Secondary Market Transaction Results in U.S. Court Jurisdiction Over Foreign Lender

Foreign financial institutions that trade dollar-denominated securities on the secondary market may not appreciate that they could be forced to defend an action arising from such a transaction in a U.S. court.  That is what happened, however, to an Austrian bank that purchased a $10 million interest in a syndicated $1.5 billion term loan on the secondary market.  In a recent decision, the bankruptcy court in Motors Liquidation Co. Avoidance Action Trust v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), Adv. Pro. No. 09-00504 (MG), 2017 WL 632126 (Bankr. S.D.N.Y. Feb. 16, 2017) held that the Austrian bank had established sufficient contacts in the United States as a result of the transaction for the court to assert specific personal jurisdiction over it.  The decision may be instructive to foreign lenders that are not familiar with the risk or the issue.  This article will provide a summary of the Motors Liquidation case, focusing on those facts and issues that are typical of such secondary market transactions.

A.  The Facts and Procedural Context

The lawsuit in Motors Liquidation arose out of the 2009 bankruptcy filings of General Motors and its subsidiaries.  Before they were in bankruptcy, General Motors Corporation (“GM”) obtained a $1.5 billion term loan (the “Term Loan”) evidenced by a note and term loan agreement (the “Loan Agreement”) and secured by certain manufacturing equipment, with JPMorgan Chase Bank, N.A. (“JPM”) serving as collateral agent.  The Term Loan was a syndicated commercial financing completed in 2006, through which several financial institutions (the “Bank Lenders”), including JPM, committed to fund the loan up front.  The Bank Lenders then had the right to sell interests on the secondary market, typically by assignment to qualified investors.  If the sale was to be by assignment, the Loan Agreement required the parties to “execute and deliver to [JPM] an Assignment and Acceptance” agreement in the form annexed as Exhibit A to the Loan Agreement.  See Motors Liquidation, 2017 WL 632123 at *3 (quoting loan documents) (quotation marks and alterations omitted).  Upon the execution and recording of the assignment agreement, the assignee became a party to the Loan Agreement and “to the extent of the interest assigned by such Assignment had the rights and obligations of a Lender under [the] Agreement.”  Id. (same).

In September 2007, immigon porfolioabbau ag (formerly known as Osterreichische Volksbanken Aktiengesellschaft) (together, “OEVAG”) purchased from JPM a $10 million interest in the Term Loan through two separate trades of $5 million each.  OEVAG was a licensed bank in Vienna Austria operating under the authority of the Austrian banking authorities.  It did not have offices, employees, or property in the United States, nor did it have a postal address or a telephone number in the U.S.  It did not offer any financial or other services in the U.S.  The transactions were arranged by an OEVAG employee in Vienna with JPM as counterparty in New York.  They were memorialized by standard LSTA Par/Near Par trade confirmations through Bloomberg, email and fax.  The parties checked off the “assignment” check box on the form trade confirmation, indicating that the trades were made by assignment.[1]  The separate assignment agreement called for by the Loan Agreement, however, was never located or produced by the plaintiff.  See id. at *2-3.

GM filed in bankruptcy in June 2009.  Pursuant to the terms of the DIP financing order, GM repaid the entire $1.5 billion loan from the DIP financing proceeds.  On June 30, 2009, three days after entry of the DIP financing order, OEVAG received $9,893,347.29, paid by JPM (the Term Loan note was made payable to JPM) into OEVAG’s correspondent bank account in New York with the Bank of New York Mellon.[2]  As is typically the case with DIP Financing Orders, however, the Official Committee of Unsecured Creditors (the “Committee”) appointed in GM’s case was granted a limited period following entry of the order to investigate and challenge the propriety of the purported liens securing the Term Loan.

As it turns out, the Committee discovered that the lien was terminated in error when GM paid off a related, smaller loan prior to the bankruptcy filing.  On July 31, 2009, the Motors Liquidation Company Avoidance Action Trust (the “AAT”), the Committee’s successor, initiated an adversary proceeding against JPM and more than 400 other defendants alleged to be Term Loan lenders to clawback the funds repaid to the holders of interests in the Term Loan.  While JPM was served with the original complaint, the bankruptcy court continually extended the plaintiff’s time for serving the complaint on the other defendants to allow the threshold lien dispute to first be finally determined as against JPM alone.  The bankruptcy court had ruled in favor of the lenders, but following various appellate proceedings, in January 2015, the Second Circuit reversed the bankruptcy court, declared the security interest was invalid and remanded the case.

