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

Decision Date13 October 2017
Docket NumberCase No. 12–11076 (SHL) (Jointly Administered),Adv. No. 13–01434 (SHL), Adv. No. 13–01435 (SHL)
Citation575 B.R. 229
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.
CourtU.S. Bankruptcy Court — Southern District of New York
MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court are motions to dismiss filed by defendants Bahrain Islamic Bank ("BisB") and Tadhamon Capital B.S.C. ("Tadhamon") (together, the "Defendants") in these adversary proceedings brought by the official committee of unsecured creditors in the above-captioned Chapter 11 cases (the "Committee" or the "Plaintiff").1 The Committee seeks the return of funds invested with the Defendants by Debtor Arcapita Bank B.S.C.(c) ("Arcapita")—a Bahraini investment bank—just before Arcapita's bankruptcy filing. Given the foreign aspects of the transactions that form the basis of the complaints, the Defendants contend that these claims should be dismissed based on the presumption against extraterritoriality and the principle of international comity. For the reasons stated below, however, the Court disagrees.

BACKGROUND

Arcapita is licensed as an Islamic wholesale bank by the Central Bank of Bahrain. BisB Compl. ¶ 12 [Adv. No. 13–01434, ECF No. 1]; Tadhamon Compl. ¶ 12 [Adv. No. 13–01435, ECF No. 1]. Headquartered in Bahrain, Arcapita is operated as an investment bank and is a global manager of Shari'ah compliant alternative investments. BisB Compl. ¶ 12; Tadhamon Compl. ¶ 12. Defendant BisB is an Islamic commercial bank headquartered in Bahrain. BisB Compl. ¶ 13. Defendant Tadhamon is a Bahraini corporation and a subsidiary of Tadhamon International Islamic Bank ("TIIB"), a Yemeni bank that offers Islamic banking and investment services to customers in Yemen and abroad. Tadhamon Compl. ¶ 13. Tadhamon serves as the investment arm of TIIB. Id.

A. The Placements

Prior to its bankruptcy filing, Arcapita made several discrete short-term investments through the Defendants (the "Placements"). BisB Compl. ¶¶ 27, 30; Tadhamon Compl. ¶¶ 27, 31. The Placements were made under two separate investment agreements between Arcapita and each of the respective Defendants (the "Placement Agreements"). BisB Compl. ¶¶ 27; Tadhamon Compl. ¶¶ 27. Both of the Placement Agreements were negotiated and signed in Bahrain and provided that the laws of the Kingdom of Bahrain govern, except to the extent that such laws conflicted with the principles of Islamic Shari'ah, in which case Shari'ah law would prevail. Rashdan Decl. ¶ 13 & Ex. A § 7.1 [Adv. No. 13–01435, ECF No. 8]; Mohammed Decl. ¶ 5 & Ex. A § 12 [Adv. No. 13–01434, ECF No. 8].

Under the Placement Agreements, Arcapita appointed the Defendants to serve as its agent in the purchase of the Placement investments on Arcapita's behalf. BisB Compl. ¶¶ 23–24; Tadhamon Compl. ¶¶ 22, 24. The Defendants were obligated to repurchase the Placements from Arcapita on a deferred payment basis for an amount equal to the original investment, plus an agreed-upon return (the "Placement Proceeds"). BisB Compl. ¶¶ 2, 24; Tadhamon Compl. ¶ 2, 24. The Defendants were to transfer the Placement Proceeds to Arcapita on the designated maturity date of the Placements. BisB Compl. ¶¶ 2, 24; Tadhamon Compl. ¶ 2, 24.

Consistent with these Placement Agreements, Arcapita entered into a Placement with BisB in the amount of $10 million on March 14, 2012 (the "BisB Placement"). BisB Compl. ¶ 27. To execute the BisB Placement, Arcapita transferred funds from its account at JP Morgan Chase Bank in New York to a correspondent bank account maintained by BisB at JP Morgan Chase Bank in New York. BisB Compl. ¶ 15. On the same day as the transfer, BisB purchased the commodities for Arcapita through a London broker. Mohammed Decl. ¶ 10.

