Iraq Telecom Ltd. v. IBL Bank S.A.L.

• Decision Date: 05 August 2022
• Docket Number: Docket No. 22-540-cv,August Term 2021
• Citation: 43 F.4th 263
• Parties: IRAQ TELECOM LIMITED, Petitioner-Appellant, v. IBL BANK S.A.L., Respondent-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

43 F.4th 263

IRAQ TELECOM LIMITED, Petitioner-Appellant,

v.IBL BANK S.A.L., Respondent-Appellee.^*

Docket No. 22-540-cv

August Term 2021

United States Court of Appeals, Second Circuit.

Argued: June 9, 2022

Decided: August 5, 2022

Derek L. Shaffer (Kevin S. Reed, William B. Adams, Alex H. Loomis, and Kristin N. Tahler, on the brief), Quinn Emanuel Urquhart & Sullivan, LLP, Washington, DC, New York, NY, Boston, MA, and Los Angeles, CA, for Petitioner-Appellant.

Mitchell R. Berger (Gassan A. Baloul, on the brief), Squire Patton Boggs (US) LLP, Washington, DC, for Respondent-Appellee.

Before: Chin, Bianco, and Nardini, Circuit Judges.

Chin, Circuit Judge:

In this case, the district court granted an ex parte order of attachment of $100 million in favor of petitioner-appellant Iraq Telecom Limited ("Telecom"), an Iraqi cell phone company, against the assets of respondent-appellee IBL Bank S.A.L. ("IBL"), a Lebanese bank. Telecom had prevailed in an arbitration against IBL and two other entities and was pursuing a second (and still pending) arbitration against IBL, and the attachment was in aid of arbitration. Thereafter, IBL appeared in the proceedings and opposed the attachment, and the district court vacated the attachment in part, reducing it to $3 million. In reviewing whether Telecom had satisfied the statutory requirements for attachment, the district court found that Telecom had established that it was likely to succeed on the merits in a pending arbitration only to the extent of $8.92 million. The district court then exercised its discretion and held that extraordinary circumstances, including the impact of the attachment on the Lebanese economy, dictated further reduction of the attachment to $3 million.

On appeal, Telecom argues that (1) it established a probability of success in the pending arbitration and was therefore entitled to an attachment of $100 million and (2) the district court lacked authority to consider extraordinary circumstances in reducing the attachment. For the reasons set forth below, we affirm in part, vacate in part, and remand.

BACKGROUND

I. The Facts

This case arises out of a scheme to defraud a lender. Telecom is a telecommunications company that owns 44 percent of an entity called International Holdings Limited ("IHL"), which in turn owns 100 percent of Korek Telecom Company LLC ("Korek"), an Iraqi company providing cell phone services in Iraq. The other 56 percent of IHL is owned by another entity, Korek International (Management) Ltd., which is controlled by an individual named Sirwan Saber Mustafa, also known as Barzani.

In 2011, Telecom lent $285 million to Korek through a transaction with IHL. IBL then lent $150 million to Korek. Barzani described that loan to Telecom as unsecured, and Telecom agreed to subordinate its loan to the IBL loan through a subordination agreement executed on December 14, 2011. In 2015, Korek defaulted on the IBL loan. IBL invoked the subordination agreement and, accordingly, Korek stopped repaying the Telecom loan and instead paid IBL approximately $148 million in interest. Later, Telecom discovered that the IBL loan was not unsecured and that IBL had secretly paid to Barzani the interest it received from Korek. Apparently, IBL and Barzani had devised a scheme to defraud Telecom into subordinating its loan, to their mutual benefit.

II. The Arbitrations

In June 2018, Telecom brought an arbitration proceeding against IBL, Korek, and IHL in Lebanon before the Lebanese Arbitration Center of the Chamber of Commerce, Industry and Agriculture of Beirut and Mount Lebanon (the "First Arbitration"). Although Telecom originally sought a damages award in the First Arbitration, it withdrew its request for damages and sought only declaratory relief "to eliminate any argument regarding double-recovery issues" in other proceedings. App'x at 130 ¶ 368.

On September 21, 2021, Telecom won an arbitration award of $3 million in attorney's fees jointly and severally against IBL, Korek, and IHL. The arbitrators found, among other things, that (1) IBL "clearly and knowingly participated in the deception" of Telecom, id. at 289 ¶ 954, and that IBL's conduct "confirmed its engagement in dol "¹ at the time it entered into the subordination agreement, id. at 294 ¶ 969; (2) IBL, Korek, and IHL "actively participated in the commission of dol ," id. at 293 ¶ 967; and (3) the subordination agreement was "null and void," id. at 294 ¶ 970, 307 ¶ 1031(vi). It also found that IBL paid to Barzani 96 percent of the interest payments it received from Korek. Id. at 289 ¶ 953.