Using letters rogatory, in June 2015, the AAT began the process of serving the complaint on OEVAG.  Due in part to delays occasioned by the U.S. Department of State, service upon OEVAG was finally effectuated in September 2016.  OEVAG moved the bankruptcy court to dismiss the complaint for, among other things, lack of personal jurisdiction.

B.  The Bankruptcy Court’s Decision

i.   Personal Jurisdiction

There was no contention by the parties that the court could assert general jurisdiction (i.e., all-purpose jurisdiction) over OEVAG.  The issue for the court, therefore, was whether it could exercise specific personal jurisdiction (i.e., transaction-specific jurisdiction) over OEVAG.[3]

In determining whether a bankruptcy court may exercise personal jurisdiction over a foreign defendant, the court must first determine whether the defendant has the requisite minimum contacts with the United States at large.  See id. at *8.  The specific personal jurisdictional inquiry focuses on the defendant’s contacts with the forum in relation to the plaintiff’s claims.  See id. at *7.  The plaintiff must demonstrate that “the defendant purposefully availed himself of the privilege of doing business in the forum state and that the defendant could foresee being haled into court there.”  Id. (quoting In re MF Glob. Holdings Ltd., 561 B.R. 608, 620-21 (Bankr. S.D.N.Y. 2016)).  Further, the New York long-arm statute is relevant to the use of New York banks to establish specific jurisdiction.  As the Motors Liquidation court recognized, if “the New York statute is met, due process is generally considered to be satisfied” because the “New York long arm statute does not reach as far as the Constitution permits.”  Id. at *8 (citing Picard v. Chaise (In re Madoff Inv. Secs., LLC), 440 B.R. 274, 280 (Bankr. S.D.N.Y. 2010)).

Under section 302(a)(1) of New York’s long arm statute, a court may exercise jurisdiction over any non-domiciliary who “transacts any business within the state” provided that the cause of action arises therefrom.  See N.Y.C.P.L.R. § 302(a)(1).  Both the Second Circuit and the New York Court of Appeals have confronted jurisdictional disputes concerning whether a correspondent bank account provides a sufficient basis to exercise personal jurisdiction over a foreign bank.  See generally, Licci v. Am. Express Bank, Ltd., 704 F.Supp.2d 403 (S.D.N.Y.2010) (“Licci I”); Licci v. Lebanese Canadian Bank, SAL, 673 F.3d 50 (2d Cir.2012) (“Licci II”); Licci v. Lebanese Canadian Bank, SAL, 20 N.Y.3d 327, 984 N.E.2d 893, 960 N.Y.S.2d 695 (2012) (Licci III); Licci IV, 732 F.3d 161.  The Licci litigation has yielded several rules on the topic, one of which is that “the use of a correspondent bank account, even if the defendant has no other contacts with New York, satisfies the first prong of New York’s long-arm statute so long as the use was purposeful and not coincidental or adventitious.”  Official Comm. of Unsecured Creditors of Arcapita v. Bahrain Islamic Bank, 549 B.R. 56, 67-68 (Bankr. S.D.N.Y. 2016).

ii.  Consent to Personal Jurisdiction Under the Loan Agreement

As a threshold matter, the court concluded that OEVAG consented to jurisdiction in New York by virtue of the forum selection clause in the Loan Agreement, which provided that each “Loan Party,” including assignees, consented to jurisdiction and venue in a state or federal court in New York for any dispute relating to the Term Loan.  Further, the Term Loan was governed by New York law.  In its briefing to the court, OEVAG disputed that it was a “Loan Party,” which was defined under the agreement as either the “Borrower” (GM) or “Guarantor” (Saturn Corporation).  It also disputed that it was an “assignee,” pointing to the absence of the separate assignment agreement called for by the Loan Agreement.  It also pointed out that the 2-page trade confirmation relied on by the plaintiff referenced the LSTA Standard Terms and Condition, which did not contain a choice of forum provision, and also called for and required the execution of an assignment agreement in the form stipulated by the parties.

