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A recent opinion by a federal judge blocking New York regulators from disposing of local assets of an international bank has sparked protests from state banking regulators nationwide. The opinion, by Judge Jed S. Rakoff of the Southern District of New York, reflected a tension between international efforts to consolidate bankruptcy proceedings for multinationals in one court and state regulators’ wishes to administer domestic assets on behalf of in-state creditors. The decision, Agency for Deposit Insurance, Rehabilitation v. Superintendent of Banks of the State of New York, No. 03 Civ. 9320, involved two bankrupt Yugoslavian banks. When the banks entered into bankruptcy in Yugoslavia in January 2002, New York’s superintendent of banks seized $100 million held in the state with a plan to distribute the assets to in-state creditors. Under New York’s banking laws, the superintendent licenses foreign banks doing business in the state, giving it regulatory oversight of financial institutions. With this license in hand, state regulators can liquidate assets and pay off domestic creditors in case of insolvency, said Richard Stein, a solo practitioner representing one of the bank’s major creditors, Sage Realty. The overseer of the bankruptcy in Yugoslavia, the Agency for Deposit Insurance, Rehabilitation, Bankruptcy and Liquidation of Banks, asked Bankruptcy Judge Cornelius Blackshear of the Southern District to transfer the assets held in New York to the court in Belgrade administering the bankruptcy globally. Blackshear rejected the transfer last August, finding that bankruptcy laws do not cover the liquidation of foreign banks. But Rakoff overturned the bankruptcy court and ordered it to rehear the case. His decision triggered complaints from state bank regulators claiming it would keep them from overseeing foreign banks doing business in their states. Congress enacted Section 304 of the Bankruptcy Code to “assist foreign debtors in marshaling their assets to allow for a single, coordinated foreign distribution,” Rakoff said. The provision seeks to harmonize multiple bankruptcy proceedings worldwide by concentrating ultimate power to distribute assets to the lead institution in charge of the bankruptcy. It represents an attempt to avoid inconsistent rulings and duplicative litigation. State regulators argued in the bankruptcy court and before Rakoff that the code did not govern bank liquidations, said William Snipes, a lawyer at Sullivan & Cromwell representing the superintendent. The congressional separation of banks from other companies in bankruptcy proceedings forbade the transfer of assets to Belgrade, he said. The bankruptcy court agreed, finding that the liquidation of foreign banks fell to the New York superintendent of banking. The agency for deposit insurance made several unsuccessful attempts to gain control of the banks’ assets. It failed until Rakoff’s ruling opened the door. He held that the bankruptcy court had jurisdiction over the banks’ liquidation, but did not say whether the assets should move to Yugoslavia. He left that decision to the bankruptcy court. If the agency prevails, the $100 million held in the banks’ accounts in New York would move to a court in Belgrade. State banking regulators reacted immediately to Rakoff’s decision. Ten days after the June ruling, Neil Milner, chief executive officer of the Conference of State Bank Supervisors, wrote a letter to Rakoff warning that his decision “would alter fundamentally how state-licensed foreign banks are regulated.” State licensing programs protect local creditors doing business with foreign banks, the letter continued. “Expatriating the assets to a foreign proceeding would defeat this.” “Under the banking laws . . . the states’ banking regulators have the sole authority to liquidate the assets of an insolvent state-licensed foreign bank for distribution to creditors,” Milner wrote. He asked the court to rehear the case or grant certification for an immediate appeal. Other state regulators in Connecticut, Texas and California, as well as the Federal Reserve Board, have filed briefs or sent similar letters to Rakoff.

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