In re Treco & Hamilton

• Decision Date: 01 August 1999
• Docket Number: Docket No. 99-5074
• Citation: 240 F.3d 148
• Parties: (2nd Cir. 2001) In re: ALISON J. TRECO & DAVID PATRICK HAMILTON, As Liquidators of Meridien International Bank Limited (In Liquidation), Debtors. THE BANK OF NEW YORK & JCPL LEASING CORP., Appellants, v. ALISON J. TRECO & DAVID PATRICK HAMILTON, Liquidators of Meridien International Bank Limited (in Liquidation), Appellees
• Court: U.S. Court of Appeals — Second Circuit

Page 148

240 F.3d 148 (2nd Cir. 2001)

In re: ALISON J. TRECO & DAVID PATRICK HAMILTON, As Liquidators of Meridien International Bank Limited (In Liquidation), Debtors.

THE BANK OF NEW YORK & JCPL LEASING CORP., Appellants, v. ALISON J. TRECO & DAVID PATRICK HAMILTON, Liquidators of Meridien International Bank Limited (in Liquidation), Appellees.

Docket No. 99-5074

August Term, 1999

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: June 14, 2000

Decided: February 14, 2001

Appeal from a judgment of the United States District Court for the Southern District of New York (Allen G. Schwartz, District Judge) affirming a decision by the Bankruptcy Court (James L. Garrity, Jr., Bankruptcy Judge) granting partial summary judgment against the appellants and directing them pursuant to 11 U.S.C. § 304(b)(2) to turn over funds to the appellees, the liquidators of a bank undergoing bankruptcy proceedings in the Bahamas.

Vacated and remanded.

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] RICHARD G. HADDAD (Daniel Wallen, Frederick M. Klein, of counsel), Otterbourg, Steindler, Houston & Rosen, P.C., New York, NY, for Appellants.

MELVIN A. BROSTERMAN (Michele L. Pahmer, Moshe Sasson, of counsel), Stroock & Stroock & Lavan, New York, NY, for Appellees.

Bruce E. Clark, Sullivan & Cromwell, New York, NY (H. Rodgin Cohen, William L. Farris, Norman R. Nelson, of counsel) submitted a brief for Amicus Curiae The New York Clearing House Association L.L.C.

Before: KEARSE and SACK, Circuit Judges, and HURD, District Judge.^*

SACK, Circuit Judge:

Appellees Alison J. Treco and David Patrick Hamilton (the "Liquidators"), the liquidators of Meridien International Bank Limited ("MIBL"), a bank incorporated in the Bahamas undergoing bankruptcy proceedings there, filed a petition in the Bankruptcy Court for the Southern District of New York pursuant to 11 U.S.C. §304(a) seeking the turnover of certain funds maintained by the appellants, the Bank of New York and JCPL Leasing Corp. (collectively "BNY").¹ After the Liquidators moved for partial summary judgment, the bankruptcy court (James L. Garrity, Jr., Bankruptcy Judge) granted the motion and directed turnover. See In re Treco, 229 B.R. 280 (Bankr. S.D.N.Y. 1999) ("Treco I"). The United States District Court for the Southern District of New York (Allen G. Schwartz, District Judge) affirmed. See In re Treco, 239 B.R. 36 (S.D.N.Y. 1999) ("Treco II"). The bankruptcy court and district court both held that turnover was appropriate under 11 U.S.C. §304(c) irrespective of whether the Bank of New York's claim to the funds held by it is secured. We disagree. We conclude that if the Bank of New York's claim is secured, turnover of these funds would be improper because of the extent to which the distribution of the proceeds of these funds in the Bahamian bankruptcy proceeding would not be "substantially in accordance with the order prescribed by" the United States Bankruptcy Code, 11 U.S.C. §304(c)(4). We therefore vacate the district court's judgment and remand for it to determine in the first instance whether or not BNY's claim is secured.

BACKGROUND

In the first months of 1995, a network of twenty-one banks located primarily in Africa and controlled by MIBL began to experience severe liquidity problems. On April 25, 1995, the Supreme Court of the Bahamas placed MIBL into involuntary liquidation and appointed Alison J. Treco and David Patrick Hamilton, both partners of KPMG Peat Marwick working out of its Bahamas office, as MIBL's liquidators.

For several years prior to these events, MIBL had enjoyed a close relationship with BNY. BNY acted as MIBL's correspondent bank in the United States, providing it and several of its subsidiaries account services, loans, and other financial accommodations. On June 15, 1993, BNY and MIBL entered into an agreement (the "MIBL Pledge Agreement") pursuant to which MIBL pledged its account with BNY and "all [its] other present and future accounts on [BNY's] books" as security for all of MIBL's "present and future obligations and liabilities" to BNY. MIBL also promised under the agreement to reimburse BNY for "costs and expenses, including attorneys' fees and disbursements, incurred" in protecting its security interest, and agreed "that all proceedings relating hereto shall be brought in courts located within" New York City.

