Iraq Telecom Limited v. IBL Bank S.A.L.

Background

Iraq Telecom Limited is a minority shareholder in Korek Telecom Company LLC and also an unsecured creditor of Korek. In 2011, Iraq Telecom lent Korek $285 million. Later that year, Korek borrowed $150 million from IBL Bank. IBL required Iraq Telecom to subordinate its loan, meaning that repayment of Iraq Telecom’s loan would be placed behind repayment of IBL’s loan while IBL’s loan was in default.

Iraq Telecom alleged that IBL and Sirwan Saber Mustafa, also known as Barzani, misrepresented IBL’s loan as unsecured even though Barzani had provided $155 million in cash collateral. Iraq Telecom alleged that it agreed to the subordination because of that misrepresentation. In a 2021 arbitration, the tribunal found that IBL participated in concealing the collateral and declared the Subordination Agreement null and void. The tribunal awarded Iraq Telecom $3 million in attorney’s fees against IBL, Korek, and IHL jointly and severally. IBL began a proceeding in Lebanon seeking to annul that award.

Iraq Telecom later began a second arbitration seeking at least $97 million in damages. It then sought to secure its arbitration-related claims by attaching IBL’s property in New York. An attachment is a court order restricting a party’s property to provide security for a potential judgment or arbitration award. An ex parte order initially attached roughly $42 million in IBL funds held in correspondent accounts at three New York banks. IBL moved to vacate the attachment, and Iraq Telecom moved to confirm it and expand it to all IBL property in the district.

Legal standards

Because the attachment was sought in aid of arbitration, the court applied New York Civil Practice Law and Rules § 7502(c). Iraq Telecom had to show a valid claim, a likelihood of success in the arbitration, that the potential award could become ineffective without an attachment, and that its claim exceeded any valid counterclaim. The court also considered equitable factors, including whether the attachment would cause substantial and irreparable harm.

The court explained that a foreign arbitration award may be confirmed in the United States even while annulment proceedings are pending in the country where the award was made. Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a court in the United States has limited grounds to refuse enforcement of a foreign award.

The court also addressed correspondent accounts, which are domestic accounts maintained by foreign banks to facilitate international transactions. Under New York law, property belonging to the debtor may generally be attached, but midstream electronic fund transfers may involve different property interests. The court noted the risks of broadly attaching correspondent accounts, including interference with customers’ transactions and international banking operations.

Application

The court found that Iraq Telecom was likely to succeed in obtaining confirmation of the $3 million attorney’s-fee award. IBL’s annulment proceeding in Lebanon did not automatically suspend enforcement in the United States. The court also found that IBL had not shown that it was likely to succeed on its arguments that evidence was improperly admitted or that an arbitrator had a disqualifying conflict.

The court rejected Iraq Telecom’s effort to secure the full $97 million sought in the second arbitration. The earlier award found that approximately 96% of the relevant interest payments had flowed through IBL to Barzani, while IBL retained about 4%, or roughly $5.92 million. Because the second arbitration panel could limit IBL’s liability to the amount it retained, Iraq Telecom had not shown that it was likely to recover $97 million from IBL. The court found that Iraq Telecom had shown a likely recovery of up to approximately $5.92 million in that arbitration.

The court found that IBL appeared likely to be insolvent and that an award could be rendered ineffective without an attachment. It also found that Iraq Telecom had a claim to enforce the $3 million award and any award from the second arbitration, and that IBL had not identified a counterclaim that would reduce Iraq Telecom’s claim.

The court nevertheless identified extraordinary circumstances weighing against a larger attachment. It found that a substantial attachment could force IBL, which appeared likely to be insolvent, into liquidation; harm IBL’s depositors and other creditors; worsen the effects of Lebanon’s financial crisis; interfere with Lebanese central-bank liquidity measures; and impair New York correspondent banking operations. The court relied on evidence that nearly all of the funds in the attached accounts were held for IBL’s customers rather than for IBL itself.

Disposition

The court modified the attachment to $3 million. It granted Iraq Telecom’s motion to confirm the January 19 Attachment Order to the extent of $3 million. It granted IBL’s cross-motion to vacate that order in part, leaving the $3 million attachment in place. The earlier attachment was vacated entirely as to the Citibank and JPMorgan Chase accounts.

The court granted in part IBL’s request to increase the undertaking, or bond, that Iraq Telecom had posted. The existing $100,000 undertaking was sufficient for the $3 million attachment. If Iraq Telecom later established a right to a larger attachment, it would have to post a bond equal to 10% of that larger amount.

The court denied Iraq Telecom’s motion to expand the attachment to all property owned by IBL in the district. It stated that a later application to attach newly discovered property would need to identify that property specifically and show reason to believe it belonged to IBL.