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

• Decision Date: 22 September 2021
• Docket Number: Adv. Pro. No. 13-01435,Case No. 12-11076 (SHL) (Jointly Administered),Adv. Pro. No. 13-01434
• Citation: 633 B.R. 207
• 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. (SHL) Bahrain Islamic Bank, Defendant. Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c), et al., Plaintiff, v. (SHL) Tadhamon Capital B.S.C., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

633 B.R. 207

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.(SHL) Bahrain Islamic Bank, Defendant.

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

v.(SHL) Tadhamon Capital B.S.C., Defendant.

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

Adv. Pro. No. 13-01434

Adv. Pro. No. 13-01435

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

Signed September 22, 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., 55 Hudson Yards, New York, New York 10001 -and-By: Andrew M. Leblanc, Esq., Samir L. Vora, Esq., 1850 K Street, NW, Suite 1100, Washington, D.C. 20006

K&L GATES LLP, Counsel for Bahrain Islamic Bank and Tadhamon Capital B.S.C., By: John A. Bicks, Esq., Brian D. Koosed, Esq., 599 Lexington Avenue, New York, New York 10022

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court is the plaintiff's request for entry of proposed orders (the "Proposed Orders")¹ granting the summary judgment motions of the Official Committee of Unsecured Creditors (the "Committee") of Arcapita Bank B.S.C.(c) and its affiliated debtors (collectively, the "Debtors") and denying the cross-motions for summary judgment of Bahrain Islamic Bank ("BisB") and Tadhamon Capital B.S.C. ("Tadhamon" and, together with BisB, the "Defendants").² The Defendants raise two objections to the Proposed Orders: 1) the Committee requests an inappropriate rate of prejudgment interest, and 2) the Proposed Orders should include language allowing each Defendant a general unsecured claim against the Debtors’ bankruptcy estate in the event that the Defendants satisfy the respective judgments against them in full in these adversary proceedings. See Obj. to Proposed Orders Granting Pl.’s Mot. for Summ. J. and Denying Defs.’ Cross-Mot. for Summ. J. at 1–3 [Adv. Pro. No. 13-01434, ECF No. 99; Adv. Pro. No. 13-01435, ECF No. 101] (the "Objections"). For the reasons set forth below, the Objections to the Proposed Orders are denied.

BACKGROUND

Familiarity with the underlying facts of these adversary proceedings is presumed. See Off. Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c)) , 628 B.R. 414 (Bankr. S.D.N.Y. 2021). Prior to its bankruptcy filing, Arcapita was licensed as an Islamic wholesale bank by the Central Bank of Bahrain and operated as an investment bank and global manager of Shari'a-compliant alternative investments. See id. at 423. Arcapita maintained a prepetition business relationship with each of the Defendants, through which Arcapita and the Defendants made several Shari'a-compliant short-term investments with one another. See id. at 423–29. Upon its bankruptcy filing, Arcapita attempted to recover the proceeds of certain investments it had made with the Defendants, but the Defendants asserted that they had exercised a purported right to a setoff under Bahraini law of the debts owing between themselves and Arcapita. See id. at 429–31. The Committee filed the above-captioned adversary proceedings against the Defendants to seek, among other things, damages for breach of contract and violation of the automatic stay, turnover of the investment proceeds in question and claims disallowance. See id. at 430–31.

Numerous issues have already been adjudicated in these adversary proceedings relating to whether certain funds constituted assets of the estate, as well as personal jurisdiction, comity, and extraterritorial application of several sections of the Bankruptcy Code. See Official Committee of Unsecured Creditors v. Bahrain Islamic Bank and Tadhamon Capital B.S.C. (In re Arcapita Bank B.S.C.(c)) , 2018 WL 718399 (Bankr. S.D.N.Y. Feb. 5, 2018) ; Official Committee of Unsecured Creditors v. Bahrain Islamic Bank and Tadhamon Capital B.S.C. (In re Arcapita Bank B.S.C.(c)) , 575 B.R. 229 (Bankr. S.D.N.Y. 2017) ; Official Committee of Unsecured Creditors v. Bahrain Islamic Bank and Tadhamon Capital B.S.C. (In re Arcapita Bank B.S.C.(c)) , 529 B.R. 57 (Bankr. S.D.N.Y. 2015) ; Baeshen v. Arcapita Bank B.S.C.(c) (In re Arcapita Bank B.S.C.(c)) , 520 B.R. 15 (Bankr. S.D.N.Y. 2014). On April 23, 2021, this Court issued a Memorandum of Decision (the "Decision") granting the Committee's summary judgment motions and denying the Defendants’ cross-motions for summary judgment in the respective adversary proceedings. See generally In re Arcapita, 628 B.R. 414. The Decision granted summary judgment to the Committee on its claims for breach of contract under Bahraini law and for turnover under Section 542(b) of the Bankruptcy Code. See id. at 476–79. While the Court also granted summary judgement on the Committee's claim for violation of the automatic stay under Section 362(a) of the Bankruptcy Code, it denied damages with respect to the stay violation. See id. at 479–481 ; see also Objections at 6.

