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A recent opinion by Southern District Judge Jed S. Rakoff blocking New York regulators from disposing of local assets of an international bank has sparked protests from state banking regulators nationwide. His opinion reflected a tension between international efforts to consolidate bankruptcy proceedings for multinationals in one court against 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, 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. Judge Blackshear rejected the transfer last August, finding that bankruptcy laws do not cover the liquidation of foreign banks. But Judge Rakoff overturned the bankruptcy court and ordered it to rehear the case. His decision triggered complaints from state bank regulators claiming it would disable them from overseeing foreign banks doing business in their states. (The decision was published June 22.) Congress enacted �304 of the Bankruptcy Code to “assist foreign debtors in marshaling their assets to allow for a single, coordinated foreign distribution,” said Rakoff. The provision seeks to harmonize multiple bankruptcy proceedings worldwide by concentrating ultimate power to control and 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 bankruptcy 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 wrest control of the banks’ assets. It failed each time, 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. IMPACT OF THE DECISION State banking regulators reacted immediately to Judge 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.” The conference is an umbrella association of state banking regulators. State licensing programs protect local creditors doing business with foreign banks, continued the letter. “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. Milner 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, have filed briefs or sent letters to Rakoff in a similar vein. Oversight of bank liquidations is “one of the most important tools used to make banking sound,” said Sullivan & Cromwell’s Snipes. It is one reason bank liquidations fall outside of the bankruptcy code and remain within the control of state regulators, he said. SAGE REALTY Aside from the regulatory quagmire, Sage Realty, the property management arm of the William Kaufman Organization, has been seeking compensation for unpaid rent dating back a decade. It rented 30,000 square feet in a building on Madison Avenue to one of the two banks, Jugobanka, and stopped receiving payment in 1994 after presidential orders froze the bank’s assets in the United States. After protracted litigation in which Jugobanka argued that the executive order terminated its contractual obligations to Sage, the realtor — one of Jugobanka’s largest creditors — won a judgment worth about $4.2 million. Sage filed as a creditor in the Belgrade court administering the bankruptcy, said Stein. But the agency contested its filing and prevailed. “I can’t collect anything,” in Belgrade, he said, leaving Sage to look to the assets in New York for relief.

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