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

by Cadwalader, Wickersham & Taft LLP

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.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.