On December 13, 2021, Telecom brought a second arbitration against IBL seeking $97 million in damages resulting from the fraud (the "Second Arbitration"). The Second Arbitration is pending.

III. Proceedings Below

On December 21, 2021, Telecom filed in the district court a sealed petition for confirmation of the First Arbitration award and a motion for an order of attachment of all of IBL's property located in the Southern District of New York. On January 19, 2022, the district court entered the ex parte order of attachment of up to $100 million held in four accounts. About $42 million was attached from IBL's correspondent accounts at JP Morgan Chase Bank, Citibank, and Bank of New York Mellon.

On January 31, 2022, Telecom moved to confirm the ex parte attachment of $100 million and to expand the scope of the attachment to include all of IBL's property located in the Southern District of New York. Id. at 16, 22, 24. IBL opposed the motion and cross-moved to vacate the attachment. Id. at 871. The district court held oral argument on March 16 and filed a forty-nine-page opinion vacating the attachment in part that same day.

The district court found that Telecom had shown a probability of success on the merits as to the $3 million in costs and fees awarded in the First Arbitration and as to $5.92 million of the amount at issue in the Second Arbitration.

As to the Second Arbitration, the district court found that Telecom was likely to establish that Barzani and IBL acted in concert to defraud Telecom. It further found that the parties agreed that, under Lebanese law, joint and several liability is established if defendants have acted in concert. Nevertheless, it concluded that Telecom failed to show that it was likely to receive an arbitration award of $97 million because all but $5.92 million of the interest payments owed to Telecom flowed through IBL to Barzani. To reach the figure of $5.92 million, the district court calculated 4 percent of the interest paid to IBL, representing funds IBL retained that had not been kicked back to Barzani. Thus, the district court held, it was "entirely conceivable" that the Second Arbitration panel "would limit any future award against IBL to the roughly $5.92 million that [IBL] retained." Special App'x at 32. Accordingly, the district court concluded that Telecom was entitled to an attachment of no more than $8.92 million, comprising the $3 million award from the First Arbitration and the potential $5.92 million award from the Second Arbitration.

Next, the district court held that "any arbitration award may be rendered ineffectual without a prejudgment attachment of IBL assets." Id. at 35. In particular, Telecom established that IBL was likely insolvent, and the attachment was thus necessary to ensure that Telecom could receive the full benefit of an award against IBL. The district court also found that Telecom had a cause of action and that no counterclaims exceeded the value of the claims. Thus, the district court found that Telecom satisfied all of the statutory requirements for attachment in aid of arbitration.

Finally, the district court reduced the attachment from $8.92 million to $3 million. The district court observed that the decision whether to grant a motion for an order of attachment "rests within the discretion of the court," id. at 22, and it held that that discretion encompassed consideration of "extraordinary circumstances" even where, as here, the statutory requirements for attachment had been satisfied, id. at 30. The district court identified the following extraordinary circumstances present in this case: the attachment (1) could force IBL into insolvency, affecting the fragile Lebanese economy; (2) would cause IBL to fall out of compliance with crisis management regulations imposed by Lebanon's central bank; (3) interfered with innocent third parties' access to their money; (4) could undermine confidence in New York's financial institutions; and (5) should not be lightly imposed because Barzani, not IBL, was the principal wrongdoer. It held that those circumstances posed "sever[e]," "perilous," and "calamitous" risks militating reduction of the attachment, noting that the larger attachment "would be entered" absent them. Id. at 40-42.

Accordingly, the district court granted in part the motion to confirm as to $3 million and granted in part the cross-motion to vacate.

This appeal followed.

DISCUSSION

I. Applicable Law

A. Attachment in Aid of Arbitration

Attachment is available in federal court "under the law of the state where the court is located." Fed. R. Civ. P. 64. "Under New York law, an attachment bars any sale, assignment or transfer of, or any interference with the property attached." Cap. Ventures Int'l v. Republic of Argentina (Cap. Ventures II ), 652 F.3d 266, 270 (2d Cir. 2011) (internal quotation marks omitted).

As pertinent here, section 7502(c) of New York's Civil Practice Law and Rules provides for attachment in aid of arbitration "only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief." N.Y. C.P.L.R. 7502(c). Section 7502(c) incorporates New York's general attachment statute, article 62 of the Civil Practice Law and Rules, which requires a plaintiff seeking attachment to establish one of five statutory bases for attachment, among them that "the defendant is a nondomiciliary residing without ...