Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahr. Islamic Bank (In re Arcapita Bank B.S.C.(C))

• Decision Date: 23 April 2021
• Docket Number: Case No. 12-11076 (SHL) (Jointly Administered)
• Citation: 628 B.R. 414
• Parties: IN RE ARCAPITA BANK B.S.C.(C), et al. Reorganized Debtors. Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c), et al., Plaintiff, v. Bahrain Islamic Bank, Defendant. Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c), et al., Plaintiff, v. Tadhamon Capital B.S.C., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

628 B.R. 414

IN RE ARCAPITA BANK B.S.C.(C), et al.Reorganized Debtors.

Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c), et al., Plaintiff,

v.Bahrain Islamic Bank, Defendant.

Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c), et al., Plaintiff,

v.Tadhamon Capital B.S.C., Defendant.

Case No. 12-11076 (SHL) (Jointly Administered)

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

Signed April 23, 2021

MILBANK, TWEED, HADLEY & McCLOY LLP, Counsel for Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c), et al., By: Dennis F. Dunne, Esq., Evan R. Fleck, Esq., 1 Chase Manhattan Plaza New York, New York 10005 -and- By: Andrew M. Leblanc, Esq., 1850K Street, NW, Suite 1100, Washington, D.C. 20006

K&L GATES LLPCounsel for Bahrain Islamic Bank and Tadhamon Capital B.S.C., By: Robert T. Honeywell, Esq., John A. Bicks, Esq., Lani A. Adler, Esq., 599 Lexington Avenue, New York, New York 10022

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court are cross-motions for summary judgment(the "Motions") filed in the above-captioned adversary proceedings by Bahrain Islamic Bank ("BisB"), Tadhamon Capital B.S.C. ("Tadhamon" and, together with BisB, the "Defendants"), and the official committee of unsecured creditors (the "Committee" or the "Plaintiff") appointed in the bankruptcy cases of Arcapita Bank B.S.C.(c)("Arcapita") and its affiliated debtors.¹SeeAdv. Pro.No. 13-01434[ECF Nos. 72, 79];Adv. Pro.No. 13-01435[ECF Nos. 69, 77].The Committee seeks, among other things, the turnover of funds that Arcapita invested with the Defendants in the days prior to Arcapita's bankruptcy filing.²The Defendants assert that they have properly exercised their rights under Bahraini law to setoff those funds against debts owed to them by Arcapita, and that that their actions in retaining the funds are further shielded by the safe harbor provisions of the Bankruptcy Code.³For the reasons set forth below, the Committee's Motion is granted and the Defendants' Motions are denied.

BACKGROUND

On March 19, 2012(the "Petition Date"), Arcapita filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.Official Comm. of Unsecured Creditors' Stmt. of Undisputed Facts¶ 67 [Adv. Pro. No. 13-01434, ECF No. 71](the "Comm. BisB SMF");Official Comm. of Unsecured Creditors' Stmt. Of Undisputed Facts¶ 69 [Adv. Pro. No. 13-01434, ECF No. 68](the "Comm. Tadhamon SMF").Prior to the bankruptcy filing, Arcapita was licensed as an Islamic wholesale bank by the Central Bank of Bahrain.Comm. BisBSMF ¶ 1;Comm. TadhamonSMF ¶ 1.Arcapita employed 268 people and, together with the above-captioned debtors and their non-debtor subsidiaries, maintained offices in Bahrain, Atlanta, London, Hong Kong and Singapore.Comm. BisBSMF ¶ 1;Comm. TadhamonSMF ¶ 1.Arcapita operated as an investment bank and was a global manager of Shari'a-compliant alternative investments.Comm. BisBSMF ¶ 1;Comm. TadhamonSMF ¶ 1."Islamic banking and finance is a revival of faith based rules governing how commercial and financial transactions are executed."Thomas Tadhamon Reportat 6;Thomas BisB Reportat 6.One of the religiously mandated rules of governance in Islamic banking and finance is a prohibition on interest, which in turn impacts the manner in which Islamic banks and investment funds manage liquidity, comply with applicable foreign and domestic regulations, and operate in the financial markets.SeeThomas Tadhamon Reportat 6;Thomas BisB Reportat 6.This prohibition on interest means that such entities "neither borrow nor lend in the traditional sense."Id .

Defendant BisB is a Bahraini corporation that operates as an Islamic commercial bank and is headquartered in Bahrain.Comm. BisBSMF ¶ 2.It is owned by, among other investors, the National Bank of Bahrain, the Islamic Development Bank and the Bahrain Social Insurance Organization.Comm. BisBSMF ¶ 2.Defendant Tadhamon is a Bahraini corporation and a subsidiary of Tadhamon International Islamic Bank ("TIIB"), a Yemeni bank that offers Shari'a-compliant banking and investment services to customers in Yemen and abroad.Comm. TadhamonSMF ¶ 2.Tadhamon serves as the investment arm of TIIB and offers Shari'a-compliant financial services and alternative investments, manages various TIIB assets and creates new investments for TIIB and other investors.Comm. TadhamonSMF ¶ 2.

A.Investments Made by the Defendants Through Arcapita

Well before the Petition Date, the Defendants began their business relationships with Arcapita by making certain short-term investments through Arcapita.The Defendants were each party to separate master investment agreements with Arcapita (the "Investment Agreements"), under which the Defendants entered into investment transactions with Arcapita.Comm. BisBSMF ¶ 3;Comm. TadhamonSMF ¶ 5.In these transactions, Arcapita acted as agent for the investment of the Defendants' funds for the purchase of commodities from a third party in the Defendants' name, with Arcapita then purchasing those same commodities from the Defendants on a deferred payment basis.Comm. BisBSMF ¶ 3;Comm. TadhamonSMF ¶ 5.