The court did not specifically address OEVAG’s “Loan Party” argument in its decision.  It determined, however, that “the Trade Confirmations [were] sufficient evidence to show that the OEVAG transactions were assignments,” because the parties checked off the assignment check box on the form.  Id. at *3.  The court concluded that the forum selection clause applied to assignees such as OEVAG, and that such express consent was sufficient to establish personal jurisdiction over OEVAG.  See id. at *3, 9.  The court added that “[a] party resisting a forum selection clause ‘must make a strong showing in order to overcome the presumption of enforceability.’”  Id. at *9 (quoting New Moon Shipping Co. v. MAN B&W Diesel AG, 121 F.3d 24, 29 (2d Cir. 1997).  And that “OEVAG enjoyed the benefits and protection of New York law in connection with [the Loan Agreement] and should be held to consent to jurisidction and New York forum choice.”  Id.

iii.  Minimum Contacts Supported Personal Jurisdiction

Even without consent jurisdiction, the court found that the plaintiff established sufficient minimum contacts to support specific personal jurisdiction over OEVAG.[4]  See id. at *10.  Considering the totality of the circumstances, the court noted that OEVAG purchased the interests from JPM in New York, the Loan Agreement was governed by New York law and the forum selection clause provided for adjudication in New York.  See id.  Furthermore, OEVAG selected Bank of New York Mellon for its correspondent account to receive payment on the transaction, as well as other dollar denominated transactions.  See id.  Under the Loan Agreement the payments were to be made to JPM in New York, and JPM, in turn, made the disputed payment to OEVAG’s New York bank account.  See id.  The court held that such contacts satisfied the requirements of “purposeful availment.”  Id.   Furthermore, the court concluded that OEVAG’s use of its Bank of New York Mellon account established personal jurisdiction because it purposefully used the account for the transaction, and the receipt of the funds in New York is precisely the conduct targeted by the plaintiff.  See id. (citing cases).

In its briefing, OEVAG argued against a rule that would automatically extend jurisdiction to any foreign financial institutions that purchased U.S. dollar denominated securities on the secondary market outside of the United States and used a New York account for such dollar transactions.  OEVAG highlighted the ubiquitous use of correspondent accounts and their importance to the international securities markets.  Further, OEVAG argued that if parties to these transactions on the secondary market felt it important that jurisdiction be in New York, then they could and would easily add a forum selection clause to the LSTA term sheet.  The absence of such a clause, however, suggests that financial institutions that trade dollar denominated securities on the secondary market do not expect or intend that jurisdiction will automatically obtain in New York.

The court disagreed with OEVAG’s line of argument.  The court observed that the New York choice of law and forum selection provisions, which are typically included in loan agreements of the type at issue in Motors Liquidation, promote certainty and predictability that disputes will be resolved applying New York law in state or federal courts in New York.  In the court’s view, the Term Loan lending relationship was centered in New York, governed by New York law, and allowed all of the parties—including OEVAG—to enjoy the benefits of the U.S. banking system and New York’s status as a financial capital.  Weighing all the countervailing facts, the court concluded that applicable case law supported the finding of personal jurisdiction over OEVAG in respect to the ATT’s action.  See id. at *10.

C.  Conclusion

The Motors Liquidation decision provides a good summary of the “minimum contacts” required for a U.S. court to obtain specific personal jurisdiction over a foreign institution, in the context of secondary market transactions.  Foreign traders that would like to avoid establishing personal jurisdiction in U.S. courts should heed the lessons of Motors Liquidation, which are most notably that:

(a) U.S. courts will enforce forum selection provisions unless a strong showing is made to overcome their presumptive enforce-ability.  Foreign traders should take care to review the transactional documents for forum selection clauses.  If establishing jurisdiction is a concern, they should opt-out of or override the provision by amendment or rider if possible.

(b) A foreign entity’s purposeful and transaction-specific use of a New York based correspondent account will establish personal jurisdiction over it.  If establishing jurisdiction is a concern, foreign traders should avoid use of a U.S. based correspondent account if possible.

[1]  Under the heading “Form of Purchase” in the trade confirmation, there were three check boxes: “Assignment,” “Participation,” and “Other.”

[2]  “A correspondent bank account is a domestic account held by a foreign bank, similar to a personal checking account used for deposits, payments and transfers of funds.  Correspondent accounts facilitate the flow of money worldwide, often for transactions that otherwise have no other connection to New York, or indeed the United States.” Licci v. Lebanese Canadian Bank, SAL, 732 F.3d 161, 165 n. 3 (2d Cir. 2013) (“Licci IV”) (internal citations and quotation marks omitted).

[3]  Although not the subject of this article, the court also addressed, and rejected, OEVAG’s argument that the ATT did not timely serve it with the summons and complaint.

[4]  Although not discussed herein, as an additional basis for personal jurisdiction, the Motors Liquidation court also found that OEVAG consented to jurisdiction by accepting repayment of the loan under the Court’s DIP financing order without contest.  See id. at *10.