Koreag, Controle et Revision S.A., In re

• Decision Date: 09 April 1992
• Docket Number: D,No. 651,651
• Parties: , 26 Collier Bankr.Cas.2d 1200, Bankr. L. Rep. P 74,552, 17 UCC Rep.Serv.2d 1036 In re: KOREAG, CONTROLE ET REVISION S.A., as Official Liquidator of Mebco Bank, S.A. (In Liquidation) pursuant to the Insolvency Laws of the Federal Republic of Switzerland. KOREAG, CONTROLE ET REVISION S.A., Petitioner-Appellee, v. REFCO F/X ASSOCIATES, INC., Respondent-Appellant. ocket 91-5061.
• Court: U.S. Court of Appeals — Second Circuit

Page 341

961 F.2d 341

60 USLW 2654, 26 Collier Bankr.Cas.2d 1200,

Bankr. L. Rep. P 74,552, 17 UCC Rep.Serv.2d 1036

In re: KOREAG, CONTROLE ET REVISION S.A., as Official

Liquidator of Mebco Bank, S.A. (In Liquidation)

pursuant to the Insolvency Laws of the

Federal Republic of Switzerland.

KOREAG, CONTROLE ET REVISION S.A., Petitioner-Appellee, v. REFCO F/X ASSOCIATES, INC., Respondent-Appellant.

No. 651, Docket 91-5061.

United States Court of Appeals, Second Circuit.

Argued Nov. 21, 1991.

Decided April 9, 1992.

Jack Weinberg, New York City (Marianne Bretton-Granatoor, Therese M. Doherty, Graubard Mollen Horowitz Pomeranz & Shapiro, of counsel), for respondent-appellant.

Celia Goldwag Barenholtz, New York City (Richard A. Edlin, Kronish, Lieb, Weiner & Hellman, of counsel), for petitioner-appellee.

Before: PRATT, MAHONEY, and McLAUGHLIN, Circuit Judges.

MAHONEY, Circuit Judge:

Respondent-appellant Refco F/X Associates, Inc. ("Refco") appeals from an order of the United States District Court for the Southern District of New York, Whitman Knapp, Judge, entered September 16, 1991. That order affirmed an order of the United States Bankruptcy Court for the Southern District of New York, Cornelius Blackshear, Bankruptcy Judge, that granted summary judgment in favor of petitioner-appellee Koreag, Controle et Revision S.A. ("Koreag"), liquidator in a Swiss insolvency proceeding, on Koreag's petition pursuant to 11 U.S.C. § 304 (1988); ordered the turnover to Koreag of certain funds deposited in a New York bank account; and enjoined the continuation of a related lawsuit by Refco.

We vacate and remand, concluding that the district court and bankruptcy court should have made a threshold determination whether certain disputed funds in the bank account were "property of [the insolvent] estate" within the meaning of 11 U.S.C. § 304(b)(2) (1988).

Background

This action arises from a series of currency exchange transactions that took place in April 1989. The issue on this appeal concerns the parties' respective interests in funds deposited in a New York bank account in connection with these exchanges.

A. The Transactions at Issue.

Much that follows has been stipulated by the parties. Refco is a corporation that engages in commodity and currency transactions around the world. It is organized under the laws of New York, and has its principal place of business in New York City. Mebco Bank, S.A. ("Mebco") is a Swiss bank currently in bankruptcy liquidation under the laws of Switzerland. Prior to liquidation, Mebco engaged in worldwide banking activities, including the trading of currencies.

Koreag is a Swiss corporation which has been appointed liquidator in charge of administering the distribution of Mebco's estate. Under Swiss law, Koreag is the sole entity authorized to act on behalf of Mebco. Swiss Bank Corporation is a Swiss bank whose New York branch office ("Swiss Bank-NY") is the locus of the bank account in which are deposited the funds at issue in this action.

Refco and Mebco first discussed doing business together at a meeting in Geneva, Switzerland in May 1986 between a Mebco representative and a representative of Refco's London office. Mebco subsequently provided its annual reports for 1986 and 1987 to Refco. On June 3, 1988, Refco granted Mebco a ten million dollar line of credit to be used for daily settlement of currency transactions.

Refco and Mebco engaged in extensive currency transactions beginning in June 1988. The trading of currencies was accomplished by direct communication between two dealers to determine the terms of the exchange: the currencies involved, the amounts, the exchange rate, and the banks to be used. The exchange was then consummated several days later by wire transfers of currencies in accordance with the prior agreement.

The currency exchanges conducted by Refco and Mebco were of two varieties, in both of which (according to the stipulation of the parties) "Refco and Mebco were each, at once, a purchaser and seller of currencies." The parties have also stipulated that "[t]he agreements between Refco and Mebco contemplated simultaneous exchanges of currencies."

