In Re Koreag, Controle Et Revision S.A.
DECISION ON PETITION FOR RELIEF ANCILLARY TO FOREIGN PROCEEDING UNDER SECTION 304 OF THE BANKRUPTCY CODE AND FOR A PRELIMINARY INJUNCTION
This mаtter comes to this Court by way of section 304 of the Bankruptcy Code (the “Code”) pursuant to which an ancillary proceeding was filed by the Koreag, Controle et Revision S.A. (the “Petitioner”) as the Official Liquidator of Mebco Bank, S.A. (“Mebco”), a foreign corporation organized and existing under the laws of Switzerland. Refco F/X Associates, Inc. (“Refco”), a corporation organized and existing under the laws of New York with its principal place of business in New York City, has filed (1) opposition to Petitioner’s motion for relief under the Code and for a preliminary injunction and (2) a cross-motion, pursuant to Rule 12(b), Fed.R.Civ.P., and Bankruptcy Rule 1011, to dismiss the petition.
On May 5, 1989, Refco commenced an action against Mebco in the United States District Court for the Southern District of New York,
Refco F/X Associates Inc. v.
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Mebco Bank, S.A.,
FACTS
Refco is a dealer in foreign currencies, including forward, spot contracts and options thereon. Mebco is not qualified or authorized to do business in the State of New York. Stip. at 11 2. 1 Before its liquidation, Mebco engaged in the banking business and, in the course of such business, dealt in foreign currencies for its own account. Stip. at ÍI4.
In May 1986, a representative from Ref-co’s London Office met with an officer of Mebco at Mebco’s sole office in Geneva to discuss a potential trading relationship. Stip. at 11 6. Subsequent contacts between Mebco and Refco’s London office took place exclusively in Europe. Stip. at 119. In 1987, pursuant to Refco’s request, Meb-co presented to Refco its annual audited financial statement, dated December 31, 1986. Subsequently, Refco requested and received Mebco’s annual report for 1987. Stip. at ¶ 6.
Refco and Mebco began trading currencies with each other in June 1988, when Refco extended to Mebco a $10 million line of credit. Stip. at ¶ 8. Refco continued to rely on Mebco’s financial statements during Refco’s ongoing business relationship with Mebco. Weiss Aff. at 11 6.
Between June and April 1989, Refco and Mebco conducted business on a daily basis, sometimes conducting as many as five currency transactions in a single day. Stip. at 1110. Between April 20, 1989 to April 27, 1989, Refco and Mebco entered into various agreements to exchange currency as they had done in the past. Stip. at 1117. These agreements contemplated that the purchases and sales of currencies would be simultaneous transactions. Stip. at 1116. The transactions were twofold: (1) Refco delivered into the Mebco general account at Swiss Bank — N.Y., $6.9 million U.S. dollars and, in exchange, Refco was to recеive from Mebco foreign currencies of comparable value; and (2) Refco was to receive from Mebco more than $4 million U.S. dollars in exchange for foreign currencies that Refco delivered to Mebco. The foreign currency side of the transactions was to take place at various banks in Europe. The U.S. dollar side of the transactions was to be effected through Mebco’s general account at Swiss Bank — N.Y. Stip. at If 5, 14, 15; Weiss Aff. at ¶ 6.
On April 27, 1989, at 10:15 a.m. (EST), Switzerland’s Federal Banking Commission placed Mebco into liquidation. Stip. at 1118. At 11:00 a.m. (EST), petitioner was appointed the Official Liquidator of Mebco by the Federal Banking Commissiоn in Switzerland. Stip. at 1119.
Following the decision to place Mebco into liquidation and the appointment of Petitioner as Official Liquidator of Mebco, a public announcement was made in Switzerland alerting the financial and investing public of these events. Levy Aff. at 113. This information was reported almost immediately by the Dow Jones International News Service and later by The Financial Times. Stip. at 1120.
