Firestar Diamond, Inc.
MEMORANDUM OF DECISION
A P P E A R A N C E S:
Attorneys for the Firestar Diamond Liquidating Trustee
919 Third Avenue
New York, New York 10022
By: Richard Levin, Esq.
Carl Wedoff, Esq.
-and-
353 North Clark Street
Chicago, Illinois 60654
By: Angela Allen, Esq.
HILL RIVKINS LLP
Attorneys for Claimants
Union Bank of India (UK) Ltd.
Bank of India (London Branch)
Bank of India (Antwerp Branch)
45 Broadway, Suite 1500
New York, New York 10006
By: John J. Sullivan, Esq.
CONDON & FORSYTH LLP
Attorneys for Claimants
Bank of India, Bharat Diamond Bourse Branch
7 Times Square, 18th Floor
New York, NY 10036
By: Joseph E. Czerniawski, Esq.
Matthew D. Emery, Esq.
SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court is a motion filed by the liquidating trustee for the Firestar Diamond Liquidating Trust (the “Trustee“) seeking summary judgment on his objection to the claims filed in this bankruptcy case by Bank of India (London Branch)
BACKGROUND
The current dispute involves transactions between the Debtor FDI, the Banks, and three non-debtor subsidiaries of the Debtor FDI: Firestar Diamond International Private Limited, an Indian entity (“FDIPL“), Firestar Diamond BVBA, a Belgian entity (“BVBA“), and Firestar Diamond FZE, an Emirati entity (“FZE,” and together with FDIPL and BVBA, the “Affiliates“).4
The Debtor FDI operated a wholesale jewelry business in New York.5 FDI and two other U.S. corporations—A. Jaffe, Inc. (“A. Jaffe“) and Fantasy, Inc. (“FI,” and together with FDI and A. Jaffe, the “Debtors“)—were part of the international diamond and jewelry business of Nirav Modi.6 Nirav Modi owned and controlled the Debtors and numerous other affiliated diamond and jewelry businesses in the United States, India, Belgium, Hong Kong, the United Kingdom, and the United Arab Emirates.7
FDI regularly purchased polished diamonds from the Affiliates.8 The Banks provided commercial banking services to the
Under these arrangements, the Affiliates were authorized to draw funds from their credit facilities with the Banks to provide liquidity for the time between the shipment of the goods to FDI and the date of payment on the invoices issued to FDI.15 After each purchase of diamonds by FDI, the Affiliates issued invoices to FDI directing that FDI make payments directly to the Banks.16 The Affiliates subsequently requested and obtained draws under the
based on the invoices issued to FDI.17 After the invoices were issued, the Affiliates would inform the Banks—by letter, by submission of an invoice, and/or by submission of proof of shipment—of each sale and of the Affiliates’ draws on their credit funds.18 As security for each draw from their credit facilities, the Affiliates pledged the underlying invoices and their accounts receivable to
pay BOI-B 150 days after the shipment date as “accepted on 10-6-17.”22 On at least one other occasion, a SWIFT document23—referencing another invoice also due 150 days after the invoice date—was sent from FDI‘s bank to BOI-L indicating that the “draft was accepted by” FDI.24 At oral argument, the Trustee conceded that FDI agreed to pay the Banks on the invoices issued by the Affiliates. See Hearing Transcript (“Hr. Tr.“) 39:12–13; 42:6–7, Dec. 9, 2021 [ECF No. 1684]. If the payments from FDI to the Banks exceeded the amounts outstanding on the Affiliates’ credit lines as to the Banks’ claims, the Banks would remit the excess to the Affiliates.25
Pre-dating the transactions at issue here, the Affiliates sold FDI diamonds,
FDI received the invoices directing payment to BOI-L, FDI paid each invoice in full to BOI-L‘s account at Citibank in New York.29 Additionally, in the eighteen months leading up to the Petition Date, BVBA drew funds under its agreement with BOI-A on at least four occasions based on sales to FDI.30 BVBA issued invoices to FDI directing payment to BOI-A, and FDI paid the invoices in full to BOI-A‘s account.31 Finally, between April and October 2016, BVBA also drew funds under its credit facility with UBI based on at least three sales to FDI.32 After FDI received the invoices directing payment to UBI, FDI paid each invoice in full to UBI‘s account with Bank of America.33 Similar to the transactions at issue here, the Banks would also credit the Affiliates’ accounts—based on these previous transactions—and remit any funds they received in excess of the amounts drawn by the Affiliates.34
The Debtors filed for Chapter 11 protection on February 26, 2018. See ECF No. 1. A few months before the Debtors’ bankruptcy filing, Punjab National Bank (“PNB“) filed a complaint against Nirav Modi and several associated entities in India, alleging “the largest bank fraud in Indian history” against PNB and other banks. See In re Firestar Diamond, Inc., 615 B.R. 161, 162–64 (Bankr. S.D.N.Y. 2020) (”Firestar I“), vacated in part and remanded,
627 B.R. 804 (S.D.N.Y. 2021); Report of John J. Carney, Examiner at 4 (the “Carney Report“) [ECF No. 394]. The Court appointed an examiner who investigated whether the Debtors and their senior officers and directors were involved in the alleged fraud and found substantial evidence to support their knowledge and involvement.35 Against this backdrop, the Court appointed Richard Levin as Chapter
The current dispute follows a remand from the District Court after a prior decision of this Court on the Banks’ claims. In the prior dispute, the Trustee had argued that the Banks’ claims were barred under Section 502(d) of the Bankruptcy Code because the Banks’ claims were transferred to the Banks by subsidiaries of the Debtors who had received millions of dollars in fraudulent transfers in a bank fraud scheme. See Firestar I, 615 B.R. at 164. The main point of contention addressed in this Court‘s prior decision was whether disallowance under Section 502(d) is a personal disability of the specific claimant or an attribute of the claim itself. See id. at 165–69 (addressing whether a claim disallowed under Section 502(d) should still be disallowed if the claim was transferred from its original owner). This Court decided that claims that are disallowable under Section 502(d) must be disallowed no matter who holds them. Id. at 167 (citing In re KB Toys Inc., 736 F.3d 247, 252 (3d Cir. 2013)). In other words, “Section 502 follows the claim, not the claimant.” Id. at 168. Having found that Section 502(d) applied to the
Banks’ claims, the Court went on to determine that the Banks’ claims were disallowed because “the claims are based on amounts owed to the entities that received fraudulent transfers from the Debtors in amounts exceeding the claims, and the claims would be subject to disallowance if those entities filed the claims.” Id. at 169.
