The Not-So-Automatic Stay for Foreign Assets and Creditors

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When a debtor files for bankruptcy, it’s axiomatic that all creditors, wherever located, must immediately cease their efforts to collect on debts owed to them by that debtor, right? Not necessarily so, says the United States Court of Appeals for the Seventh Circuit, insofar as those creditors and their collateral are located outside of the United States.

            On September 7, 2022, a panel of the Seventh Circuit rendered a decision on the subject of foreign creditors and collateral in In re Sheehan, 48 F.4th 513 (7th Cir. 2022). The Sheehan case revolved around the chapter 11 bankruptcy of Doctor Joseph Sheehan (“Dr. Sheehan”), a retired surgeon who had emigrated from Ireland to Illinois. Prior to filing for bankruptcy, Dr. Sheehan, in 2006, had obtained a loan from an Irish bank in order to buy an interest in an Irish medical company and purchase real estate in Ireland. In 2008, Dr. Sheehan took out an additional loan from the same Irish bank to buy additional shares in that Irish company. Both loans were secured by the purchased Irish shares and real property; neither loan was secured by property located outside of Ireland.

            By 2010, Dr. Sheehan had already defaulted on these Irish bank loans.  In 2014, those loans had been purchased by another Irish entity, Breccia Unlimited Company (“Breccia”). Breccia was a private Irish company with its principal place of business in Dublin and which conducted no business in the United States. Breccia initiated foreclosure proceedings in Ireland, which Dr. Sheehan fought in the Irish courts.  In July 2019, an Irish appellate court ruled in Breccia’s favor and permitted Breccia to foreclose on the collateral securing its loans. On March 5, 2022, Breccia appointed an Irish receiver to sell the collateral, but seven days later, on March 12, 2022, Dr. Sheehan filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Illinois (the “Bankruptcy Court”).

            In April 2020, Dr. Sheehan initiated an adversary proceeding against Breccia, claiming that Breccia had violated the automatic stay by exercising control over the Irish collateral. Breccia moved to dismiss under Federal Rule of Civil Procedure (“Rule”) 12(b)(2) for lack of personal jurisdiction, Rule 12(b)(5) for insufficient service of process under the Hague Convention, and for forum non conveniens. The Bankruptcy Court granted the motion to dismiss, Dr. Sheehan appealed, and the District Court affirmed.

            On further appeal, the Seventh Circuit ruled that the Bankruptcy Court did not have personal jurisdiction over Breccia or the Irish collateral. While acknowledging that, generally, the Bankruptcy Court would have in rem jurisdiction over all of a debtor’s property, the panel noted, “the [Bankruptcy] court’s ability to assert control over any property in [Dr. Sheehan’s] estate located in Ireland depends on whether the court has jurisdiction over the Irish citizens and entities holding that property.”

            On the question of personal jurisdiction, the panel found that the Bankruptcy Court had neither general nor specific jurisdiction over Breccia. The Seventh Circuit panel determined that Breccia lacked sufficient minimum contacts with Illinois, where Breccia’s only connection to Illinois was Dr. Sheehan. On the facts of the case, the panel found that, “Breccia’s acts in Ireland may indeed have had an effect upon Dr. Sheehan in Illinois, but none of the defendants ‘intentionally direct[ed]’ or ‘expressly aim[ed]’ the alleged wrongdoing (exerting control over and liquidating collateral) at [Dr. Sheehan], let alone at Illinois.” The panel affirmed the dismissal of the adversary proceeding on the basis of personal jurisdiction and therefore did not reach the issues of service of process or forum non conveniens.

            So what does this mean for you, your creditors, or your borrowers? Succinctly stated, it means that defects in personal jurisdiction cannot be cured by the bankruptcy court’s normally broad in rem jurisdiction.Bankruptcy courts are courts of limited jurisdiction, and that jurisdiction is subject to constitutional constraints. As a result, if you represent a borrower with substantial foreign debt, it is essential that you, prior to filing for bankruptcy, determine whether the foreign creditors have established sufficient minimum contacts in the district in which you hope to file to establish personal jurisdiction over those creditors.

            As with all questions of specific personal jurisdiction, the idiosyncratic facts of each case will govern the outcome. What if Dr. Sheehan had offered his Illinois home as additional collateral for the Irish loans? Would Dr. Sheehan’s hypothetical grant of Illinois collateral to Breccia satisfy the requirements of personal jurisdiction? Whether it would have or not, creditors should also be cognizant of the risks that accompany accepting additional collateral located in a foreign jurisdiction. Ultimately, the lesson of Sheehan is that the broad in rem jurisdiction of bankruptcy courts cannot serve as a panacea for constitutional personal jurisdiction defects.

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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