A. Prejudgment Interest Generally

Both the award of prejudgment interest and the rate at which it is set are matters within the discretion of the Court. See Endico Potatoes v. CIT Grp./Factoring , 67 F.3d 1063, 1071 (2d Cir. 1995) ("The decision whether to grant prejudgment interest and the rate used if such interest is granted are matters confided to the district court's broad discretion. ...") (citations and quotations omitted). But while an award of prejudgment interest is discretionary, it should be awarded absent a sound reason to deny it. See Savage & Assocs. v. Mandl (In re Teligent Inc.) , 380 B.R. 324, 344 (Bankr. S.D.N.Y. 2008) (citations omitted). When determining whether prejudgment interest should be awarded, "courts in this Circuit look to the source of the law underlying plaintiff's claims: claims that arise out of federal law are governed by federal rules, claims arising out of state law are governed by state rules." Kittay v. Korff (In re Palermo) , 739 F.3d 99, 107 (2d Cir. 2014). In a determination on prejudgment interest, a court should consider:

(i) the need to fully compensate the wronged party for actual damages suffered, (ii) considerations of fairness and the relative equities of the award, (iii) the remedial purpose of the statute involved, and/or (iv) such other general principles as are deemed relevant by the court.

Wickham Contracting Co., Inc. v. Local Union No. 3, Int'l Bhd. of Elec. Workers, AFL-CIO , 955 F.2d 831, 834 (2d Cir. 1992). "Pre-judgment interest is not a penalty, but rather is viewed as delayed damages to be awarded as a component of compensation to the prevailing party." Davis v. R.A. Brooks Trucking, Co. (In re Quebecor World (USA), Inc.) , 491 B.R. 379, 389 (Bankr. S.D.N.Y. 2013). But "[a]wards of prejudgment interest must not result in over-compensation of the plaintiff." Wickham , 955 F.2d at 834.

The Committee requests a prejudgment interest rate equal to the New York state statutory rate of 9%. See Off. Comm. of Unsecured Creditors’ Reply in Supp. of its Proposed Order for Entry of J. at 10 [Adv. No. 13-01434, ECF No. 100; Adv. No. 1-01435, ECF No. 102] (the "Reply"). The Defendants dispute that an award of prejudgment interest is appropriate, arguing that the payment of interest violates Islamic Shari'a. See Objections at 2. The Defendants further argue that there is no basis for applying the New York statutory rate, since the claims at issue arise under either Bahraini or U.S. federal law. See id. at 6. But if the Court does grant prejudgment interest, the Defendants contend that it should be set at the federal treasury rate under 28 U.S.C. § 1961(a), which they calculate to be 0.738% for the applicable time period. See id. at 4; see also Defs.’ Counter-Proposed Order Granting Pl.’s Mot. for Summ. J. and Denying Defs.’ Cross-Mot. for Summ. J. , attached as Exhibits A and B to the Objections; Hr'g Tr. at 32:15:16 (June 10, 2021) [Adv. No. 13-01434, ECF No. 101, Adv. No. 13-01435, ECF No. 103].

In the current case, the governing law for the contracts is the law of the Kingdom of Bahrain, and the Court will therefore look to Bahraini law for guidance. See PNCEF, LLC v. Omni Watch & Clock Co. , 2010 WL 3861009, at *7, 2010 U.S. Dist. LEXIS 102910, at *19 (E.D.N.Y. Sep. 24, 2010) ("In a contract action with a choice of law provision, the substantive law of the chosen jurisdiction controls the award of prejudgment interest.") (citing Valley Juice Ltd., Inc. v. Evian Waters of France, Inc ., 87 F.3d 604, 614 (2d Cir. 1996) ). While Bahraini law does not specifically provide for prejudgment interest, Article 223 of the Bahraini Civil Code allows for parties to recover as a component of damages, "losses suffered by the creditor and profits of which he has been deprived" upon the breach of a contract. Decl. of Kavon M. Khani in Supp. of the Off. Comm. of Unsecured Creditors’ Mot. for Summ. J. , Ex. X at Art. 223 [Adv. No. 13-01435, ECF No. 70]. Additionally, Article 140(a) of the Bahraini Civil Code provides that "[i]n bilateral binding contracts if one of the parties does not perform his obligation, the other party may ... demand from the judge the performance ... of the contract, with damages[.]" Id. at Art. 140. Article 188 of the Bahraini Civil Code further provides that a party that has received "that which is not due to him" in bad faith must "restitute in addition the interest and profit that he has gained or that he has failed to gain by neglect on the thing unduly received[.]" Id. at Art. 188. So while Bahraini law does not award interest, the Bahraini Civil Code provisions cited above are consistent with the compensatory purpose of prejudgment interest under American law in providing compensation to the wronged party. See, e.g. , Brock v. Casey Truck Sales, Inc. , 839 F.2d 872, 880 (2d Cir. 1988) ("[P]rejudgment interest obviously serves the compensatory purpose by making up for...