One type of transaction involved Refco's selling foreign currency to Mebco in exchange for U.S. dollars. In that event, Refco would wire transfer the foreign currency into Mebco's account at a designated European bank. Mebco in turn would wire U.S. dollars into an account that Mebco maintained at Swiss Bank-NY (the "Account") with instructions to credit a Refco account at Citibank in New York. Alternatively, Refco purchased foreign currency from Mebco. In that case, the transaction would proceed in reverse, with Refco wiring U.S. dollars to the Account, and Mebco transferring foreign currency to a designated Refco bank account in Europe.

Refco and Mebco entered into several currency exchange contracts during the period April 20 to April 27, 1989. In partial settlement thereof, Refco wired $7,407,510 to the Account at 3:52 p.m. Eastern Standard Time ¹ on April 28, 1989, in exchange for which Refco was to receive from Mebco foreign currencies of comparable value, to be delivered to Refco bank accounts abroad. Refco also delivered foreign currencies worth approximately 4.1 million dollars to Mebco European accounts from April 28 to May 2, 1989, and in exchange was to receive that amount in U.S. dollars from Mebco via the Account. In connection therewith, from April 20 to April 27, 1989, Mebco had transmitted orders to Swiss Bank-NY for payments from the Account to Refco's account at Citibank in the total amount of $8,789,800. Each of the individual trades was subject to approval by Refco's New York office, which sent confirmation slips for each transaction to Mebco in Switzerland.

At 10:15 a.m. on April 27, 1989, however, the Swiss Banking Commission of Switzerland placed Mebco into liquidation under Swiss law. Immediately thereafter, Koreag was appointed as liquidator. At approximately 2:00 p.m. that day, in accordance with instructions from its Geneva office, Swiss Bank-NY stopped all payments out of the Account, including the payments intended as performance for the Refco currency exchanges. Swiss Bank-NY received no instruction to stop receiving incoming transfers, on the other hand, and the Account remained open to receive deposits.

Refco was not informed by Debtor, Koreag, or Swiss Bank-NY that Debtor had been placed in liquidation, that the Account was closed to outgoing payments, or that Mebco would not perform its side of most of the pending currency exchanges. ² The commencement of the liquidation proceedings was reported by the Dow Jones International News Service newswire, but Refco does not subscribe to that service, and claims that it never received notice that Mebco was in liquidation and its payment orders had been stopped.

Refco received a portion of the foreign currencies covered by its April 28 transfer to the Account of $7,407,510, but the remaining foreign currencies--corresponding to approximately 6.9 million of the U.S. dollars delivered to Mebco--were never delivered. Similarly, there has been no delivery to Refco of U.S. dollars in exchange for the foreign currencies worth approximately 4.1 million dollars that Refco delivered to Mebco European accounts from April 28 to May 2, 1989, although funds had been provided to the Account by Mebco for that purpose. The net result of these aborted currency exchanges is that Refco transferred approximately 6.9 million dollars into the Account, and approximately 4.1 million dollars worth of foreign currency to overseas Mebco accounts, for which Mebco failed to make reciprocating transfers. ³

On May 3, 1989, Refco first learned of Mebco's financial situation in response to an inquiry into Mebco's failure to perform its side of the pending currency exchanges. During this conversation between Gary M. Weiss, senior vice president of Refco, and a Mr. Savio to whom Weiss was referred when he called Mebco in Geneva, Weiss orally demanded that Mebco return the U.S. dollars and foreign currencies that Refco had delivered to Mebco in connection with those exchanges. Thereafter, also on May 3, Citibank sent a telex message on behalf of Refco to Swiss Bank-NY requesting the return, inter alia, of the disputed 6.9 million dollars previously wired to the Account by Refco on April 28, 1989. Swiss Bank-NY responded by telex on May 4, 1989 that it would release the funds when authorized by Koreag to do so. Koreag never provided authorization, however, and the funds were never released.

Also on May 4, 1989, Weiss wrote a letter to Mebco, c/o Koreag, detailing "the amounts that are claimed from [Mebco] by [Refco] as of May 4, 1989." Further, see infra, a litigation affidavit by Weiss dated May 4, 1989 and served upon Mebco reiterated Refco's claim.

B. The Proceedings Below.

On May 5, 1989, Refco commenced an action against Mebco in the United States District Court for the Southern District of New York to recover the Disputed Funds. At the same time, Refco obtained an ex parte attachment of the Account. In support of the attachment, Refco served Koreag with papers that included an affidavit by Weiss dated May 4, 1989 which repeated Refco's claim and demand against Mebco, and attached as an exhibit Weiss' letter to Mebco, c/o Koreag, dated May 4, 1989. The attachment papers were delivered to an air courier for transmission to Mebco, and also mailed to Mebco, on May 5, 1989, and the courier completed its delivery to Mebco on May 8, 1989.

Refco moved the district court to confirm the attachment, and Koreag, intervening as Mebco's successor-in-interest, cross-moved to dismiss Refco's action. Koreag's position was that comity should be accorded to the Swiss insolvency proceeding, and that all the funds in the Account should accordingly be turned over for administration in Switzerland. The district court concluded that a proceeding pursuant to 11 U.S.C. § 304 (1988) ⁴ was...