On appeal, the District Court agreed with this Court‘s conclusion that “a transferee of a claim is subject to the same burdens under Section 502(d) as the transferor.” In re Firestar Diamond, Inc., 627 B.R. 804, 808 (S.D.N.Y. 2021) (”Firestar II“). But the District Court remanded the case for this Court to make specific factual findings regarding the “characterization of the Banks’ claims and how they are allegedly traced—or not traced—to claims by the Affiliates against Firestar,” so as to determine whether Section 502(d) applies here. Id. at 809. In the discussion below, the Court assumes familiarity with both prior opinions.
The Court held oral argument on the Motions now before the Court on December 9, 2021. See Hr. Tr., Dec. 9, 2021.
DISCUSSION
I. Applicable Legal Standards
A. Summary Judgment
Federal Rule of Civil Procedure 56, made applicable by Rule 7056 of the Federal Rules of Bankruptcy Procedure, governs the granting of summary judgment. “[S]ummary judgment is proper ‘if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the [movant] is entitled to a judgment as a matter of law.‘” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (quoting
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting First Nat‘l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 288 (1968)).
“A fact is material when it might affect the outcome of the suit under governing law.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 202 (2d Cir. 2007). But “the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment . . . .” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48 (1986). “The Court may also grant some but not all of the relief requested in a summary judgment motion if it finds disputed issues of fact as to some of the issues presented.” In re Residential Capital, LLC, 533 B.R. 379, 395 (Bankr. S.D.N.Y. 2015) (citing
“The party seeking summary judgment bears the burden of establishing that no genuine issue of material fact exists and that the undisputed facts establish [the movant‘s] right to judgment as a matter of law.” Rodriguez v. City of New York, 72 F.3d 1051, 1060–61 (2d Cir. 1995). The showing necessary to satisfy this initial burden depends on which side bears the burden of proof on a particular issue at trial. See Read Prop. Grp. LLC v. Hamilton Ins. Co., 2018 WL 1582291, at *5 (E.D.N.Y. Mar. 30, 2018). When the movant has the burden of proof at trial, its own submissions in support of the motion must entitle it to judgment as a matter of law. See Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612, 618 (2d Cir. 1998). When the burden of proof falls on the nonmoving party, it is generally sufficient for the movant to point to a lack of evidence on an essential element of the nonmovant‘s claim. See Cordiano v. Metacon Gun Club, Inc., 575 F.3d 199, 204 (2d Cir. 2009). To avoid summary judgment, the nonmoving party must then come forward with evidence sufficient to raise a genuine issue of fact for trial. See id.
“In deciding whether material factual issues exist, all ambiguities must be resolved and all reasonable inferences must be drawn in favor of the nonmoving party.” In re Ampal-Am. Israel Corp., 2015 WL 5176395, at *10 (Bankr. S.D.N.Y. Sept. 2, 2015) (citing Matsushita, 475 U.S. at 587). But “the nonmoving party may not rely on conclusory allegations or unsubstantiated speculation[,]” Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 428 (2d Cir. 2001), and “only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Anderson, 477 U.S. at 248.
“When cross motions for summary judgment are made, the standard is the same as that for individual motions.” United Indus. Corp. v. IFTE plc, 293 F. Supp. 2d 296, 299 (S.D.N.Y. 2003). “The court must consider each motion independently of the other and, when evaluating each, the court must consider the facts in the light most favorable to the non-moving party.” Id. “Moreover, even when both parties move for summary judgment, asserting the absence of any genuine issues of material fact, a court need not enter judgment for either party.” Morales v. Quintel Entm‘t, Inc., 249 F.3d 115, 121 (2d Cir. 2001). “Rather, each party‘s motion must be examined on its own merits, and in each case all reasonable inferences must be drawn against the party whose motion is under consideration.” Id.
After a proof of claim has been filed, it may be disallowed for various reasons under Section 502 of the Bankruptcy Code. Section 502(d) provides, in relevant part:
[T]he court shall disallow any claim of any entity from which property is recoverable under [S]ection 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under [S]ection 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under [S]ection 522(i), 542, 543, 550, or 553 of this title.
