Official Committee of Unsecured Creditors of Arcap v. Bahrain Islamic Bank

UNITED STATES BANKRUPTCY COURT 	FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re 	Chapter 11
ARCAPITA BANK B.S.C.(c), et al. 	Case No. 12-11076 (SHL)
Reorganized Debtors. 	(Jointly Administered)
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OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF ARCAPITA BANK B.S.C.(c),
et al.,
Plaintiff,
vs.
Adv. Pro. No. 13-01434
(SHL)
BAHRAIN ISLAMIC BANK,
Defendant.
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OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF ARCAPITA BANK B.S.C.(c),
et al.,
Plaintiff,
vs.
Adv. Pro. No. 13-01435
(SHL)
TADHAMON CAPITAL B.S.C.,
Defendant.
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MEMORANDUM OF DECISION
A P P E A R A N C E S:
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
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-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
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.
1 	See Proposed Order Granting Pl.’s Mot. for Summ. J. and Denying Defs.’ Cross-Mot. for Summ. J. [Adv.
Pro. No. 13-01434, ECF No. 98]; Proposed Order Granting Pl.’s Mot. for Summ. J. and Denying Defs.’ Cross-Mot.
for Summ. J. [Adv. Pro. No. 13-01435, ECF No. 100].
2 	Because the Proposed Orders filed in each adversary proceeding raise substantially similar issues and the
objections are essentially identical, the Court has chosen to address them together in this decision.
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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
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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,
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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].
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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 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 the delay in receiving the money . . . .”); see also Wickham, 955 F.2d at 833.
The Court believes that compensation in the form of prejudgment interest is appropriate
in the circumstances of these cases. The Defendants have withheld the money owed to the
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Debtors for close to a decade—and indeed still has not been paid. This is true despite the
direction of the Central Bank of Bahrain to the Defendants to return the funds to Arcapita. See
In re Arcapita, 628 B.R. at 426–30. During that time, the estate has been deprived of the use of
these funds. Thus, not only was the money unavailable for distribution to the Debtors’ creditors
and equity holders, but it was also unavailable for the administration of the Debtors’ bankruptcy
case. See Wickham, 955 F.2d at 834 (noting that prejudgment interest is a function of, among
other things, the need to compensate the wronged party for damages and considerations of
fairness and the equities of the award). Indeed, the Debtors were eventually forced to borrow
funds to administer the cases under a debtor-in-possession financing facility. See generally
Debtors’ Mot. to Enter Into and Perform Under DIP Agreement [Case No. 12-11076, ECF No.
690].
B. Appropriate Rate for Prejudgment Interest
Having determined that the Committee is entitled to prejudgment interest, the question
now is the rate for such interest. The Second Circuit has offered helpful guidance on this
question:
The suitability of that postjudgment rate for an award of prejudgment interest will
depend on the circumstances of the individual case, and the court need not limit
the award of prejudgment interest to the rate at which the injured party would
have lent money to the government. The court may, for example, consider
whether the plaintiff would have invested the money at some higher rate . . . or it
may take into account the rate of interest the defendant would have had to pay
to borrow the money it withheld from the plaintiff . . . .
Jones v. UNUM Life Ins. Co. of Am., 223 F.3d 130, 139–40 (2d Cir. 2000). For example, this
Court has applied these principles in Ames Merch. Corp. v. Unical Enters. (In re Ames Dep't
Stores), 2010 Bankr. LEXIS 5115, at *3–4 (Bankr. S.D.N.Y. Sep. 10, 2010). In Ames, the Court
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concluded that these considerations weighed in favor of awarding prejudgment interest. As it
explained:
Ames has been denied the funds that went out to defendant Unical for many
years, and, in the early years of this case, needed to borrow money under its DIP
financing facility; it is only fair to compensate it, at least to some extent, for the
incremental interest expense it thereby had to incur. And the remedial purpose of
the statute is to recover funds from favored creditors for the benefit of the creditor
community generally, and it is unfair for the remainder of the creditor community
to subsidize a losing preference defendant by providing what is in essence an
interest-free loan.
