In re Treco

• Decision Date: 10 September 1999
• Docket Number: No. 99 Civ. 3442(AGS).,99 Civ. 3442(AGS).
• Citation: 239 BR 36
• Parties: In re Petition of Alison J. TRECO and David Patrick Hamilton, as Liquidators of Meridien International Bank Limited (In Liquidation), Debtor in Foreign Proceedings.
• Court: U.S. District Court — Southern District of New York

239 B.R. 36 (1999)

In re Petition of Alison J. TRECO and David Patrick Hamilton, as Liquidators of Meridien International Bank Limited (In Liquidation), Debtor in Foreign Proceedings.

No. 99 Civ. 3442(AGS).

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

September 10, 1999.

Stroock & Stroock & Lavan LLP, New York City, for Liquidators.

Otterbourg, Steindler, Houston & Rosen, P.C., New York City, for Bank of New York and JCPL Leasing Corp.

OPINION AND ORDER

SCHWARTZ, District Judge.

The Bank of New York and JCPL Leasing Corp. ("Appellants") appeal from the judgment of the bankruptcy court granting partial summary judgment and requiring Bank of New York ("BNY") to turnover certain funds to Appellees, the foreign liquidators of Meridien International Bank Limited ("MIBL"). Appellants contend that the turnover order (i) is an abuse of discretion under 11 U.S.C. § 304(c) because BNY holds a security interest in said funds, (ii) is not lawful because the bankruptcy court failed to provide adequate protection for BNY's alleged security interest before ordering turnover, and (iii) is not lawful because it prevents BNY from exercising its set-off rights. For the reasons that follow, the decision of the bankruptcy court is AFFIRMED.

FACTUAL BACKGROUND

The following facts are undisputed for the purposes of this motion. See In Re Treco, 229 B.R. 280, 283-84 (Bankr. S.D.N.Y.1999).¹ MIBL is a bank incorporated under the laws of the Bahamas. It has conducted business in the Bahamas, Africa and various other jurisdictions, including the United States.

In June 1993, MIBL entered into a loan agreement with BNY. Pursuant to a pledge agreement executed on June 15, 1993 (the "MIBL Pledge Agreement"), MIBL pledged certain of its own bank accounts (the "MIBL Accounts") as security for that loan. Later that year, BNY agreed to permit MIBL to overdraw these accounts, but required that Meridien BIAO Bank Tanzania Limited ("Meridien Tanzania"), a related company,² pledge certain of its accounts at BNY to BNY (the "Meridien Accounts") as security for MIBL's overdrafts. Meridien Tanzania pledged those accounts to BNY in a November 15, 1994 agreement (the "Meridien Pledge Agreement"). The Meridien Pledge Agreement provided that BNY could use funds on deposit in the Meridien Accounts to satisfy MIBL's loan obligations if at any time BNY deemed itself to be insecure. BNY's advances to MIBL ultimately aggregated in excess of $15 million. These funds were never repaid by MIBL.

On or about March 28, 1995, Meridien BIAO Bank of Swaziland Limited commenced an involuntary liquidation proceeding against MIBL in the Supreme Court of the Bahamas. By order dated April 25, 1995, the Bahamian court directed that MIBL be placed into compulsory liquidation, and appointed Appellees as MIBL's official liquidators. Effective March 28, 1995, BNY applied all of the funds in the Meridien Accounts to MIBL's debt with BNY. BNY did not, however, liquidate the funds remaining in the MIBL Accounts.

In April 1995, the Central Bank of Tanzania appointed a Manager to operate Meridien Tanzania, who subsequently questioned the validity of the Meridien Pledge Agreement and demanded that BNY return the $15 million that it had removed from the Meridien Accounts. In June 1995, BNY commenced an action in the United States District Court for the Southern District of New York (the "1995 action") against MIBL, Meridien Tanzania, and certain other entities. In that action, BNY sought, inter alia, (i) a declaratory judgment rejecting Meridien Tanzania's claim for the return of the approximately $15 million in the Meridien Accounts and declaring that BNY has the right to those funds, and (ii) a declaratory judgment that BNY may apply funds remaining in the MIBL Accounts against the amount owed to it by MIBL in the event it does not prevail on its other causes of action. Meridien Tanzania's assignee moved for partial summary judgment on the issue of BNY's rights to the Meridien Accounts, contending that Meridien should be entitled to the return of these funds, but this motion was denied in a Memorandum Order and Opinion dated February 10, 1997. See Bank of New York v. Meridien BIAO Bank Tanzania Limited, Case No. 95 Civ. 4856(SS), 1997 WL 53172 (S.D.N.Y. Feb. 10, 1997) (Sotomayor, J.) On June 22, 1998, after trial of the dispute in the district court, and while the matter was sub judice, Meridien Tanzania's assignee and BNY entered into a settlement agreement (the "Tanzania Settlement") pursuant to which BNY, inter alia, agreed to pay Meridien Tanzania's assignee $4 million plus attorneys' fees in full satisfaction of all claims. Also, as part of the Tanzania Settlement, BNY was assigned all of Meridien Tanzania's rights of subrogation with respect to the MIBL Accounts.³

