575 B.R. 229
Bankr. S.D.N.Y.2017Background
- Arcapita Bank (a Bahraini Islamic investment bank) made short-term "Placement" investments of $10M each with Bahrain Islamic Bank (BisB) and Tadhamon in March 2012; funds were transferred through New York correspondent bank accounts.
- Arcapita filed Chapter 11 less than a month later; when the Placements matured the defendants set off prepetition debts instead of paying matured Placement Proceeds.
- The Official Committee of Unsecured Creditors sued in the SDNY bankruptcy court seeking turnover, avoidance of preferential transfers (11 U.S.C. § 547/550), violations of the automatic stay, breach of contract, and disallowance of claims.
- District court previously held that use of New York correspondent accounts established personal jurisdiction over the defendants and that the avoidance claim arose from those New York contacts.
- Defendants moved to dismiss on international comity and presumption-against-extraterritoriality grounds; the bankruptcy court denied dismissal on both doctrines.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether international comity requires abstention | Committee: no parallel foreign insolvency; U.S. has strong interest in enforcing Bankruptcy Code and marshaling estate assets | Defendants: Bahraini law governs (placement agreements), foreign interests weigh against U.S. adjudication | Court: Comity does not require abstention; no parallel foreign proceeding and U.S. contacts (NY correspondent accounts + Chapter 11 filing) weigh for adjudication |
| Whether Bankruptcy avoidance and recovery claims require extraterritorial application (presumption against extraterritoriality) | Committee: challenged transfers occurred in U.S. (receipt via NY correspondent accounts) so domestic application | Defendants: key component events occurred overseas; mere routing through U.S. banks is insufficient | Court: Transfers touching and concerning U.S. (receipt in NY correspondent accounts) displace presumption; claims viable |
| Whether turnover (§ 542) and automatic stay (§ 362) claims apply extraterritorially | Committee: Sections 541/542/362 reach property "wherever located," so turnover and stay protect estate assets abroad | Defendants: §542 and §362 do not apply extraterritorially; turnover depends on avoidance first | Court: §541 definition covers property wherever located; §§ 542 and 362 can apply extraterritorially to estate property; turnover and stay claims are independent of avoidance |
| Whether breach of contract and claim-disallowance counts should be dismissed on extraterritoriality grounds | Committee: counts overlap with other claims and were not argued fully by defendants | Defendants: constitution/subject-matter limits and extraterritoriality bar | Court: Declines to dismiss Counts I and V; insufficient briefing and overlap with other counts |
Key Cases Cited
- Hilton v. Guyot, 159 U.S. 113 (definition of international comity)
- Maxwell Commc’n Corp. v. Societe Generale, 93 F.3d 1036 (2d Cir. 1996) (articulates prescriptive vs adjudicatory comity and §403 Restatement factors)
- JP Morgan Chase Bank v. Altos Hornos de Mex., S.A. de C.V., 412 F.3d 418 (2d Cir. 2005) (comity principles and deference in foreign insolvency contexts)
- Morrison v. National Australia Bank Ltd., 561 U.S. 247 (Sup. Ct. 2010) (presumption against extraterritoriality; two-step focus test)
- EEOC v. Arabian American Oil Co., 499 U.S. 244 (presumption-against-extraterritoriality principle)
- United States v. Prevezon Holdings, Ltd., 251 F. Supp. 3d 685 (S.D.N.Y. 2017) (use of NY correspondent banks constitutes sufficient domestic conduct)
- Licci by Licci v. Lebanese Canadian Bank, SAL, 834 F.3d 201 (2d Cir. 2016) (correspondent-account use created sufficient U.S. connection)
- Mastafa v. Chevron Corp., 770 F.3d 170 (2d Cir. 2014) (numerous New York-based payments through NY accounts displace extraterritoriality presumption)
- Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 480 B.R. 501 (Bankr. S.D.N.Y. 2012) (discussion of extraterritoriality and limits where intervening foreign transfers and parallel proceedings exist)