The next year, MIBL requested from BNY certain financial accommodations -- primarily in the form of overdrafts on certain of its operating accounts at BNY -- in the amount of $15.15 million to be secured by funds newly deposited at BNY by one of MIBL's subsidiaries, Meridien BIAO Bank Tanzania Limited ("Meridien Tanzania"). BNY agreed on the condition that Meridien Tanzania and MIBL sign a second agreement (the "Meridien Tanzania Agreement") according to which Meridien Tanzania would pledge certain of its accounts to BNY as security. This agreement was signed on November 15, 1994.

MIBL subsequently defaulted on its obligation to repay the $15.15 million. To satisfy this obligation, BNY liquidated Meridien Tanzania's pledged account in the amount of $15.15 million between January and March 1995. But in early April 1995, the Central Bank of Tanzania appointed a manager to operate Meridien Tanzania. The manager questioned the validity of the Meridien Tanzania Agreement and demanded return of the $15.15 million that BNY had taken.

After MIBL was placed in bankruptcy in the Bahamas in late April 1995, BNY commenced a suit in June 1995 against MIBL, Meridien Tanzania and several other subsidiaries of MIBL, in the United States District Court for the Southern District of New York, seeking, inter alia, (1) a declaratory judgment that BNY, not Meridien Tanzania, had the right to the $15.15 million that BNY had liquidated, or, (2) if it did not prevail with respect to the Meridien Tanzania accounts, an order permitting BNY to retain approximately $600,000 remaining in MIBL's accounts with BNY.

On September 29, 1995, the Liquidators initiated a separate proceeding, filing a petition on behalf of MIBL in the Bankruptcy Court for the Southern District of New York pursuant to 11 U.S.C. §304(a). "Section 304(a) authorizes a 'foreign representative' in a 'foreign [bankruptcy] proceeding' to commence a '[c]ase ancillary to [that] proceeding' in a United States bankruptcy court to protect the administration of the foreign proceeding." In re Koreag, Controle et Revision S.A., 961 F.2d 341, 348 (2d Cir. 1992) ("Koreag")(quoting §304(a)) (alterations in original). Among the forms of relief authorized by §304 are an injunction prohibiting actions against the debtor and the "turnover" of property to a foreign representative. See 11 U.S.C. §304(b)(1), (2). In their petition, the Liquidators requested, inter alia, that all judicial actions against MIBL be enjoined and that "all persons or entities possessing MIBL's assets... turn over those assets, or the proceeds thereof, to [the Liquidators]."

On March 12, 1996, the bankruptcy court preliminarily enjoined further proceedings involving MIBL in BNY's district court action. That action proceeded to trial before then-District Judge Sonia Sotomayor as to the other defendants, however. Then, on June 22, 1998, while the case was sub judice, BNY entered into a settlement agreement pursuant to which BNY agreed, inter alia, to pay $4 million to Meridien Tanzania's assignee, Deposit Insurance Board ("DIB"), which had appeared and answered in the action. As part of the agreement, BNY was assigned all DIB's rights of subrogation with respect to the MIBL accounts.

In the bankruptcy court, meanwhile, the Liquidators moved for partial summary judgment directing turnover of the $600,000 remaining in MIBL's accounts at BNY and being held by BNY. BNY opposed the motion on several grounds, asserting that it rightfully held the $600,000 as security for two secured debts owed by MIBL: (1) the $4 million BNY had agreed to pay DIB as part of the settlement agreement, together with related attorneys' fees; and (2) any of DIB's claims against MIBL that had been assigned to BNY pursuant to the settlement agreement. As of May 1998, MIBL's estate contained approximately $1.75 million.

The bankruptcy court granted the Liquidators' partial summary judgment motion in a January 22, 1999 decision holding, inter alia: (1) that BNY's purported status as a secured creditor would not bar turnover because "Bahamian law recognizes security interests in property," Treco I, 229 B.R. at 292; (2) that turnover under §304 is not contingent on the provision of "adequate protection" to BNY's interest, id.; (3) that §304 does not preserve any "right of setoff" BNY might possess, id. at 290, 292-93; and (4) that the Bahamian liquidation proceeding complies with the requirements for turnover set out in §304(c), see id. at 293-301.

In a September 10, 1999 Opinion and Order, the district court affirmed the bankruptcy court's order for substantially the same reasons. See Treco II, 239 B.R. 36. Judge Schwartz explicitly declined, however, to "address whether any common law or contractual right of BNY's to set-off is preserved, because any set-off claim may be fully addressed by the Bahamian court." Id. at 44.

This appeal followed.

DISCUSSION

I. Turnover Under 11 U.S.C. §304

A. The Statutory Framework and Standard of Review

Section 304 of the Bankruptcy Code, enacted as part of the Bankruptcy Reform Act of 1978, "was intended to deal with the complex and increasingly important problems involving the legal effect the United States courts will give to foreign bankruptcy proceedings." Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452, 454 (2d Cir. 1985). Of particular relevance to this appeal, §304 addresses situations in which a bankruptcy proceeding has been instituted in a foreign country and the debtor has assets in the United States. As the district court observed, see Treco II, 239 B.R. at 41 & n.7, courts and...