, External Administrator and Foreign Representative of the Debtor in a Foreign Proceeding.

Bingham McCutchen LLP, New York, NY, Joshua Dorchak, Esq., Robert M. Dombroff, Esq., Todd B. Marcus, Esq., of counsel, for Deutsche Bank AG.

Cleary Gottlieb Steen & Hamilton LLP, New York, NY, Carmine D. Boccuzzi, Esq., of counsel, for Mashreqbank PSC.

MEMORANDUM DECISION AND ORDER REGARDING ATTACHED FUNDS

STUART M. BERNSTEIN, Bankruptcy Judge:

Trowers & Hamlins (the “Administrator”), administrator of foreign debtor The International Banking Corporation B.S.C. (“TIBC”), moves for an order vacating state court orders of attachment obtained by Deutsche Bank AG (“DB”) and Mashreqbank PSC (“Mashreqbank”, and together with DB, the “Banks”), and directing that the attached funds that are currently held by the New York sheriff be turned over for administration in a foreign main proceeding pending in Bahrain. ( Motion to Vacate Certain Orders of Attachment and Directing the Turnover of Certain Attached Funds to the Administrator for Administration in the Foreign Main Proceeding in Bahrain, filed May 5, 2010 (“ Turnover Motion ”) (ECF Doc. # 30).) The Banks oppose the motion.

The tension in this case lies between protecting the rights of attaching creditors on the one hand and promoting the interests of comity and deference to foreign proceedings under chapter 15 of the United States Bankruptcy Code on the other. The Administrator contends that it is entitled to relief because the attachments are void under Bahraini law. The Administrator does not, however, ask this Court to decide that issue, and fails to explain how the attaching creditors will be protected if the Administrator is wrong. As the Administrator's motion is ultimately committed to the Court's discretion, the Turnover Motion is denied without prejudice for the reasons that follow.

BACKGROUND

A. Introduction

TIBC is a banking entity formed in 2002 under Bahraini law with a principal place of business in the Kingdom of Bahrain. ( Declaration of Abdullah Mutawi in Support of Petition for Entry of Order, filed Dec. 14, 2009 (“ Mutawi I ”), 7 (ECF Doc. # 8)); ( Declaration of Abdullah Mutawi in Support of Turnover Motion, filed May 5, 2010 (“ Mutawi II ”), at 2 (ECF Doc. # 32).) It is (or was) licensed and regulated as a wholesale bank by the Central Bank of Bahrain (“CBB”) pursuant to the Central Bank of Bahrain and Financial Institutions Law of 2006 (“BCBL”). ¹ ( Mutawi I at ¶ 7.) TIBC never maintained any offices, employees or agents in New York. ( Mutawi II at ¶ 3.)

Historically, TIBC provided commercial loans and extended trade-related finance to its customers. ( Mutawi I at ¶ 9.) A substantial amount of TIBC's trading activities involved transactions in which either TIBC or its counterparties were obligated to make or receive payments in U.S. dollars by wire transfer. ( Id. at ¶ 11.) Such payments were typically made through correspondent bank accounts maintained by the parties at banks in New York. ( Id.)

The world-wide recession and a number of financial irregularities left TIBC in the throes of a liquidity crisis that, by May 9, 2009, left it unable to pay its debts. ( Mutawi II at ¶ 5.) These problems were aggravated when various counterparties and creditors of TIBC exercised rights of set-off and accelerated TIBC's long-term loans and letters of credit. ( Mutawi I at ¶ 17.) TIBC could not meet its immediate financial obligations and suspended payment on its debts and obligations. ( Id.) On May 12, 2009, Standard & Poor's downgraded its rating of TIBC's debt to “SD” or “selective default,” ( id. at ¶ 18), and the CBB restricted the trading of TIBC. ( Id.) TIBC ceased doing new business at or about this time, ( id.), and has not conducted any business since. ( Id. at ¶ 14.)

B. The Attachments

TIBC had engaged in one or more foreign exchange transactions (“FX Transaction”) with DB and purported to have engaged in an FX Transaction with Mashreqbank involving currency swaps. ( Mutawi II at ¶ 5 & n. 2). The FX Transactions between DB and TIBC were governed by a master agreement (“DB Master Agreement”), ( id., Ex. A), and related credit support annex, ( id., Ex. B), each dated January 10, 2007 (collectively, the “DB Agreements”). ( Id. at ¶ 8.) Pursuant to their agreements, DB delivered $59,762,440 to TIBC, ( Declaration of Joshua Dorchak in Support of Limited Opposition of Deutsche Bank AG to Petition for Recognition, dated Jan. 6, 2010 (“ Dorchak Decl.”), at ¶ 3 (ECF Doc. # 14)), and TIBC agreed to deliver £40 million to DB in London. ( Mutawi II at ¶ 8; see Dorchak Decl. at ¶ 3.) The DB Agreements were negotiated and agreed to by TIBC employees in Bahrain and DB employees in London, ( Mutawi II at ¶ 8), they are governed by English law, ( DB Master Agreement at 34), and the parties consented to the non-exclusive jurisdiction of the English Courts. ( Id. at 20.)

