District Court for the Southern District of New York Reaffirms Extraterritorial Effect of the Automatic Stay

by Cadwalader, Wickersham & Taft LLP
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On May 4, 2012, Judge J. Paul Oetken of the United States District Court of the Southern District of New York held that the Bankruptcy Court has the injunctive power to enforce the automatic stay against entities falling within the Bankruptcy Court’s in personam jurisdiction, and that, in this case, the enforcement of the automatic stay did not violate interests of comity.  Sec. Investor Prot. Corp v. Bernard L. Madoff Inv. Sec., LLC (In re Bernard L. Madoff Inv. Sec., LLC), No. 11 Civ. 8629 (JPO), 2012 WL 1570859 (S.D.N.Y. May 4, 2012).

I.  Background

On December 8, 2010, the SIPA trustee for Bernard L. Madoff Investment Securities LLC brought an avoidance action against appellant MAXAM Absolute Return Fund LTD, an entity incorporated in the Cayman Islands, but with all its assets in the United States.  Contemporaneously with filing its answer, the appellant commenced an action in the Cayman Islands seeking (i) a declaration that the transfers at issue in the trustee’s avoidance action are not avoidable and recoverable by the trustee and (ii) reimbursement for costs and any other relief.  The trustee then brought an application for an injunction against the appellant in the Bankruptcy Court.  Finding that the appellant’s Cayman action violated, inter alia, the automatic stay of section 362(a) of the Bankruptcy Code, applicable in SIPA liquidations pursuant to 15 U.S.C. § 78fff(b), the Bankruptcy Court granted the application, deemed the Cayman action void ab initio, enjoined the appellant from participating in the Cayman action, and directed the appellant to dismiss the Cayman action.  This appeal followed.

II.  Analysis

On appeal, the appellant first argued that the automatic stay lacks extraterritorial effect, and the Bankruptcy Court therefore erred in applying it extraterritorially against the appellant.  The District Court rejected this argument and held that the appellant violated the automatic stay by filing the Cayman action.  Pursuant to section 541(a) of the Bankruptcy Code, the commencement of a bankruptcy case creates an estate of the debtor’s assets “wherever located,” which includes property located outside of the United States, and bankruptcy courts have in rem jurisdiction over those assets.  The automatic stay of section 362(a) of the Bankruptcy Code, in turn, protects the debtor’s assets, and the bankruptcy courts’ jurisdiction, from acts to obtain possession of or exercise control over estate property.  Accordingly, because estate property may have a extraterritorial presence, the District Court concluded that the automatic stay “protects a bankruptcy court’s in rem jurisdiction extraterritorially by way of in personam jurisdiction over those who would take actions prohibited by the stay.”   2012 WL 1570859, at *5.

Next, the appellant contended that the Bankruptcy Court lacked the authority to issue an injunction with extraterritorial effect and thus could not enjoin the appellant from prosecuting the Cayman action.  The District Court overruled this argument as well and held that the injunctive portions of the Bankruptcy Court’s order were valid.  Bankruptcy courts may exercise their equitable powers to implement other provisions of the Bankruptcy Code pursuant to section 105(a) of the Bankruptcy Code.  Because the automatic stay has extraterritorial effect, the District Court reasoned that bankruptcy courts likewise have the power under section 105(a) to enjoin extraterritorial violations of the automatic stay.

Finally, the appellant unsuccessfully argued that the interests of comity required reversal of the Bankruptcy Court’s order.  The District Court’s consideration of this issue was guided by the Second Circuit’s decision in China Trade & Dev. Corp. v. M.V. Choon Yong, 837 F.2d 33 (2d Cir. 1987), where the Second Circuit established a multi-factor test to determine whether an injunction against a foreign action was consistent with the interests of comity.  Although the Bankruptcy Court believed China Trade was inapplicable to the instant case because the foreign suit at issue in China Trade did not violate any law of the United States or interfere with the jurisdiction of a United States court (in contrast to the Cayman action), it held that enjoining the Cayman action was warranted under China Trade.

The District Court agreed with the latter point, and held that enjoining the Cayman action was in accord with international comity.  Specifically, the District Court found that the issues in the Cayman action and the trustee’s adversary proceeding were identical and that the Cayman action would (i) “raise doubts about the reliability of America’s judiciary in responding to bankruptcies in the American securities markets,” (ii) “vexatiously require the Trustee to relitigate claims raised in the adversary proceeding,” (iii) “threaten the Bankruptcy Court’s exclusive in rem jurisdiction of the worldwide estate” of the debtor’s assets, (iv) threaten “inconsistency with the adversary proceeding,” and (v) “cause extra inconvenience and expense for the Trustee in double litigation . . . .”  2012 WL 1570859, at *8.  Because, in the District Court’s view, “the injunction at issue would be appropriate whether China Trade is applicable or not,” it abstained from considering whether China Trade governed its decision in this case.  Id. at *9.

IV.  Conclusion

This decision makes it clear that the automatic stay has an extraterritorial reach and that bankruptcy courts have the clear authority to enforce the automatic stay in foreign jurisdictions, so long as personal jurisdiction over the offending party exists.  Furthermore, although the District Court refrained from deciding whether China Trade applied to injunctions issued by a bankruptcy court to enforce the automatic stay, the District Court’s analysis demonstrates that, at least in certain situations involving competing proceedings, injunctions enforcing the automatic stay in foreign jurisdictions will not conflict with principles of comity.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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