Shortly thereafter, at 3:46 p.m. (EST), Refco wire transferred funds into Mebco’s account at Swiss Bank — N.Y. Stip. at ¶¶ 21 *709 and 22. At 3:52 p.m. the following day, April 28, 1989, Refco made yet another deposit. Stip. at II22. Mebco delivered some foreign currencies to Refco, but failed to deliver foreign currenсies against $6.9 million of the U.S. dollars that Refco had sold to Mebco and deposited at Swiss Bank — N.Y. Stip. at ¶ 22; Weiss Aff. ¶ 9.
On April 27, 1989, at approximately 2:00 p.m. (EST), Mebco’s account officer at Swiss Bank, Ernest Kung (“Kung”), read over the Dow Jones International News Service that the Swiss Banking Commission revoked Mebco’s banking license. Kung Aff. at ¶ 5. Kung immediately stopped all of Mebco’s payment orders to Refco. Kung Aff. at ¶ 5. The next day, April 28, 1989, Swiss Bank received a telex from Swiss Bank Corporation in Geneva (a) advising that Mebco’s license was revoked by the Swiss Banking Corporation, (b) directing that Swiss Bank immediately stop working with Mebco, and (c) notifying Swiss Bank that all Mebco accounts had bеen blocked and that no other commitments were to be taken. Stip. at ¶ 23; Kung Aff. at II7.
There is in excess of $12.5 million in Mebco’s Swiss Bank — N.Y. account. 2 This represents deposits, amounting to millions of dollars, from Mebco creditors in addition to Refco. Mebco currently has over 400 creditors around the world.
On May 3,1989, Gary Weiss (“Weiss”) of Refco telephoned Mebco in Geneva, Switzerland. Stip. at ¶ 26. Weiss's call was referred to a Mr. Savio who claimed that Mebco’s accounts had been frozen and that his company, Koreag, had been named “liquidator.” Stip. at ¶ 27. Savio also told Refco that (i) Mebco’s Geneva banking license had been revoked by the Swiss Bаnking Commission at 11:00 a.m. (EST)' on April 27, 1989, and (ii) at that time, his company was appointed as “liquidator.” Stip. at ¶ 27; Weiss Aff. at ¶ 14. Savio also told Weiss that Mebco’s side of the open transactions with Refco would not be completed. Stip. at II31; Weiss Aff. at II16. Weiss demanded that Mebco immediately return to Refco the U.S. dollars and foreign currencies that Refco deposited into Mebco’s accounts. Stip. at ¶ 29.
On May 3, 1989, Citibank — N.Y., on behalf of Refco, sent a telex a message to Swiss Bank — N.Y., demanding the return of $7,407,510 that Refco deposited into Mebco’s account at Swiss Bank on April 27, 1989. Stip. at U 33. On May 3, 1989, Citibank — N.Y., on behalf of Refco, sent a telex message to Swiss Bank — N.Y., demanding the rеturn of $2,000,000 that Ref-co deposited into Mebco’s account at Swiss Bank — N.Y. Stip. at ¶ 34.
On January 5, 1990, the Petitioner filed the instant petition seeking relief pursuant to section 304, together with a motion to, inter alia, enjoin Refco’s prosecution of the District Court Action and to direct turnover of all the funds in Mebco’s Swiss Bank — N.Y. account to the Petitioner for administration in the Swiss Proceedings. Refco, in rebuttal, objects to the injunctive relief requested by the Petitioner and to the turnover of Mebco’s assets. Additionally, Refco seeks to dismiss the section 304 petition.
DISCUSSION
Section 304 of the Code authorizes a representative appointed in a foreign bankruptcy prоceeding to file a petition in the United States Bankruptcy Court ancillary to the foreign proceeding. The fundamental purpose of section 304 is to afford the foreign bankrupt the opportunity to “prevent the piecemeal, distribution of [its] assets [located] in this country ...” by local creditors.
Victrix Steamship Co. S.A. v. Salen Dry Cargo A.B.,
A section 304 filing, however, does not create a full scale bankruptcy case with
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the protections of an automatic stay or with the Code’s avoiding powers. H.R.Rep. No. 96-595, 95th Cong., 1st Sess. 324-25 (1977); S.Rep. No. 95-989, 95th Cong., 2nd Sess. 35 (1978), U.S.Code Cong. & Admin.News 1978, 5787, 5821, 6280, 6281.