Under the structure of these investment transactions, the Defendant that was the investing party first deposited funds with Arcapita, which Arcapita then used to purchase specific Shari'a-compliant commodity investments on behalf of the Defendant.Comm. BisBSMF ¶ 4;Comm. TadhamonSMF ¶ 7.Arcapita then immediately repurchased those same commodities from the Defendant for the original investment amount plus an agreed upon return, to be paid to the Defendant on an agreed-upon maturity date.Comm. BisBSMF ¶ 4;Comm. TadhamonSMF ¶ 7.The investment amounts were sometimes reinvested (or "rolled over") by agreement of the parties prior to or upon maturity of the investment.Comm. BisBSMF ¶ 6;Comm. TadhamonSMF ¶ 9.These rollovers were executed pursuant to new and separate contractual arrangements, which continued to be governed by the Investment Agreements.Comm. BisBSMF ¶ 6;Bahrain Islamic Bank's Resp. to the Official Comm. of Unsecured Creditor's Statement of Undisputed Facts in Supp. of its Mot. forSumm. J. ¶ 6 [Adv. Pro. No. 13-01434, ECF No. 80](the "BisB Resp. to Comm. SMF");Comm. TadhamonSMF ¶ 9.The amounts invested by the Defendants over time through Arcapita ultimately resulted in Arcapita owing to each Defendant a substantial sum.Comm. BisBSMF ¶¶ 23, 79; BisB Resp. to Comm. SMF ¶¶ 23, 79;Comm. TadhamonSMF ¶ 16; Tadhamon Capital, B.S.C.'s Resp. to the Official Comm. of Unsecured Creditor's Statement of Undisputed Facts in Supp. of its Mot. for Summ. J. ¶ 16 [Adv. Pro. No. 13-01435, ECF No. 78](the "Tadhamon Resp. to Comm. SMF").

1.BisB Investments with Arcapita

In April 2002, BisB entered into one such Investment Agreement with Arcapita (the "BisB Agreement"), which resulted in BisB ultimately investing a total of approximately $9.8 million with Arcapita.Comm. BisBSMF ¶¶ 3, 10.Under the BisB Agreement, BisB and Arcapita engaged in two investment transactions in December 2011, each of which were rolled over multiple times.Comm. BisBSMF ¶¶ 7-9, 13-22, 25-26.One of these investments was for BHD (Bahraini Dinars) 1.8 million⁴ and the other for $5 million.⁵Comm. BisBSMF ¶ 7.The two investments were set to mature on March 15 and 16, 2012, respectively, less than a week prior to the Petition Date. Comm. BisBSMF ¶¶ 16, 21.On March 16, 2012, the $5 million investment was rolled over for a fifth and final time, establishing a new maturity date of March 23, 2012.Comm. BisBSMF ¶ 22; Khani BisB Decl., Ex. E at BISB_000115.On March 15, 2012, the other investment of BHD 1.8 million was rolled over for a fifth and final time, establishing a new maturity date of March 22, 2012.Comm. BisBSMF ¶¶ 17.The parties agree that the total of the two investments is approximately $9.8 million.Comm. BisBSMF ¶ 10.⁶In summary, BisB had the following investments on deposit with Arcapita:

INITIAL TRANSACTION DATE:	MATURITY DATE:	AMOUNT INVESTED:	TRANSACTION ROLL OVER DATES:
December 1, 2011	January 4, 2012	BHD 1,800,000 (Bahraini Dinars)	1/4/12 - 2/6/122/6/12 - 2/29/122/29/12 - 3/8/123/8/12 - 3/15/123/15/12 - 3/22/12
December 1, 2011	January 4, 2012	$5,000,000	1/4/12 - 2/6/122/6/12 - 2/29/122/29/12 - 3/9/123/9/12 - 3/16/123/16/12 - 3/23/12

2.Tadhamon Investments with Arcapita

Tadhamon and Arcapita also entered into two Investment Agreements, one in September 2009 and the other in November 2011(together, the "Tadhamon Agreements"), with Tadhamon ultimately investing a total of over $18 million with Arcapita.Comm. TadhamonSMF ¶¶ 5, 6, 17; Tadhamon Resp. to Comm. SMF ¶ 5.Between November 2011 and January 2012, Tadhamon and Arcapita engaged in four investment transactions under the Tadhamon Agreements,⁷ certain of which were rolled over by agreement of the parties before or upon the maturity date of the investment.Comm. TadhamonSMF ¶ 9.⁸Thus, as of the March 19, 2012 Petition Date, Tadhamon had the following four investments on deposit with Arcapita:

TRANSACTION DATE:	MATURITY DATE:	AMOUNT INVESTED:	EXPECTED RETURN:
August 8, 2011	August 3, 2012	$99,750	$5,562.45
November 17, 2011	May 17, 2012	$12,000,000	$485,333.33
January 9, 2012	April 9, 2012	$2,000,000	$22,750.00
January 9, 2012	April 9, 2012	$4,000,000	$45,500.00

B.Investments Made by Arcapita Through the Defendants

In addition to investments by the Defendants with Arcapita, Arcapita made investments with the Defendants.Specifically, Arcapita entered into similar master investment agreements with each of the Defendants, under which the parties engaged in several investment transactions.In these transactions, Arcapita appointed the applicable Defendant as its agent for the investment of Arcapita's funds for the purchase of Shari'a-compliant investments from a third party and the sale of those same investments to the Defendants on a deferred payment basis, on...