THE PROCEEDINGS BELOW

On September 29, 1995, Appellees, as MIBL's liquidators, commenced this action by filing a petition on behalf of MIBL pursuant to 11 U.S.C. § 304 ("§ 304"). Section 304 permits a foreign representative, often a liquidator, to file an "ancillary proceeding" in a United States bankruptcy court, authorizing the bankruptcy court to administer assets located in the United States in order to "prevent dismemberment by local creditors of assets located here." In Re Koreag, Controle et Revision S.A., 961 F.2d 341, 348 (2d Cir.1992). Among the powers given to a bankruptcy court acting pursuant to § 304 is the ability to "order turnover of the property of the debtor's estate, or the proceeds of such property, to such foreign representative. . . ." See 11 U.S.C. § 304(b)(2).

In the bankruptcy court, Appellees sought, inter alia, an order directing that all persons or entities in possession of MIBL's assets turn over those assets, or the proceeds thereof, to Appellees. BNY opposed the turnover order, asserting that it should not be required to turnover the funds in the MIBL Accounts, of which approximately $600,000 remain.

BNY opposed the application for a turnover order on various grounds, two of which are relevant here.⁴ First, BNY asserted that it was a secured creditor with respect to the MIBL Accounts,⁵ and that, although BNY's secured status would be recognized by the Bahamian courts, it is unlikely that BNY will recover the value of its collateral in the Bahamian proceeding because of one particular difference between Bahamian and U.S. bankruptcy law. In particular, BNY asserted that, under Bahamian law as opposed to U.S. law, BNY's interest will be subordinated to (i) the administrative costs of the liquidation, (ii) taxes, (iii) pre-petition wages, and (iv) personal injuries to workmen. BNY asserted in the bankruptcy court that (i) this priority system, (ii) the severe shortage of funds available to the liquidators, (iii) the high fees paid for estate administration,⁶ and (iv) the large amount of outstanding claims, together raised a serious question as to whether there would be any funds available for its own secured claim.

The second rationale that BNY asserted in opposing the turnover request was that BNY was entitled to set-off MIBL's debts to it from the funds remaining in the MIBL Accounts. BNY asserted that it was improper to order turnover given that the bankruptcy code explicitly preserves its set-off rights.

Appellees moved the bankruptcy court for partial summary judgment on the issue of the turnover of the MIBL Accounts. BNY opposed the motion, asserting that a trial should be conducted in order to determine whether Appellees are entitled to turnover. The bankruptcy court rejected all of BNY's legal contentions and granted partial summary judgment to Appellees, ordering that the MIBL Accounts be turned over to them. The court concluded, inter alia, that, even assuming that BNY was a secured creditor of MIBL, (i) turnover of the MIBL Accounts should be directed as an appropriate exercise of discretion given that the bankruptcy laws in the Bahamas provide for the distribution of funds substantially in accordance with the order provided by the U.S. bankruptcy code; and (ii) a bankruptcy court ordering turnover of property in the possession of a secured creditor pursuant to § 304(b)(2) need not insure that "adequate protection" is provided for the secured creditor's interest in the property. The bankruptcy court also concluded that BNY's set-off claims were unavailing because § 553 of the Bankruptcy Code, which preserves the right to set-off claims in bankruptcy proceedings, does not apply to § 304 ancillary proceedings.

DISCUSSION

The Court will review the decision of the bankruptcy court de novo for questions presented that are matters of statutory interpretation. See Koreag, 961 F.2d at 358; Truck Drivers Local 807, Int'l Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of Am. v. Carey Transp. Inc., 816 F.2d 82, 88 (2d Cir.1987). The bankruptcy court's reliance on the factors of § 304(c) and its decision to defer to the Bahamian proceeding will be reviewed for an abuse of discretion. See In re Singer, 205 B.R. 355, 356 (S.D.N.Y. 1997); Allstate Life Ins. Co. v. Linter Group Ltd., 994 F.2d 996, 999 (2d Cir. 1993).

I. THAT BNY MAY BE A SECURED CREDITOR DOES NOT PREVENT TURNOVER.

BNY asserts that, if it is found to be a secured creditor, turnover is an inappropriate exercise of discretion for a § 304 ancillary court because the guidelines in § 304(c) do not weigh in favor of turnover. In particular, BNY contends that the distribution of funds under Bahamian procedure would not be substantially in accordance with that under U.S. bankruptcy law. See § 304(c)(4). Additionally, BNY asserts that, although § 304 does not, on its face, further limit the bankruptcy court's ability to order turnover, the bankruptcy code requires that property in the possession of a secured creditor not be the subject of a turnover order in a § 304 proceeding unless the court insures that "adequate protection" is provided to the creditor. Third, BNY asserts that, even if the bankruptcy...