Id.
The Committee argues that because the governing law—here the law of Bahraini—does
not set a specific rate for damages in these circumstances, the Court should exercise its discretion
to apply the New York statutory interest rate. The Defendants argue for the much lower federal
treasury rate under 28 U.S.C. § 1961(a), which they calculate at 0.738% for the applicable period
of time. In assessing these competing views, the Court will look to the law applicable to the
claims here, the facts of the case and the connection to New York.
1. 	Causes of Action
This Court’s Decision granted summary judgment to the Committee on two of its claims:
(i) breach of contract under Bahraini law, and (ii) turnover under Section 542(b) of the
Bankruptcy Code. See In re Arcapita, 628 B.R at 476–79.
With respect to the breach of contract claim, state law generally governs the calculation
of prejudgment interest on state law breach of contract claims. See Adrian v. Town of Yorktown,
620 F.3d, 104, 107 (2d Cir. 2010) (citing Marfia v. T.C. Ziraat Bankasi, 147 F.3d 83, 90 (2d Cir.
1998). The Court here looks to the concept of compensation incorporated in Bahraini law, which
is the applicable law under the contracts in question. See Reply at 3. As for the Committee’s
request for turnover under Section 542(b), a turnover action pursuant to the Bankruptcy Code is
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the mechanism for monetizing the receivable owed to the estate. But while “[a] turnover claim is
asserted as a matter of federal bankruptcy law . . . the underlying property rights that are
enforced through a turnover claim are governed by state law.” Tapmasters Hoboken, LLC v.
Blackrock Millwork Co., LLC (In re Tapmasters Chelsea, LLC), 621 B.R. 580, 584 (Bankr.
S.D.N.Y. 2020). As courts have considered the relevant state law when calculating prejudgment
interest for a turnover claim, the Court here will look to the Bahraini law cited above that is
designed to compensate the wronged party.
2. 	Facts of the Case
In keeping with the compensatory rationale of both Bahraini and U.S. law, the Court
looks to the specific facts of these cases to determine the appropriate rate of prejudgment
interest, specifically the lost profit opportunities to the Arcapita estate and any costs that the
estate suffered as a result of being deprived of the funds. The Committee identifies three other
interest rates that are particularly relevant to the Court’s analysis.
First, the Committee points to the rate of return that was available in the Bahraini
investment market during the near decade of time that the money has been held by the
Defendants. The Committee notes that the most fitting point of reference is a $12 million
placement that Tadhamon made with Arcapita in November 2011 for a six month term. See In re
Arcapita, 628 B.R. at 426. The expected profit on that placement was $485,333.33, which the
Committee notes equals a return of approximately 4.04% over six months or 8.08% on an
annualized basis. See id.; see also Reply at 14; Hr’g Tr. 14:1–12 (June 10, 2021). The
Defendants counter that the most appropriate rates are those set in the transactions that were
actually at issue in the summary judgement decision, which range from .55 percent to two
percent. See Objections at 9. But these transactions were extremely short term financings of two
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to four weeks each, see In re Arcapita, 628 B.R. at 423–29, and the Court finds the annualized
rate cited by the Committee to be more appropriate. Indeed, the interest rate urged by the
Defendants would appear to severely undercompensate the estate.
Second, the Committee cites the cost of the debtor-in-possession financing in this case.
The facility was in the form of a commodity murabaha, which did not specify a traditional rate of
interest to remain Shari’a compliant. See Debtors’ Mot. to Enter Into and Perform Under DIP
Agreement at 14–15. But the profit rate on the transaction was pegged to LIBOR plus ten
percent, with a two percent LIBOR floor, resulting in a rate of return of not less than twelve
percent. See id. at 7.