Under
II. Whether the Banks’ Claims are Transfers or Obligations
It is undisputed that any claims by the Affiliates against FDI “would be disallowed under Section 502(d) because the Affiliates have not transferred to [FDI] any preferences they received under Section[s] 544, 547, and 548” of the Bankruptcy Code. Firestar II, 627 B.R. at 807. Accordingly, “if the Banks’ claims [here] are a result of a transfer from the Affiliates, the claims must be disallowed under Section 502(d) in the same way they would be disallowed if the Affiliates were asserting them.” Id. at 808. As noted above, the Court must now determine
“what exactly the Banks received from the Affiliates,” and “how [the Banks’ claims] are allegedly traced—or not traced—to claims by the Affiliates against [FDI].” Id. at 809.
The Trustee argues that the Banks’ claims are based on the Affiliates’ pledges of—or the Banks’ security interests in—the Affiliates’ accounts receivable, that the claims remain with the Affiliates, and that the claims are disallowable under Section 502(d). Trustee‘s Memo at 14–18 of 21; Trustee‘s Reply at 13 of 18; Hr. Tr. 38:22; 47:5–11; 48:1–13, Dec. 9, 2021. In the alternative, the Trustee argues that the Banks’ claims are the results of assignments of the Affiliates’ claims against FDI and, thus, disallowable under Section 502(d) because they are transfers of the Affiliates’ claims. Trustee‘s Memo at 14, 20–21 of 21; Hr. Tr. 40:18–22; 47:11–15; 60:8–61:2, Dec. 9, 2021. The Banks, on the other hand, argue that Section 502(d) does not apply
As directed by the District Court—and now as narrowed by the parties’ Motions and oral argument on the Motions—this Court must now decide whether the Banks’ claims are “transfers” under Section 502(d) or contractual “obligations” owed by FDI to the Banks.
“Section 101(54) of the Bankruptcy Code defines a ‘transfer’ broadly as every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor‘s equity of redemption.” In re Asia Glob. Crossing, Ltd., 333 B.R. 199, 203 (Bankr. S.D.N.Y. 2005). Although the Bankruptcy Code does not define an “obligation,” “it presumably means ‘[a] formal binding agreement or acknowledgment of a liability to pay a certain amount or to do a certain thing for a particular person or set of persons; esp., a duty
arising by contract.‘” Id. (quoting BLACK‘S LAW DICTIONARY 1104 (8th ed. 2004)). “In most situations, therefore, the ‘obligation’ will impose a ‘debt’ on the obligor, and give a ‘claim’ to the obligee.” Id.; see also In re Zetta Jet USA, Inc., 2021 WL 3721477, at *14 (Bankr. C.D. Cal. Aug. 17, 2021) (“Considering the ordinary common meaning of obligation, it is essentially a contract or promise to perform some act or do something in the future.“).
A. The Language in the Agreements Between the Parties
The parties use a variety of terms to label the transactions at issue in this case, including such terms as discounting, factoring, seller financing, pledges of receivables, accounts receivable financing, lockbox transactions, assignments, and obligations. The Trustee has consistently argued that the arrangements between the Affiliates, the Banks, and FDI are ultimately pledges of the Affiliates’ receivables to the Banks or, in the alternative, assignments of the Affiliates’ claims to the Banks—either of which, the Trustee argues, would be avoidable under Section 502(d). Trustee‘s Memo at 15–21 of 21. The Banks, on the other hand, have been less clear, contending these are tripartite contractual arrangements that result in choses-in-action, or obligations, benefiting the Banks with some apparent disagreement among the Banks as to whether these transactions can fairly be labeled as discounting, or factoring. See Banks Memo at 26 of 38; Banks Reply at 12–17 of 21; Hr. Tr. 18:7–21, 19:21–22, Dec. 9, 2021.38 At oral argument, the Banks appeared to settle on the term “seller financing.” Hr. Tr. 18:18–19; 19:22–24, Dec. 9, 2021. Of course, none of the parties’ labels are controlling, and the Court must examine the relevant documents to determine the nature of the parties’ relationship. The relevant documents here are the Deed of Hypothecation and the Amendment and Restatement Facility
Agreement between the Bank BOI-L and the Affiliate FZE, see Panda Decl., Exs. A, B; the Sanction of Credit Line agreement between the Bank BOI-A and the Affiliate BVBA, see Singh Decl., Exs. A, B; the Pledge of Receivables Agreement
As to the Bank BOI-L, FZE and BOI-L executed a Deed of Hypothecation “[a]s security for the payment of the principal, interest and other obligations . . . of [FZE]” related to FZE‘s credit facility with BOI-L—the “Amendment and Restatement Facility Agreement.” Panda Decl., Exs. A, B. BOI-L itself asserts that under the Deed of Hypothecation, “FZE granted BOI-L a right of pledge over all Receivables of FZE.” Id. ¶ 5 (emphasis added). BOI-L defines “pledge” as “a process where the exporter/seller [FZE] prepares a commercial invoice addressed to its customer [FDI] . . . directing that payment on the invoice be made by a certain date in the future at a specified bank account maintained by BOI-L.” Id. ¶ 7. The invoice that FZE issued to FDI that is at issue here directed FDI to pay BOI-L, with the “Ultimate Beneficiary: Firestar Diamond FZE.” Id. at Ex. D-1; see also supra note 21.