See also, Matter of Axona Int’l Credit & Commerce, Ltd.,
Instead, a section 304 petition creates a bankruptcy сase limited in scope and designed to aid in the foreign proceedings.
Matter of Axona,
The limited scope of a section 304 petition, however, is balanced with the broad powers granted the bankruptcy court in determining the type of relief to be granted the section 304 petitioner. The bankruptcy court may:
(1) enjoin the commencement or continuation of
(A) any action against
(i) a debtor with respect to property involved in such foreign proceeding; or
(ii) such property; or
(B) the enforcement of any judgment against the debtor with respect to such property, or any act on the commencement on continuation of any judicial proceeding to create or enforce a lien against the propеrty of such estate;
(2) order turnover of the property of such estate, or the proceeds of such property, to such representative; or
(3) order other appropriate relief.
The powers of the bankruptcy court in a
It is apparent that Congress, in allowing the bankruptcy court flexibility in the exercise of the
Jurisdiction
Refco’s threshold argument is jurisdictional. It claims that this Court lacks subject matter jurisdiction under
(a) Refco properly and timely exercised its rights under the U.C.C. to cancel its currency exchange agreements and reclaim its money;
(b) Refco was defrauded by Mebco’s misrepresentation of its financial condition when Refco agreed to the currency exchanges and when Refco made the payments at issue here;
(c) Refco’s money is impressed with a constructive trust in favor of Refco because the money was obtained wrongfully, and Mebco and its creditors would be unjustly enriched if the liquidation were permitted to retain Refco’s funds; and
(d) when the Swiss liquidation proceeding was commenced, the currency exchange agreements between Réfco and Mebco were exеcutory. Even if Refco’s funds (which were delivered after the liquidator’s appointment) were deemed a part of Mebco’s “estate” or Mebco’s property at the time of delivery, Refco’s funds cannot be retained by the liquidation without performing Mebco’s side of the transaction.
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All that a foreign representative need do to invoke the bankruptcy court’s jurisdiction under
A foreign representative is defined in section 101(23) of the Code to mean a “duly selected trustee, administrator, or other representative of an estate in a foreign proceeding.”
A foreign proceeding is one which is either judicial or administrative in a “foreign country in which the debtor’s domicile, residence, рrincipal place of business or principal assets were located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization.”
This
Therefore, when conducting a jurisdictional analysis, the laws in the foreign proceeding are determinative of whether the foreign bankrupt has assets located in the district in which the
The
The Petitioner seeks an order enjoining the continuation of the District Court Action; enjoining the commencement of any actions against Mebco or its property located in this district; enjoining the attachment or garnishment and the creation, perfection and enforcement of any lien, setoff or other claim against any asset of Mebco located within this district; and directing that all assets held for the account of Mebco and all monies or other assets located in this district which are now due or which hereafter may become due to Mebco be turned over to the Petitioner.
The six
(1) just treatment of all holders of claims against or interest in such estate;
(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;
(3) prevention of preferential or fraudulent disposition of property of such estate;
(4) distributiоn of proceeds of such estate substantially in accordance with the order prescribed by this title;
(5) comity; and
(6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.
The gravamen of the issues before this Court is the proper weight that should be accorded “comity”, the fifth enumerated factor. Refco correctly points out that neither
The often cited definition of comity is: The recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.
Hilton v. Guyot,
The mere filing of a
Thе purpose of granting comity to foreign bankruptcy proceedings is quite simple and very logical. Essentially,
Refco argues against turnover of the attached funds to the Swiss proceeding because its claim will not be treated the same as if its were adjudicated in the United States. Specifically, Refco claims that under the Code and the laws of New York, its claim to the attached funds would enjoy secured status whereas under the laws of Switzerland, its claims would be relegated to the status of an unsecured creditor.
4
This Court need not address the merits of Refco’s claim that under the Code and New York laws it holds a secured claim because
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that is not the test under
In its support, Refco relies on the holdings in
Matter of Toga,
The bankruptcy court in
Toga
refused to turnover the assets located in its district to the Canadian court to be administered in the Canadian bankruptcy proceeding where the local creditors would not enjoy under Canadian law the same secured status they would enjoy in the United States.