Third, the Committee looks to the rate of return that could have been achieved if the
funds in question had been invested elsewhere. See Comm. of Unsecured Creditors of Interstate
Cigar Co. v. Interstate Distribution, Inc. (In re Interstate Cigar Co.), 2002 Bankr. LEXIS 781, at
*14 (Bankr. E.D.N.Y. July 26, 2002) (in setting an award of prejudgment interest, noting that
“[i]t is also appropriate to look at the rate of interest which the Debtor would have enjoyed had
the Debtor been able to invest an amount equal to the judgment” and that “during the time period
running from the date of the complaint to the present, the stock market enjoyed sizeable gains,
even including the recent downturn”). For example, the Committee notes that if the transaction
proceeds had been conservatively invested in an S&P 500 index fund during the period of time in
question, the Arcapita estate would have realized annualized returns of 12.375%. See Reply at
14 (citing to https://dqydj.com/sp-500-return-calculator/, and calculating return for the period of
April 2012 – April 2021). An investment in the Dow Jones Industrial Average would have
realized annualized returns of 11.072%. See id. (citing to https://dqydj.com/dow-jones-return-
calculator/, and calculating return for the period of April 2012 – April 2021). And investment in
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the Russell 2000 would have realized annualized returns of 13.13%. See id. (citing to
https://www.customstockalerts.com/stockReturnCalculator, and calculating a return for the
period of April 2012 – April 2021). All of these returns are significantly above the 9% interest
requested by the Committee.
3. 	Connection to New York
As noted above, the Committee argues that the interest rate be set at the New York
statutory rate of 9%, asserting that the New York statutory rate is appropriate because New York
is the state in which this Court sits. The Defendants assert that these cases are unrelated to New
York. But as the District Court noted in its decision in these cases on personal jurisdiction, the
Defendants’ use of New York correspondent bank accounts to receive funds from Arcapita
constituted the transaction of business in New York and 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), rev’g 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 noted the importance of the New York connections in this
proceeding, citing “[t]he Banks’ deliberate choice to utilize the New York correspondent bank
accounts and, more generally, New York’s and the United States’s banking system . . . .” In re
Arcapita, 549 B.R. at 70. The District Court further stated that “the Banks deliberately chose to
effectuate the Placements by directing the transfer of millions of dollars through New York.” Id.
at 71. In any event, the Court does not rest its decision on the appropriate rate of prejudgment
interest solely on this dispute’s connection to New York. Rather, the Court considers the New
York statutory rate as one of several factors in exercising its discretion to set an appropriate rate,
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along with the other factors unique to this case discussed above, including the rate of return
available in the Bahraini investment market, the cost of the Debtors’ debtor-in-possession
financing in its bankruptcy case and the rate of return generally available during this time.
Considering New York’s connection to the suit—as recognized by the District Court—
and the other factors identified above, the Court finds it appropriate to set the rate of
prejudgment interest at the rate of 9% requested by the Committee.
C. Defendants’ Requested Language Regarding Claims
The Defendants request that language be added to the Proposed Orders that provides each
Defendant with an allowed general unsecured claim against the Debtors’ bankruptcy estate for
the amount of the returned investment proceeds upon satisfaction of the judgment in full in these
adversary proceedings. The Proposed Orders merely contain general language that reserves the
Defendants’ rights against the Debtors’ bankruptcy estate upon payment of the judgment. See
Proposed Orders ¶ V.
At the hearing on these Proposed Orders, the Defendants argued for this language as the
corollary to the Committee’s request for claims disallowance under Section 502. See Hr’g Tr.
38:24–39:1 (June 10, 2021). But the Court did not grant the Committee’s request for claims
disallowance in its Decision and similarly will not include the Defendants’ requested language
here. See In re Arcapita, 628 B.R. at 479 n.67; Hr’g Tr. 39:2–11. The status of the claims
remains to be determined based on how the case proceeds, and all parties reserve their rights
with respect to this issue.3
3 	The Court has reviewed the other arguments contained in the Objections and rejects them as
without merit.
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CONCLUSION
For the reasons stated above, the Defendants’ Objections are denied. The Court will
enter orders that are consistent with this decision.
Dated: New York, New York
September 22, 2021
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
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