As to the second Bank BOI-A, the Sanction of Credit Line between BVBA and BOI-A similarly provided for security by way of pledge for BOI-A‘s extension of credit to BVBA. See
Singh Decl., Ex. B at 7–8 of 12 (“Article 16 – Pledge“) (emphasis omitted); see also id., Ex. A at 27 of 42 (“All such bills/invoices submitted to us for the purpose of drawing limit/cover shall be specifically pledged/assigned in our favor as mentioned in Article 16 . . . and shall contain a clause mentioning that payment must be made to your account in our books only.“); id. ¶ 5. All of the invoices issued by BVBA directed FDI to pay BOI-A, “in whose favor [BVBA] endorse[s] this invoice, by way of pledge,” and “for ultimate credit to [account] of Firestar Diamond BVBA.” Id. at Exs. D-1, E-1, F-1 (emphasis omitted); see also supra note 21.
As to the third Bank UBI, the “Pledge of Receivables Agreement” between BVBA and UBI “granted to UBI a right of pledge over all Receivables of BVBA.” Araujo Decl. ¶ 5; id. at Ex. B. The invoices at issue here directed FDI to pay UBI “[f]or further credit to Account ... of M/s . . . BVBA with [UBI].” Id. at Exs. D-1, E-1, F-1; see also supra note 21. Additionally, as noted above, UBI was granted the right to collect on the invoices as agent for BVBA. See supra note 20.
As to the fourth Bank BOI-B, FDIPL entered an agreement with a consortium of Indian Banks, of which BOI-B is a member, titled “Consortium Arrangement of Working Capital Facilities.” Kumra Decl., Ex. B. As security for repayment under the facilities agreement, FDIPL “created/extended or agreed to create/extend . . . for the benefit of the said Banks securities . . . by way of hypothecation of the entire assets of [FDIPL], including, but not limited to, [FDIPL]‘s . . . bills, receivables and book debts, both present and future.” Id., Ex. B at 8–9 of 266. All of the invoices at issue here directed FDI to pay BOI-B with “further credit to [the account of FDIPL] with [BOI-B].” Kumra Decl., Ex. A at 4–5, 15–18, 33–36, 41, 46 of 51; see also supra note 21. And, as noted above,
In construing the meaning of these agreements, the Court finds Nickey Gregory Co., LLC v. AgriCap, LLC, 597 F.3d 591 (4th Cir. 2010) and Endico Potatoes, Inc. v. CIT Grp./Factoring, Inc., 67 F.3d 1063 (2d Cir. 1995) instructive.
AgriCap was a case brought under the Perishable Agricultural Commodities Act (“PACA“). See AgriCap, 597 F.3d at 594. PACA protects the sellers of perishable agricultural commodities by requiring the purchasers of the commodities to maintain a trust retaining the commodities or the proceeds of the commodities until the sellers are paid, giving the sellers rights of recovery superior to all other creditors and keeping the assets outside of the bankruptcy estate. Id. at 595. While these protections under PACA are not applicable to this case, the court‘s discussion as to whether the accounts receivable in that case were sold (and thus removed from the trust and its protections) or functioned as collateral for secured loans (and thus remained protected in the trust) is analogous to the arguments raised here. See id. at 600–01. Indeed, the question of whether the agreement in that case was a sale of accounts receivable or a loan secured by accounts receivable did not turn on the statutory scheme underlying PACA. The court reviewed the documents constituting the arrangement between the parties and concluded, based on the language of the documents themselves, that “[the lender] was thus only a lender and collection agent, not a purchaser of the accounts receivable that assumed the risks of collecting on the receivables.” Id. at 603. Specifically, the court reviewed the Preliminary Term Sheet which, among other things, listed the respective parties as “borrower” and “lender,” described the credit available under the credit facility as “up to the lesser of $500,000 or 80% of [the borrower‘s] accounts receivable,” and “specified that the purpose of the credit facility was ‘to fund Borrower‘s working capital needs.‘” Id. at 601. The court further explained that when the borrower transferred a receivable to the lender, the lender advanced 80% of the receivable‘s face
value as a loan, and when it collected on the receivable the lender, among other things, retained 80% as repayment, and remitted the balance to the borrower. Id. at 603.
The language of the agreements here is strikingly similar to the AgriCap case. The Affiliates here are listed as “Borrower[s]” in their respective agreements with the Banks, the agreements were entered into for the purpose of funding the Affiliates’ working capital requirements, and the Affiliates were permitted to draw up to a sum certain or a percentage—ranging from between 60% and 100%—of the total sale price of the Affiliates’ invoices with FDI. See Panda Decl. ¶ 6; id., Ex. A at 1, 2, 4 of 50; Kumra Decl., Ex. B at 8 of 266; Singh Decl. ¶ 6; id., Ex. A at 26 of 42; id., Ex. B at 1 of 12; Araujo Decl. ¶¶ 5–7; id., Ex. A at 4 of 6 (labeling BVBA as “Borrower“); id., Ex. B at 3 of 15 (labeling BVBA as “Pledgor” and UBI as “Pledgee” and “Financer“). Other than the agreement between FDIPL and BOI-B, the agreements between the Affiliates and the Banks are either specifically named “Pledges of Receivables” or are referred to as pledges of receivables agreements by the Banks’ representatives here. See Panda Decl. ¶ 6; Singh Decl., Ex. B at Article 16; Araujo Decl., Ex. B. And although the agreement between FDIPL and BOI-B does not specifically use the word “pledge” and BOI-B denies that FDIPL‘s invoices were pledged to BOI-B, see Kumra Decl. ¶ 4—the Consortium Arrangement of Working Capital Facilities agreement
to allow all the property named in the security instrument to serve as collateral and to be used to satisfy the outstanding debt“).