The purported FX Transaction with Mashreqbank was negotiated and agreed to by TIBC employees in Bahrain and Mashreqbank employees in Dubai. ² ( Mutawi II at ¶ 9.) Pursuant to their alleged agreement, Mashreqbank delivered $75 million to TIBC on May 5, 2009, but TIBC failed to deliver Saudi Riyals to Mashreqbank on May 11, 2009, the contractual due date. ( Mashreqbank PSC's Reservation of Rights and Joinder in Deutsche Bank AG's Opposition to TIBC Administrator's Motion for an Order Pursuant to 11 U.S.C. §§ 1521(a)(5), 1521(b), and 1507 Vacating Certain Orders of Attachment and Directing the Turnover of Certain Attached Funds to the Administrator for Administration in the Foreign Main Proceeding in Bahrain,

dated June 14, 2010, at ¶ 1 (ECF Doc. # 46).)

On May 13, 2009, DB commenced an action against TIBC in New York County Supreme Court for sums alleged to be due in connection with the FX Transactions. ( Mutawi II at ¶ 5.) DB simultaneously moved for and obtained an ex parte temporary restraining order and order of attachment with respect to TIBC's property located in New York. ( Id.) On May 22, 2009, Mashreqbank commenced a similar action against TIBC in New York County Supreme Court, seeking to recover amounts alleged to be due in connection with their purported FX Transaction. ( Id. at ¶ 6.) Mashreqbank also sought and obtained an order of attachment (collectively with DB's attachment order, the “Attachment Orders”) with respect to TIBC's property located in New York. ( Id.) After they were served with the Attachment Orders, TIBC's New York banks delivered the balances in TIBC's accounts to the custody of the New York County sheriff. ( Id. at ¶ 7.) In total, $26,918,494.59 is being held by the New York County sheriff (the “Attached Funds”), and $2,353,828.84 is being held by HSBC Bank USA. ³ ( Id.)

C. The Commencement of the Foreign Proceeding

TIBC's financial affairs continued to worsen. After the filing of the DB and Mashreqbank actions, TIBC's remaining counterparties terminated their relationships with TIBC, accelerated various long-term loan agreements and purported to set off debts immediately due and owing to TIBC. ( Mutawi I at ¶ 22.) These actions left TIBC without sufficient operating capital to meet its daily operational needs. ( Id.) By the end of July 2009, TIBC had liabilities of roughly $2.575 billion and had received several notices of default. ( Id. at ¶ 24.)

On July 30, 2009, the CBB placed TIBC in Administration, and the Administrator was appointed as the external administrator of TIBC on August 6, 2009, ( id. at ¶ 33), to supervise and manage TIBC's business. (BCBL Art. 140; Mutawi I at ¶ 30.) The commencement of Administration triggered an automatic stay against attempts to enforce interests in TIBC's property or the commencement or continuation of proceedings against TIBC or its property except with the approval of the Administrator or in the course of executing a court judgment or order issued before the Administration. BCBL Art. 142. Among other things, the CBB asked the Administrator to “identify the outstanding claims of creditors and ... develop proposals for satisfying those claims to the extent permitted by the realizable assets of the bank.” ( Mutawi I at ¶ 34.)

Toward that end, the Administrator requested that all creditors of TIBC submit a notice detailing the amounts due and basis for any claims against TIBC. ( Id. at ¶¶ 35-36.) DB submitted a notice of claim, dated August 28, 2009, ( id., Ex. D), and Mashreqbank submitted a notice of claim, dated August 30, 2009, ( id., Ex. E), for the amounts owed in relation to the FX Transactions. The Administrator has received claim forms from TIBC's creditors representing 88% of TIBC's debts, and has completed its assessment of TIBC's financial state and the outstanding claims. ( Mutawi II at ¶ 11.)

The period of administration cannot last more than two years. By then, the Administrator must submit a petition to a Bahraini Court for either (1) compulsory liquidation of TIBC; or (2) termination of the administration and restoration of TIBC to its management and shareholders. ( See BCBL Art. 143; Mutawi I at ¶ 28.) It appears that liquidation of TIBC will follow the period of administration.

D. The Commencement of the Chapter 15

TIBC filed its chapter 15 petition on December 14, 2009, (ECF Doc. # 1), and on January 15, 2010, this Court entered an Order recognizing the Administration as a foreign main proceeding and the Administrator as a foreign representative under chapter 15 of the Bankruptcy Code. ( Order Pursuant to 11 U.S.C. §§ 105(a), 1504, 1515, 1517, 1519, 1520 and 1521 Recognizing Foreign Main Proceeding and Granting...