Since the Supreme Court’s decision in Stern v. Marshall, the extent of a bankruptcy court’s authority to adjudicate claims against non-debtors has been the subject of extensive debate and litigation.  Stern focused on the inherent authority of a bankruptcy court to exercise the judicial power conferred on so-called Article III courts under the United States Constitution. The extent to which a bankruptcy court can exercise personal jurisdiction over non-debtor defendants is another facet of this debate.  This latter issue was addressed by the United States Bankruptcy Court for the Southern District of New York in Jacobs v. Terpitz (In re Dewey & Leboeuf LLP), Dec. 22, 2014.

The Jacobs decision concerns one of the numerous avoidance actions filed by the liquidating trustee for Dewey & Leboeuf (Dewey), in this instance an action to recover alleged fraudulent transfers made to one of Dewey’s former equity partners.  Terpitz, the defendant in this action, moved to dismiss the complaint on the grounds that he was a resident of Germany when he was a partner at Dewey, he worked solely in Dewey’ Frankfurt office, he had no assets in the United States, and he never solicited nor performed any work for any U.S.-based clients.  Based on these facts, Terpitz argued that the bankruptcy court did not have personal jurisdiction over him, or, in the alternative, that the doctrine of forum non conveniens required dismissal of the lawsuit.

The court rejected both arguments in a short, focused opinion.  With respect to Terpitz’s first argument, the court recognized that the reach of its personal jurisdiction is determined by reference to the Due Process Clause of the United States Constitution.  The Supreme Court has addressed this issue in a long line of cases, most recently in Waldman v. Fiore, 134 S.Ct. 1115 (2014), which was analyzed in some detail by the court here.  Waldman and its antecedents hold that due process requires a showing of “minimum contacts” between the defendant, the forum and the litigation before a court can exercise personal jurisdiction over an out-of-state defendant.  A key requirement of this analysis is that the relationship must arise out of contacts the defendant himself creates with the forum state, and not necessarily on contacts with persons who reside in that state.

Based on this standard, the court in Jacobs found Terpitz to have minimum contacts with the State of New York because Dewey was a New York limited liability partnership, Terpitz signed an agreement to become a member of that partnership, and payments made to Terpitz for compensation and taxes originated from Dewey’s New York office.  Because all these contacts related to the avoidance action brought by the trustee, the court found that it had personal jurisdiction over Terpitz.

The court then turned to Terpitz’s forum non conveniens argument.  The bulk of this argument centered on the fact that the witnesses Terpitz would need to establish his defense all resided in Germany, and having them travel to New York for trial would be expensive and inefficient.  Terpitz also argued that any judgment the trustee might obtain would be unenforceable in Germany.  The court found these arguments unpersuasive, however, as the cross-border nature of the case would result in one party having to accommodate a trial in a foreign jurisdiction.  As a result, the court found that the equities weighed in favor of conducting the trial in the local jurisdiction, especially since the central actions underlying the case all took place in New York, and because the discovery in this action could be coordinated with discovery in the other pending avoidance actions, which would reduce the potential for inconsistent adjudications and allow for more efficient discovery.

In light of the facts present here, the Jacobs decision is not surprising.  While Terpitz was a foreign national, he was a partner of a New York law firm who signed a partnership agreement governed by New York law, and all payments made to him originated from New York.  The decision does highlight, however, the potential risk involved in conducting business with a U.S.-based company.