A US bankruptcy judge has rejected a legal challenge by a developer against Irish Bank Resolution Corporation, formerly Anglo Irish Bank, and refused to lift temporary court protection for the bank.
The Delaware bankruptcy court also rejected an application by two US funds, holders of the bank's subordinated debt, in which they are seeking a wide range of documents held by the Government and the bank that might provide more details about the emergency legislation liquidating the bank in February.
In two victories for the special liquidators of the State-owned bank yesterday, US bankruptcy judge Christopher Sontchi rejected the applications in legal proceedings aimed at stopping the bank's special liquidation status in Ireland being recognised in the US courts under what is known as a Chapter 15 bankruptcy.
IBRC's liquidators Kieran Wallace and Eamonn Richardson of KPMG filed for bankruptcy in Delaware in August as Chapter 15 bankruptcy guards foreign companies from legal actions in the US while they are liquidated at home. They are seeking to protect IBRC's US assets of about € 1 billion.
Developer John Flynn, who is suing IBRC for fraud in a New York court relating to overcharging, and two funds linked to US billionaire Paul Singer and his hedge fund Elliott Capital Management want to block the US bankruptcy petition. The Elliott funds are trying to recoup $75 million in debt from IBRC.
Mr Flynn and the funds say that IBRC’s special liquidation, grounded in emergency legislation passed by the Dáil in an overnight session in February, disadvantages them as creditors in favour of the State.
Judge Sontchi refused to lift temporary court protection, pending a full hearing of the court on whether to recognise the special liquidation of the bank in the US courts. This freezes Mr Flynn’s lawsuit.
Describing the liquidated bank as a “mini-Lehman situation” though with comparably lower costs than in the case of the failed US bank, he said he saw no harm in delaying the Flynn litigation in New York.
The court was told yesterday that KPMG had charged fees of € 5 million for the liqudation since February, while A&L Goodbody, solictiors for the liquidators, were charging € 1 million a month in fees.
He ruled that it was “premature” – for now at least – to permit the two funds to perform a forensic analysis of the decision-making behind the Government’s emergency legislation to liquidate the bank.
The judge said that the records being sought by the two Elliott-owned funds were not relevant to the issues before the court or in the control or knowledge of the liquidators.
Allan Brilliant, lawyer for the funds, told the judge that the liquidators were asking the court to “walk through” the recognition of the Irish liquidation and “rubber-stamp” everything in the Irish statute.
Van Durrer, lawyer for the liquidators, said that if the funds were going to question public policy in Ireland, then the liquidators would question when they bought the bank’s subordinated debt in the secondary markets and whether they were just a “vulture hedge fund” trying to make “a quick buck.”
Dan O’Neill, lawyer for Mr Flynn, had argued that the liquidators were trying to stop the developer’s litigation “with unclean hands” because the bank had continued overcharging since the liquidation.
The court heard testimony via videolink from banking specialist Eddie Fitzpatrick in Belfast that the bank had overcharged customers $1.6 billion (€ 1.2 billion) and continued to overcharge to this day.
Mr Wallace, who travelled over from Ireland to testify in the US court, rejected this. He said that the overcharging ended in 2004-2005 and that former IBRC management addressed the issue in 2010, and that affected customers were refunded and compensated in 2012.
He said that it was not in dispute that Mr Flynn had been overcharged on his loans but that the amount he had been overcharged was “up for debate.”
Mr Wallace said Mr Flynn had received a cheque for an overcharged sum but that he didn’t cash it.
The liquidators disclosed in a statement last night that the overcharging took place over 15 years.
Most variable rate customer loans in the Republic, Isle of Man and the US were overcharged from January 1990 to July 2004 and a quarter of such loans in the UK were overcharged from September 1991 to June 2005, the liquidators said in the statement.
“The special liquidators are satisfied that there is no evidence of deliberate, systemic overcharging of interest to customer loan accounts in subsequent periods,” the statement said.
The judge described Mr Wallace as “a very good witness” and also said that Mr Fitzpatrick “presented a strong case.”
Cross-examined by Mr Flynn’s lawyer, Mr Wallace said that IBRC was insolvent on February 7th, 2013, the day they were appointed, even though he said the bank’s directors maintain that it was solvent.
The bank was unable to repay loans to the Central Bank when it demanded their repayment, he said.
No date has yet been set on when the court will hear the full case on whether to recognise the Irish liquidation in the US court.
Elliott Capital Management has a fearsome reputation for pursuing distressed debt, famously suing Argentina over a debt default a decade ago and having an Argentine naval ship impounded in Africa.