In AgriCap, the court also reviewed the Security Agreement which “gave [the lender] a security interest in virtually all of [the borrower‘s] assets—including crops, inventory, and accounts receivable—to secure repayment of [the borrower‘s] obligations under the Factoring Agreement.” AgriCap, 597 F.3d at 602. The Banks here deny that there is a security agreement, arguing that if “the Banks simply held the commercial invoices as collection agents for the Affiliates and . . . the Affiliates always owned the accounts[,] . . . then a security agreement should be present in these transactions.” Banks’ Reply at 15 of 21. But as in AgriCap, the agreements here specifically grant the Banks a security interest in virtually all of the Affiliates’ assets. See Panda Decl., Ex. B (FZE “hypothecat[ing] to [BOI-L] . . . all the tangible and intangible assets of [FZE]“); Singh Decl., Ex. B (BVBA pledging “[a]ll documents, securities, goods, valuables and commercial paper that [BOI-A] keeps on the Borrower‘s behalf, . . . all [BVBA‘s] present and future receivables from third parties, including, but not limited to, bills, claims, contracts, engagements, securities, investments, deposits with financial institutions, fees and commissions“); Araujo Decl., Ex. A (listing as security for the credit facility with UBI, the “[p]ledge on asset of [BVBA] upto [sic] the loan amount under . . . agreement” as well as property of BVBA); Araujo Decl., Ex. B (Pledge of Receivables Agreement between BVBA and UBI); Kumra Decl., Ex. B (FDIPL hypothecating “the entire current assets of the Borrower” to BOI-B). Moreover, at least two of the Affiliates—BVBA and FDIPL—specifically appointed the Banks as their attorneys-in-fact to act on the Affiliates’ behalf as agents in the collection of their secured receivables. See supra note 20. And as noted above, the invoices underlying all
of the transactions at issue here direct payment to the Banks with the balance to be remitted to the Affiliates, similar to the agreement in AgriCap. See AgriCap, 597 F.3d at 603.39
For similar reasons, the Endico Potatoes case is also instructive. In that case, the court decided whether an assignment of accounts receivable from a borrower to a lender—and that lender‘s loan advances to the borrower—constituted a purchase for value or whether the lender obtained “no more than a security interest.” Endico Potatoes, 67 F.3d at 1068. The court in Endico Potatoes looked at the documents
[t]he root of all of these factors is the transfer of risk. Where the lender has purchased the accounts receivable, the borrower‘s debt is extinguished and the lender‘s risk with regard to the performance of the accounts is direct, that is, the lender and not the borrower bears the risk of non-performance by the account debtor. If the lender holds only a security interest, however, the lender‘s risk is derivative or secondary, that is, the borrower remains liable for the debt and bears the risk of non-payment by the account debtor, while the lender only bears the risk that the account debtor‘s non-payment will leave the borrower unable to satisfy the loan.
Applying these same principles, the documents here make clear that the Banks hold a security interest in the Affiliates’ accounts receivable. Much like Endico Potatoes, the Affiliates “remain[ ] liable for the debt and bear[ ] the risk of non-payment by [FDI], while the [Banks] only bear[ ] the risk that [FDI]‘s non-payment will leave the [Affiliates] unable to satisfy the loan.” See id. As in Endico Potatoes, the direction on the invoices for FDI to make payments directly to the Banks had no effect on the Affiliates credit balances with the Banks. Rather, “[the Affiliates‘] loan balance[s] w[ere] reduced only upon receipt of payment.” See id.; see also supra note 25 (Banks declarants acknowledging that they would only credit the Affiliates’ accounts after receiving payments). Additionally, the Banks could demand payment directly from the Affiliates “at any time for the entire outstanding loan balance.” Endico Potatoes, 67 F.3d at 1069; see Singh Decl., Ex. A at 22, 29 of 42, Ex. B at Article 25; Panda Decl., Ex. A at 22, 23-24 of 50, Ex. B; Araujo Decl., Ex. A at 3 of 6; Kumra Decl., Ex. B at 33, 34, 52, 57 of 266. “Finally, in the event that [the Affiliates] paid all outstanding obligations to [the Banks], [the Banks] would no longer hold an interest in [the Affiliates‘] outstanding accounts receivable.” See Endico Potatoes, 67 F.3d at 1069; see also Singh Decl., Ex. B at Article 10; Panda Decl., Ex. A at 22-23 of 50; Araujo Decl., Ex. B at 9 of 15; Kumra Decl., Ex. B at 57, 58 of 266. Thus, “[e]ach of these provisions indicates that the primary risk of a customer‘s non-payment remained at all times with [the Affiliates] and that [any agreements between FDI, the Affiliates, and the Banks] did not reduce [the Affiliates‘] obligations to [the Banks]” unless and until payments were made on the loans. See Endico Potatoes, 67 F.3d at 1069. Thus, the Banks’ risk here is derivative.
In sum, the Court finds that the arrangements between the parties here did not insulate the Affiliates from the risk of non-collection on the debts owed by FDI. Accordingly, the Court finds that, as in AgriCap and Endico Potatoes, the agreements here were loan transactions in which the Banks held no more than security interests in the Affiliates’ accounts receivable as collateral for the repayment of the Banks’ loans to the Affiliates. See AgriCap, 597 F.3d at 601, 603; Endico Potatoes, 67 F.3d at 1069. In other words, the Banks are only lenders to and collection agents for the Affiliates. See AgriCap, 597 F.3d at 603. Moreover, and as further discussed below, the Court finds that because the Affiliates retained the ultimate responsibility to repay these loans under the agreements, the agreements cannot be classified as independent, contractual obligations owed by FDI to the Banks.
