On September 7, 2022, the U.S. Court of Appeals for the Seventh Circuit affirmed dismissal of a chapter 11 debtor’s adversary proceeding to enforce the automatic stay against Irish creditors seeking to sell the debtor’s property located in Ireland. In the underlying bankruptcy case, the debtor’s assets included personal real estate in Ballyheigue, Ireland and shares in an Irish hospital. The debtor, an Irish immigrant, filed chapter 11 and brought an adversary proceeding to enforce the automatic stay, arguing that the bankruptcy court held in rem jurisdiction over his property, “wherever located and by whomever held.” The creditors argued the bankruptcy court lacked jurisdiction over the Irish creditors, and the bankruptcy court dismissed the claim.
The Seventh Circuit reviewed the jurisdictional limits of bankruptcy courts and noted that, while the automatic stay prohibits attempts to exercise control over property of the debtor’s estate, such prohibitions cannot be enforced if the court lacks personal jurisdiction over the party holding the property. The Seventh Circuit held that because the defendants were not “at home” in the bankruptcy court’s home state (i.e., they were not incorporated in Illinois and did not have their principal places of business there), the bankruptcy court could exercise personal jurisdiction only if (a) the defendants purposefully directed their activities at the forum state, (b) the injury arose or related to the defendants’ forum-related activities, and (c) the exercise of personal jurisdiction comports with traditional notions of fair play and substantial justice. (Because bankruptcy courts have nationwide service of process, the relevant forum is the United States, not just the State of Illinois.) The Seventh Circuit held that the fact that effects of the action in Ireland might be felt in the United States did not create a purposeful direction of activities causing injury in the United States.
The debtor argued that in rem jurisdiction creates a legal fiction that all property of the debtor is located “in” the bankruptcy court’s district. Therefore, the debtor reasoned, even if Irish defendants exercised control over the debtor’s property in Ireland, the in rem fiction deems those actions to have been taken in the forum state (the United States). The Seventh Circuit rejected this argument, holding that a debtor cannot use in rem jurisdiction to bootstrap the separate requirement of personal jurisdiction.
The case is Sheehan v. Breccia Unlimited Co. (In re Sheehan), Nos. 21-2946 & 21-2954 (7th Cir. Sept. 7, 2022). The debtor is represented by Burke, Warren, MacKay & Serritella, P.C. The creditors are represented by Kirkland & Ellis LLP, Clement & Murphy, PLLC, and Freeborn & Peters LLP. The order is available here.
