"New York Bankruptcy Court Flexes Global Muscle"; Eurofenix, Summer 2012

1. I N S O LV E N C Y US COLUMN
New York bankruptcy
court flexes global muscle
Can a non-US creditor maintain a lawsuit in its own jurisdiction against a US-based Chapter 11 debtor?
O
n 4 May 2012, the protect customers of failed to obtain a court order in the
United States District brokerage firms by providing a Cayman Islands ruling the
Court for the specialised liquidation proceeding, MAXAM defendants had no
Southern District of known as a SIPA liquidation, preference liability in the US
New York affirmed a 2011 which is distinct from a US proceedings.
Bankruptcy Court ruling, which Chapter 7 liquidation proceeding. In response to the Cayman
enjoined a lawsuit in the Cayman Madoff Securities is currently in a Islands lawsuit, the Madoff
Islands against a Chapter 11 SIPA liquidation, and in a Trustee filed a motion to enjoin
debtor. The case of Bernard L. Chapter 11 proceeding, both of the action, on the grounds that the
Madoff Investment Securities, which have been substantively action violated the automatic stay
LLC v. Maxam Absolute Return consolidated. Irving Picard was of Section 362 of the Bankruptcy
Fund, et al., arises in the Bernie appointed as the Trustee on Code, and Section 78 of SIPA,
DAVID H. CONAWAY
Shumaker, Loop & Madoff SIPA liquidation and behalf of the liquidation estates. that prohibits legal action against
Kendrick, LLP (USA) Chapter 11 proceedings, where The cases are pending in the the Trustee, as SIPA reserves
the aftermath of the massive Southern District of New York. exclusive jurisdiction to the US
“
Madoff fraud is playing out. One of Picard’s duties is to Courts. In a well-reasoned, 21-
The question in this Madoff recover assets for the benefit of page opinion, the New York
case is whether a non-US creditor defrauded customers of Madoff Bankruptcy Court on 12 October
can maintain a lawsuit in its own Securities, which assets include 2011, ruled the Cayman Islands
jurisdiction against a US-based claims against third parties. action violated the automatic stay
Chapter 11 debtor. In this On 8 December 2010, the of Section 362 and applicable
THE QUESTION instance, can a Cayman Islands Madoff Trustee sued MAXAM SIPA provisions. The New York
IS WHETHER registered entity sue a Chapter 11 Capital Management, LLC, Court found the Cayman Islands
debtor in the Cayman Islands, MAXAM Absolute Return Fund, action to be void, and enjoined
A NON-US and does the automatic stay of LTD and affiliates (“MAXAM”) the MAXAM entities from taking
CREDITOR CAN Section 362 of the Bankruptcy in the New York Bankruptcy any further action against the
Code prohibit the lawsuit? Court to recover preference Madoff estate “in any domestic or
MAINTAIN A Section 362 provides: payments totaling $25 million, extraterritorial jurisdiction”
LAWSUIT IN . . . this section . . . operates as a
allegedly paid to MAXAM within without first obtaining permission
90 days prior to the Madoff from the US Bankruptcy Court.
ITS OWN stay, applicable to all entities, of Chapter 11 filing. Briefly, a In essence, the US Bankruptcy
. . . the commencement . . . of a
JURISDICTION judicial . . . proceeding against
“preference” arises under Section
547 of the Bankruptcy Code and
Court viewed the Cayman Islands
action as an attempt to usurp the
AGAINST A US- the debtor . . . or to recover a is a pre-petition payment to Bankruptcy Court’s jurisdiction
claim . . . or [added] any act to
BASED CHAPTER obtain possession of property
creditor made within 90 days
prior to a Chapter 11 filing. The
over an asset of the Madoff
Securities’ estates.
11 DEBTOR of the estate . . . US Bankruptcy Code provides for The MAXAM entities
Section 541 of the Bankruptcy the recovery by the debtor’s estate appealed the Bankruptcy Court
”
Code defines “property of the of payments made on the “eve” ruling, but the US District Court
estate” as all of the legal or of insolvency so that value can be affirmed the Bankruptcy Court
equitable interests of the debtor in more equitably re-distributed to ruling. In the appeal, the
property “wherever located”. all creditors. Upon being sued by MAXAM entities argued that the
Madoff Securities was a the Madoff Trustee, the automatic stay of Section 362 (as
member of SIPC, the Securities MAXAM defendants filed an well as applicable SIPA provisions)
Investor Protection Corporation, answer in the New York had no extraterritorial effect, and
formed under SIPA, the Securities preference case, but also filed a could not apply or be enforced
Investor Protection Act, passed by declaratory judgment action outside the US. The MAXAM
the US Congress in 1970. SIPA against the Trustee in the Cayman entities further argued that the US
and SIPC were designed to Islands. The purpose of the Bankruptcy Court should have
declaratory judgment action was deferred to the Cayman Islands
34 SUMMER 2012

2. US COLUMN I N S O LV E N C Y
court under principles of obligation, on the one hand, personal jurisdiction over the direct challenge to its ability to
“comity”. In affirming the nor of mere courtesy and MAXAM entities. By filing the protect such assets of the estate
Bankruptcy Court ruling, goodwill upon the other. But it lawsuit in the Cayman Islands, the for the benefit of all creditors.
however, the US District Court is the recognition which one MAXAM estates attempted to It is clear, however, that US
emphasized several points: nation allows within its interfere with the recovery of an Courts will honor the principles
1. Under Section 541 of the territory to the legislative, asset of the estate, a violation of of comity, and defer to foreign
Bankruptcy Code, defining executive or judicial acts of the automatic stay. courts in appropriate cases. For
“property of the estate”, the another nation, having due In affirming the New York example in the BTA Bank case, a
filing of Chapter 11 creates a regard both to the Bankruptcy Court decision, the Chapter 15 proceeding in the
worldwide estate of all of the international duty and US District Court has affirmed Southern District of New York,
legal or equitable interests, convenience, and to the rights the global reach of the automatic the Bankruptcy Court refused to
“wherever located”, with the of its own citizens, or of other stay imposed by Section 362 of extend the automatic stay to a
implication that the persons who are under the the US Bankruptcy Code. The Swiss arbitration proceeding.
Bankruptcy Court has protection of its laws. Bankruptcy Court also concluded While the particulars of the BTA
exclusive jurisdiction over However, the court noted that that principles of international Bank case are beyond the scope
“property of the estate” the principles of comity do not comity did not apply to a foreign of this article, it is important to
anywhere. stand for the notion that a US action that violated US law and note that US Courts have refused
2. The automatic stay (of Section Court can exercise control sought to interfere with the to extend the automatic stay in
362) exists to protect the estate over a foreign court. Rather, a exclusive jurisdiction of the US appropriate cases. However, this
from a chaotic and bankruptcy court can enforce Bankruptcy Court. This Madoff Madoff case makes clear that any
uncontrolled scramble for the the automatic stay ruling should not be overstated. It attempt to interfere with a
Debtor’s assets in a variety of extraterritorially only against is important to note that recovery preference action, in any
uncoordinated proceedings in entities over which it has actions, such as preference jurisdiction, will be enjoined.
different courts, whether personal jurisdiction, including actions, have long been viewed as
domestic or foreign. the MAXAM entities. a key asset of a Chapter 11 estate.
The court concluded that the US The Madoff decisions indicate
3. “Comity” in the legal sense is
Courts for these purposes has that US Courts will not permit a
neither a matter of absolute
SUMMER 2012 35