B. The Banks’ Arguments About the Timing of these Transactions
The Banks attempt to sidestep the plain language in the credit facility agreements by arguing that the claims at issue here are direct obligations owed by FDI to the Banks because the Banks acquired the claims pre-petition. See Banks’ Memo at 11-15, 16, 27 of 28; Banks’ Reply at 6, 7, 11, 12, 17, 20 of 21; Hr. Tr. 15:13, 3:23-25, 57:18-58:2, Dec. 9, 2021. But the Court disagrees. The cases cited by Banks do not support their contention that claims that would otherwise be disallowed under
The Banks first cite In re MacMenamin‘s Grill Ltd., 450 B.R. 414 (Bankr. S.D.N.Y. 2011) to support their argument that “pre-petition rights acquired in the ordinary course of business for value are not considered transfers of claims but rather represent the acquiring of causes of action against the Debtor, who has undertaken an obligation.” Banks’ Reply at 11 of 21 (citing In re MacMenamin‘s Grill, 450 B.R. at 428-29). The court in In re MacMenamin‘s Grill examined, among other things, whether certain lenders to a debtor were protected by the safe harbor provision of
The Banks also cite In re M. Fabrikant & Sons, Inc., 447 B.R. 170 (Bankr. S.D.N.Y. 2011), aff‘d, 480 B.R. 480 (S.D.N.Y. 2012), aff‘d, 541 F. App‘x 55 (2d Cir. 2013) where the alleged transfer was a two-part transaction. In re M. Fabrikant & Sons, 447 B.R. at 189. In the first part of the transaction, the lending banks advanced proceeds under lines of credit to the debtors. Id. In the second part, the debtors fraudulently transferred the proceeds to another entity. Id. While the complaint there focused on the second part, the Fabrikant court found that it could not ignore the first part of this transaction, in which a loan created valid obligations owed to the lending banks because the lending banks gave value. Id. But once again, the issue in Fabrikant is not the issue here. Indeed, the situation here is reversed. The first part of the transactions in this case is the avoidable claims of the Affiliates, while
For similar reasons, the Asia Global Crossing case also does not support the Banks’ argument. See Asia Global Crossing, 333 B.R. 199. While Asia Global Crossing deals with whether claims are transfers or obligations under
disallows the claim of the transferee of an avoidable transfer, but does not speak to the claim of an obligee under an avoidable obligation for the reasons already stated; the avoided obligation is rendered unenforceable, and the underlying claim is subject to disallowance without regard to
§ 502(d) . Moreover, such a provision would be entirely unnecessary. In short,§ 502(d) applies to avoidable transfers but does not apply to avoidable obligations.
Id. at 202-03. The court ruled that the guaranty gave the third-party a chose in action against the debtor—an obligation owed by the debtor—conditioned on the default of the subsidiary, but it did not grant the third-party any interest in or right to the debtor‘s property—a transfer. Id. at 204. These facts do not support the Banks’ argument that a claim acquired pre-petition is an obligation that falls outside of
C. The Banks’ Arguments that a Tripartite Agreement Existed
The Banks also contend that the documents here amount to tripartite agreements that were created pre-petition, originated between all the parties rather than just the Banks and Affiliates and, thus, created contractual obligations owed directly by FDI to the Banks. See Banks Reply at 8-9, 19-20 of 21; Hr. Tr. 35:9-10, Dec. 9, 2021. But once again, the Court
The Banks also appear to argue that the alleged tripartite agreements were entered contemporaneously because the Affiliates and FDI were run by the same principal who could assent at the same time to both the Affiliates agreement with the Banks and FDI‘s alleged agreement to pay the Banks in exchange for additional time to pay on the invoices. See Hr. Tr. 22:23-25:9, Dec. 9, 2021. But the Affiliates, the Debtors, and their common principal, Nirav Modi, are three distinct legal entities. See, e.g., Novak v. Scarborough All. Corp., 481 F. Supp. 2d 289, 292 (S.D.N.Y. 2007) (“Corporations, of course, are legal entities distinct from their managers and shareholders and have an independent legal existence . . . .“) (quoting Port Chester Elec. Constr. Corp. v. Atlas, 40 N.Y.2d 652, 656 (1976)). Modi‘s actions on behalf of the Affiliates do not bind the Debtors.
In support of their view that there was a meeting of the minds among all these parties, the Banks note that there was virtually no lapse between the time when the Affiliates drew funds from the Banks and when the goods were shipped out from the Affiliates to FDI. See Hr. Tr. 25:21-26:7; 36:8-37:18, Dec. 9, 2021. In other words, the Banks look to the timing of the invoices, the export customs declarations, and the house airway bills, which the Banks contend demonstrate that the cargo was shipped a day or two after the invoices
The Banks also argue that a tripartite agreement exists because all of the parties extended and received consideration. Specifically, the Banks assert that they extended funds to the Affiliates to finance the Affiliates’ working capital needs, the Affiliates shipped goods to FDI, and FDI received extended periods of time to pay on the invoices, allegedly in exchange for FDI‘s acceptance of the invoices directing them to pay the Banks. See Banks’ Reply at 8-9, 12-13 of 21. But there is no indication on the invoices—issued by the Affiliates to FDI—that the 120 to 152 days that the Affiliates gave FDI to pay was actually an offer extended by the Banks. Nor is there any indication in the record that FDI understood this extended period of time to be consideration in exchange for anything—let alone for any benefit it was extended by the Banks.