Arcapita entered into two Placements with Tadhamon on March 15, 2012, each for $10 million (the "Tadhamon Placements"). Tadhamon Compl. ¶ 27. To execute the Tadhamon Placements, Arcapita transferred funds from its account at JP Morgan Chase Bank in New York to an account at HSBC Bank in New York. Tadhamon Compl. ¶ 28. The HSBC account was a correspondent bank account maintained by Khaleeji Commercial Bank B.S.C., Tadhamon's bank in Bahrain. Rashdan Decl. ¶ 7. The funds were then immediately transferred from the HSBC account to an account held by Tadhamon at Khaleeji Commercial Bank in Bahrain. Tadhamon Compl. ¶ 28; Rashdan Decl. ¶ 7.

B. The Bankruptcy Case and Prior Proceedings in These Adversary Proceedings

Less than a month after entering into the Placements, Arcapita filed for protection under Chapter 11 of the Bankruptcy Code. Although the Placements matured within a month after Arcapita's bankruptcy filing, the Defendants failed to deliver the Placement Proceeds to Arcapita. BisB Compl. ¶¶ 31, 32, 34; Tadhamon Compl. ¶¶ 27, 35, 36, 38. Instead, the Defendants informed Arcapita that, pursuant to Bahraini law, they were setting off the Placement Proceeds against prepetition debt owed to them by Arcapita. BisB Compl.

¶ 34; Tadhamon Compl. ¶ 38.2 The Committee alleges that the outstanding balance of Placement Proceeds due and owing to Arcapita is $10,002,292.00 from BisB and $18,480,269.00 from Tadhamon.3 BisB Compl. ¶ 36; Tadhamon Compl. ¶ 40. The Committee filed these cases against the Defendants for breach of contract, turnover, the avoidance of a preferential transfer, violation of the automatic stay, and claims disallowance. BisB Compl. ¶¶ 1, 36; Tadhamon Compl. ¶¶ 1, 40.4 The Committee seeks, among other things, to compel the Defendants to comply with their obligations under the Placement Agreements by turning over the Placement Proceeds or to avoid the Placements and recover the Placement Proceeds as an improper payment of antecedent debts. BisB Compl. ¶ 6; Tadhamon Compl. ¶ 6.

The Defendants' current motions do not take place in a vacuum. The parties have already litigated the issue of personal jurisdiction in this case. On that issue, the United States District Court for the Southern District of New York held that the Defendants' use of New York correspondent bank accounts to receive funds from Arcapita met the threshold of minimum contacts necessary to assert personal jurisdiction over the Defendants. See Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c)) , 549 B.R. 56, 67–71 (S.D.N.Y. 2016), reversing Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c)) , 529 B.R. 57 (Bankr. S.D.N.Y. 2015). The District Court further held that the assertion of jurisdiction was reasonable under the circumstances of the cases. See id. at 71–2. In reaching its decision, the District Court examined the issue of personal jurisdiction under both the New York long-arm statute and federal case law. See id. at 67–70.

The District Court first held that the Defendants' use of the correspondent accounts in New York was purposeful, constituted a "transaction of business" in New York, and established the minimum contacts necessary to assert specific jurisdiction over the Defendants. See id. at 68–70. Given the allegations in the complaints, the District Court found that the Defendants had selected U.S. dollars as the currency for the transactions and had designated the New York correspondent bank accounts to receive the funds from Arcapita. See id. at 68–69. The District Court stated that, despite the Defendants' decision to use the funds for investments overseas, the Defendants "deliberately chose to receive Arcapita's funds in U.S. dollars and designated correspondent bank accounts in New York to receive the funds, even though they presumably could have performed the Placement transactions without ever directing the funds through New York or anywhere else in the United States." Id. at 70. The Defendants therefore made a "deliberate choice to utilize the New York correspondent bank accounts and, more generally, New York's and the United States's banking system...." Id.

Importantly for the present motions, the District Court also held that the Committee's avoidance claim under Section 547 of the Bankruptcy Code arose from the Defendants' use of the New York correspondent accounts. See id. at 69–70. The District Court stated that the Defendants' "New York contacts—i.e. , the receipt of the transferred funds in New York correspondent bank accounts—are at the heart of this cause of action. The receipt of the funds in New York is precisely the conduct targeted by the Committee, and the activity that the cause of action seeks to have voided." Id. at 69. In coming to this conclusion, the District Court observed that "when a defendant purposely selects and uses a correspondent bank account to effectuate a particular transaction, and a plaintiff later files a lawsuit asserting a cause of action arising out of that transaction, the defendant can hardly claim that it could not have foreseen being haled into court in the forum in which the correspondent bank account it had selected is located." Id. at 68 ; see id. at 71.

The District Court also concluded that "the United States has a strong interest in adjudicating claims that arise...

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