Toga,
The facts in
Matter of Papeleras
are altogether different than those before this Court. In
Papeleras,
the bankruptcy court refused to require the local creditor to have its claim satisfied in a Spanish court. The court in
Papeleras
held that the local creditor would not be afforded just treatment in the Spanish proceeding because under Spanish law, only liquidated claims are recognized and the local creditor held a disputed claim at the time the Spanish proceedings commenced.
Papeleras,
Therefore, this Court will next turn to the
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“[EJvery person who deals with a foreign corporation impliedly subjects himself to such laws of the foreign government, affecting the powers and obligations of the corporation with which he voluntarily contracts, as the known and established policy of that government authorizes. To all intents and purposes, he submits his contract with thе corporation to such a policy of the foreign government, and whatever is done by that government in furtherance of that policy, which binds those in like situation with himself, who are subjects of the government, in respect to the operation and effect of their contracts with the corporation, will necessarily bind him. He is conclusively presumed to have contracted with a view to such laws of that government, because the corporation must of necessity be controlled by them, and it has no power to contract with a view to any other laws with which they are not in entire harmony. It follows, therefore, that anything done at the legal home of the corporation, under the authority of such laws, which discharges it from liability there, discharges it everywhere.”
Canada Southern Railway v. Gebhard,
Refco, as a sophisticated creditor with substantial assets and European offices, must have contemplated the risks involved when it decided conduct business with Meb-co, a foreign business. Refco does not claim that it is unable to assert its claim in Switzerland, rather it seeks to maintain the same rights it enjoys under domestic laws. As the court in
Matter of Culmer
observed, “[o]ne who invests in a foreign corporation subjects his investment to foreign law and may not seek to obtain greater rights than his co-creditors by suing in an American court.”
Culmer,
A consideration of the
Petitioner’s Claim for Wrongful Attachment
The Petitioner seeks damages for wrongful attachment. Petitioner argues that attachment was obtained wrongfully because Refco was aware, prior to the time it went to the district court, that the Swiss insolvency proceedings had commenced and that Refco was required to seek relief in Switzerland. However, absent a ruling by a court of competent jurisdiction directing Refco to litigate its claims in Switzerland, Refco was fully entitled to pursue its remedies under American law. Therefore, the Petitioner’s claim for damages is denied.
Summary Judgment
An examination of the motion papers and accompanying documents before this Court indicates that no genuine dispute exists as to any material facts stated in the parties’ respective local rule 13(h) statements. Rather the facts asserted by the parties are substantially similar. To the extent that there аre facts in dispute, summary judgement is not defeated because these disputes do not represent “material issues of fact.”
Id.
at 300.
Accord Shaw v. Jamaica Savings Bank (In re Cohen),
Conclusion
Accordingly, the Petitioner’s motion for summary judgment is granted and Refco’s cross-motion for summary judgment is denied. The funds in the Swiss Bank — N.Y. account are ordered to be turned over to the Petitioner for the purpose of administering the funds pursuant to the Swiss liquidation proceedings. The Petitioner’s claim for damages is denied for failure to show cause for such relief. Also, the balance of the Petitioner’s requests in its motion are denied in light of this Court’s decision to turnover the funds.
The Petitioner is hereby directed to settle an order on five (5) dаys notice.
Notes
. The Stipulation of Facts dated September 14, 1989 (Exhibit 3), between Refco and Mebco will be referred to as "Stip.”
. This figure is not the most current since the amount of funds in Mebco’s Swiss Bank — N.Y. account may have increased since the time the briefs were submitted and the hearing was conducted.
. Controversy exists as to whether this last requirement must be satisfied in order to establish jurisdiction.
In re Metzeler,
. It is undisputed that under the laws of Switzerland, Refco would be treated as an unsecured creditor.
. The remainder of this decision will proceed on the assumption that Refco’s claim is entitled to a secured status pursuant to the Code and New York laws.