Additionally, the Banks contend that they realized—and relied on—a profit from these transactions because the invoice amounts between the Affiliates and FDI were greater than the amounts that the Banks loaned to the Affiliates. Id. at 10, 13, 18-19 of 21. But the Banks’ own statements and evidence contradict this contention. See Banks’ Memo at 8 of 28 (“BOI-L then credited the balance owed under the credit facility before remitting any amount left over to FZE‘s account with BOI-L“) (emphasis added); Panda Decl. ¶ 10 (“In the ordinary course, FZE had no control over the funds paid by FDI unless and until BOI-L released any net funds to FZE, after paying the credit facility extended by the BOI-L against the bill.“) (emphasis added); Banks’ Memo at 9 of 28 (“BOI-A would remit any funds to BVBA only if the transfer from FDI covered more than the sum BVBA had drawn.“) (emphasis added); Singh Decl. ¶ 9 (same); Banks’ Memo at 13 of 28 (“All payments made by FDI were for the account of the Banks, and not for the Affiliates, and the Affiliates had no control or
The Banks further contend that the Southern District of New York recently addressed a nearly identical transaction and concluded that an enforceable obligation was created. Banks’ Reply at 13 of 21 (citing State Bank of India v. Shane of New York, Inc., Case No. 12-08916, ECF No. 44 (S.D.N.Y. Nov. 7, 2014)). But while the facts of that case are somewhat similar to this case, the questions presented and the legal analysis are not. In that case, the court found that an assignment was created by the invoices there, which directed the purchaser of diamonds to make payments directly to the bank in that case rather than the seller. See generally State Bank of India, Case No. 12-08916, ECF No. 44. In that case, the seller entered into a credit agreement with the State Bank of India. Id. This seller sold diamonds to the purchasers and issued two invoices to the purchasers based on these sales. Id. As in this case, the invoices there included language directing payment to the bank. Id. Also similar to this case, the seller and the purchasers were controlled by the same principal. Id. Unlike this case, however, the bank in that case argued that the amounts due on the invoices had been assigned to the bank and sought to recover from the purchasers under that theory. Id. The purchasers there argued that the invoices had been satisfied by set off payments related to subsequent sales made by the purchasers to the seller. Id. The court ultimately found that these invoices created an “equitable assignment“—and would have created an otherwise valid “common-law assignment” but for the bank‘s violation of terms under the assignment—namely its acceptance of the set-off payments noted above. Id. But the court in State Bank of India was not presented with the question of whether the claim there was an obligation, a pledge of accounts receivable, or a transfer of a claim under any other theory. Rather, the court was deciding whether or not the transaction was an assignment. Moreover, the court was not addressing the applicability of
The plain meaning of terms in a written agreement is given serious weight. “[A] written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.” Greenfield, 98 N.Y.2d at 569. “It is too well settled for citation that, if a written agreement contains no obvious or latent ambiguities, neither the parties nor their privies may testify to what the parties meant but failed to state.” Oxford Commercial Corp. v. Landau, 12 N.Y.2d 362, 365 (1963).
Thus, it is well established that “[p]arole [sic] evidence—evidence outside the four corners of the document—is admissible only if a court finds an ambiguity in the contract.” Schron, 20 N.Y.3d at 436; see also Chateaugay Corp., 116 B.R. at 903. The parol evidence rule “imparts stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses . . . infirmity of memory . . . [and] the fear that the jury will improperly evaluate the extrinsic evidence.” W.W.W. Assocs., Inc., 77 N.Y.2d at 162 (citing Fisch, New York Evidence § 42, at 22 [2d ed.]). “Whether or not a contract provision is ambiguous is a question of law to be resolved by a court.” Van Wagner Advert. Corp. v. S & M Enterprises, 67 N.Y.2d 186, 191 (1986). “[T]he threshold decision on whether a writing is ambiguous is the exclusive province of the court.” Sutton v. E. River Sav. Bank, 55 N.Y.2d 550, 554 (1982).
The Banks first contend that the underlying credit agreements “do not specify the mechanics as to how the ‘pledge’ of the accounts receivables and invoices . . . are undertaken.” Banks’ Memo at 14 of 28. But the Court finds nothing ambiguous about the language in the credit facilities. For the reasons discussed above, the credit facility agreements clearly pledge the Affiliates’ accounts receivable as security for money loaned to them by the Banks, and the agreements clearly set forth the requirements of the Affiliates prior to drawing money under these facilities. For example, the Affiliates are required to issue invoices to their customers—here FDI—directing payment to the Banks and are further required to submit those invoices and proof of shipment of the goods sold to the Banks before receiving the loans. See Trustee‘s Response to BOI-B Statement of Facts ¶ 9; Trustee‘s Response to BOI-A, BOI-L, and UBI Statement of Facts ¶¶ 33-34; Panda Decl. ¶ 13; id. at Exs. E-1, E-2; Kumra Decl., Ex. A at 10-12, 23, 30 of 51; Singh Decl., Ex. A at 11-12 of 42.
