Finds Bankruptcy Court to be Proper Forum for Claim Objection Despite Forum Selection Clauses in Investor Agreements

The Southern District of New York recently reiterated the critical difference between creditor claims and equity interests in the bankruptcy context.  In a recent opinion arising out of the Arcapita Bank bankruptcy case, the Court was faced with an objection to a proof of claim filed by an investor, Captain Hani Alsohaibi, who characterized his right to recovery against the debtors as being based on a “corporate investment.”


Arcapita Bank was a Bahrain bank that specialized in facilitating investments in compliance with Sharia law.  Arcapita transactions were typically structured by establishing a Cayman Islands company that acted as a holding company for purposes of acquiring an equity interest in an unaffiliated target company.  Arcapita then created another company, referred to as the “syndication company” to which it transferred a portion of the holding company’s equity.  Investors were given the opportunity to purchase an interest in the syndication company, thus indirectly (and in compliance with Sharia law) acquiring an interest in the unaffiliated target company.  Arcapita and certain of its subsidiaries filed chapter 11 bankruptcy petitions on March 19, 2012.  The Debtors’ chapter 11 plan was subsequently confirmed in June of 2013.

Claimant Alsohaibi made a series of investments in various syndication companies through Arcapita.  Although none of these syndication companies filed for bankruptcy protection, Alsohaibi nonetheless filed a claim in Arcapita’s bankruptcy case alleging amounts owed pursuant to “corporate investments.”  Specifically, Alsohaibi argued that his investments in the syndication companies had not been and were not likely to be profitable.  The Reorganized Debtors objected to the claim as based on equity interests in non-debtor entities.  The bankruptcy court sustained the objection and Alsohaibi appealed to the district court which affirmed the decision.


Distinction Between Claims and Equity Interests

While the disallowance of Alsohaibi’s proof of claim is not particularly surprising, the district court opinion offers sound guidance in distinguishing between claims and equity securities or interests.  In particular, the district court stressed that while a claim is a “right to payment” or “equitable remedy”, an equity interest is a share or interest in a corporation.  Unlike creditors holding claims, equity holders may not assert a right to payment through the proof of claim process.  Recognizing the strong “temptation to lay aside the garb of a stockholder, on one pretense or another”, the court advised that any such attempts must nonetheless be viewed with suspicion.

Evidentiary Burdens Governing Claim Allowance

In ruling on the propriety of Alsohaibi’s claim, the district court also reviewed the evidentiary rules governing the claims allowance process.  In particular, Federal Bankruptcy Rule 3001(f) provides that a properly filed proof of claim is prima facie evidence of the validity and amount of the claim.  A party in interest may object to the claim and will bear the initial burden of production to produce evidence establishing the legal insufficiency of the claim.  The burden then shifts to the claimant to prove by a preponderance of the evidence that the claim should be allowed.  In this case, the Reorganized Debtors produced declarations from both their restructuring advisor and an associate in Arcapita’s investor information group, which together established the nature of Alsohaibi’s claim as one grounded in an equity investment.

Debtor is Not Bound by Forum Selection Clause

The district court also overruled Alsohaibi’s objection to the bankruptcy court as the appropriate forum for litigation of the claim objection proceeding.  According to Alsohaibi, his investor agreements with Arcapita provided for exclusive jurisdiction in either Bahrain or the Cayman Islands (depending on the contract).  The district court held that a debtor-in-possession is not bound by a forum selection clause provided that the litigation at issue constitutes a core proceeding under the Bankruptcy Code and “is not inextricably intertwined with non-core matters.” As a claim objection is a core proceeding and the litigation at issue was not “inextricably intertwined” with other litigation, the district court found the bankruptcy court to be a proper forum for resolution of the dispute.


While in certain instances it may be difficult to distinguish between debt and equity interests, such distinctions are critical for purposes of claim allowance.  Proofs of claim based on equity interests will almost surely be met with objection.  However, creditors with valid claims against the estate must proactively take steps to ensure that their proofs of claim are timely filed and that they are prepared to offer supporting evidence in the face of a claim objection.