Second, the Banks argue that the language on the invoices themselves is ambiguous and that the Trustee misinterprets them to mean that “the payment direction was to the Bank, but not for the Bank‘s account. Rather, the direction was specifically for credit to the account at the Bank of the Affiliate.” Banks’ Memo at 14 of 28 (quoting Trustee‘s Memo at 19 of 21). But
The Banks are correct that “evidence of the course of dealing and performance and usage of trade may be employed to explain or supplement provisions of the contract,” but this is not an exception to the rule that “extrinsic evidence may not be used to vary or contradict the express terms of a writing embodying the parties’ final agreement” as the Banks seem to suggest. See Phibro Energy, Inc., 929 F.2d at 52 (citing Fairfield Lease Corp. v. Eastern Sportswear Co., 6 Conn. Cir. 347, 273 A.2d 300 (1970)); see also Banks’ Memo at 13 of 28. Here, the extrinsic evidence that the Banks wish to introduce is intended to override the express terms of the credit facilities and invoices, which is not permitted. See Phibro Energy, Inc., 929 F.2d at 52. The Banks’ reliance on Phibro Energy is misplaced as the court there only considered extrinsic evidence because it determined that the meaning of a word in the contract was not clear. See id.; see also In re Chateaugay Corp., 116 B.R. at 903-04 (finding that evidence of common trade usage and course of dealing may be introduced to define ambiguous terms). Here, for the reasons discussed above, the language in the agreements is not ambiguous.
III. Applicability of Section 502(d)
Given that the relevant agreements between the Affiliates and Banks establish pledges of accounts receivables, the Court must next address whether such pledges are transfers under
The Court finds that the pledges of accounts receivable here are transfers under
But even if the Banks must foreclose on the accounts receivable before a transfer is completed, the Banks’ claims here would still be disallowed under
CONCLUSION
For the reasons stated above, the Trustee‘s motion for summary judgment is granted, and the Banks’ motions for summary judgment are denied. The Trustee should settle an order on five days’ notice. The proposed order must be submitted by filing a notice of the proposed order on the Case Management/Electronic Case Filing docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of the notice and proposed order shall also be served upon opposing counsel.
Dated: New York, New York
September 1, 2022
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
Notes
On or about November 8, 2017, FZE sold diamonds to FDI, and an invoice was generated on the same date. Trustee‘s Response to BOI-A, BOI-L, and UBI Statement of Facts ¶ 56. On November 9, 2017, FZE initiated the “pledge” of the invoice to BOI-L and sent a letter of exchange to FDI directing payment to BOI-L. Id. ¶ 57. On November 11, 2017, FZE sent notice to BOI-L of the sale, the shipment of the diamonds, and FZE‘s drawing of funds under its credit facility. Id. ¶ 58; Declaration of Sasanka S. Panda (the “Panda Decl.“), Exs. D-3, E-2 [ECF No. 1661-4]. On November 21, 2017, BOI-L issued notice to FDI‘s bank of the transaction, instructing how the payment was to be processed, and requesting acceptance of the due date. Trustee‘s Response to BOI-A, BOI-L, and UBI Statement of Facts ¶ 59. FDI‘s bank then sent acknowledgment that the “draft was accepted by [FDI]” on Nov. 30, 2017. Id. ¶ 60 (emphasis omitted).
The relevant sales between BVBA and FDI, with funding from BOI-A, took place on or about August 16, 2017, September 6, 2017, and November 10, 2017. Trustee‘s Response to BOI-A, BOI-L, and UBI Statement of Facts ¶¶ 64–66. BOI-A then sent each invoice—issued on the same dates—and proof of shipment—on or around the same dates—to FDI and “FDI accepted each invoice without objection.” See id. ¶ 69; Declaration of Arvind Singh (the “Singh Decl.“), Exs. D-1, D-3, E-1, E-3, F-1, F-3 [ECF Nos. 1660-8, 1660-9, 1660-10]. At a later date, BVBA would submit this documentation with its request to draw funds under its credit facility with BOI-A. See Singh Decl., Ex. A at 11–12 of 42 (requiring BVBA to submit invoices and proofs of shipment before making draws under their credit facility).
The relevant sales between BVBA and FDI, with funding from UBI, took place on or about October 6, 2017, November 10, 2017, and November 29, 2017. Trustee‘s Response to BOI-A, BOI-L, and UBI Statement of Facts ¶¶ 73–75. The invoices were issued, and the shipments of diamonds were made on or around the same dates. See Declaration of Royston Araujo (the “Araujo Decl.“), Exs. D-1, D-3, E-1, E-2, E-4, F-1, F-2 [ECF Nos. 1662-6, 1662-7, 1662-8]. At a later date, BVBA would submit this documentation with its request to draw funds under its credit facility with UBI. See Banks’ Memo at 6 of 28 (“Under the seller financing arrangements, the [Affiliates] were authorized to draw funds from their credit facilities with the Banks in order to provide liquidity during the lead time between shipment of goods being sold and the payment due dates on the commercial invoices issued to the buyers.“).
As to the sales between FDIPL and FDI, FDIPL drew funds under its agreement with BOI-B between September 15, 2017 and December 15, 2017. See Trustee‘s Response to BOI-B Statement of Facts ¶ 1. BOI-B received two invoices dated September 15, 2017 from FDIPL, stamped their approval, and submitted them to FDI‘s bank for confirmation. Id. ¶ 9. FDI “accepted[ ] a draft exchange demand for the sum of these first two invoices to be paid to [BOI-B] via [FDI‘s bank].” Id.; see, e.g., Kumra Decl., Ex. C at 3 (the September 15, 2017 invoice stamped “accepted” by FDI on October 6, 2017). FDI‘s bank and/or FDI were presented with all the invoices for