Section 541(a) of the Bankruptcy Code creates a worldwide estate comprising all of the legal or equitable interests of the debtor, “wherever located,” held by the debtor as of the filing date.1 The Bankruptcy Code’s automatic stay, in turn, applies “to all entities” and protects the debtor’s property and the bankruptcy court’s jurisdiction by barring “any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.”2 These provisions grant the debtor a breathing spell from litigation and collection activities; they protect the estate from a chaotic and uncontrolled scramble for assets in a variety of uncoordinated proceedings in different courts.3 But did Congress intend the automatic stay to have extraterritorial reach, and does a bankruptcy court have the power to enjoin a foreign creditor from filing a non-liability lawsuit in a foreign jurisdiction?  

In an opinion forcefully reaffirming the global effect of the Bankruptcy Code’s automatic stay and a U.S. bankruptcy court’s injunctive powers over foreign creditors, the District Court for the Southern District of New York held in SIPC v. Bernard L. Madoff Inv. Secs. LLC (In re Bernard L. Madoff Inv. Secs. LLC)4 that the automatic stay applies extraterritorially and protects a bankruptcy court’s in rem jurisdiction globally by way of in personam jurisdiction over those taking actions that the stay prohibits. Thus, a foreign creditor’s filing of a declaratory judgment action in a foreign jurisdiction on the merits of a bankruptcy preference action against it violates the automatic stay, and the bankruptcy court can enjoin the creditor and its agents from filing any further proceedings against the trustee, the debtor’s estate, or the estate’s assets in any domestic or foreign jurisdiction.

Here’s the background. Irving H. Picard (the “Trustee”), as Trustee for the substantively consolidated Securities Investor Protection Act (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (the “Debtor”) and Bernard L. Madoff, sued MAXAM Absolute Return Fund LTD (“Maxam”) and several related funds, seeking to avoid and recover as ppreference period. Maxam was incorporated under the laws of the Cayman Islands, where it allegedly maintained its principal place of business. On the same day that Maxam filed an answer to the Trustee’s complaint, it filed an action in the Grand Court of the Cayman Islands (the “Cayman Action”) seeking (a) a declaration that it was not liable to the Trustee for either the $25 million transferred during the preference period, or any amounts transferred in excess of the $25 million within the period two years prior to the Debtor’s filing date, and (b) costs and any other relief deemed proper by the court.  

In response, the Trustee asked the Bankruptcy Court for injunctive relief against Maxam. The Bankruptcy Court granted the Trustee’s request. Among other things, it concluded that the Cayman Action violated the automatic stay, and issued an order (the “Order”) which deemed the Cayman Action and any relief derived from it void ab initio. The Order also enjoined Maxam and its agents from participating in the Cayman Action and from filing any further proceedings against the Trustee, the Debtor’s estate, or the estate’s assets, without first obtaining leave from the Bankruptcy Court. Finally, the Order directed Maxam to dismiss the Cayman Action as well as any other claims and requests for declaratory judgment or other relief against the Trustee or the Debtor in the Grand Court of the Cayman Islands.  

Maxam appealed, seeking reversal of the Order. On appeal, the District Court affirmed the Order. It concluded that the automatic stay and the Bankruptcy Court’s injunctive power have extraterritorial effect, that the Cayman Action violated the automatic stay, and that the interests of comity did not restrict the Bankruptcy Court’s actions.  

  1. Extraterritoriality of the Automatic Stay.

Relying on the plain language of the Bankruptcy Code and numerous judicial opinions recognizing the global reach of the automatic stay, the District Court readily concluded that the automatic stay applies extraterritorially. It found that the Trustee’s preference action was property of the Debtor’s estate, and that the Cayman Action was an attempt to usurp the Trustee’s cause of action in violation of sections 362(a)(1) and (3) of the Bankruptcy Code. These statutory provisions together operate as a stay of, among other things, “the commencement or continuation . . .of a judicial, administrative, or other action or proceeding against the debtor” or “any act to obtain possession of . . . or to exercise control over property of the estate.”5

Finding clear Congressional intent to apply the automatic stay globally by virtue of Congress’ grant of expansive jurisdiction to bankruptcy courts over a debtor’s “property, wherever located and by whomever held,”6 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 taking actions that violate the automatic stay. As a result, Maxam’s Cayman Action seeking declaratory relief concerning the merits of the Trustee’s preference action (which was itself property of Debtor’s estate) constituted an act by Maxam “to exercise control over property of the estate” in violation of the automatic stay.7

  1. Extraterritoriality of the Bankruptcy Court’s Injunctive Power.

The District Court likewise rejected Maxam’s argument that the Bankruptcy Court lacked injunctive authority to issue an order with extraterritorial effect. It noted that bankruptcy courts rely on section 105(a) of the Bankruptcy Code to enjoin extraterritorial violations of the automatic stay. Section 105(a) authorizes a bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].”8 The District Court reasoned that Congress’ intent that bankruptcy courts have worldwide jurisdiction over a bankruptcy estate’s property as expressed in section 541(a) of the Bankruptcy Code established not only the extraterritorial reach of the automatic stay, but also the bankruptcy court’s injunctive power to enforce the Bankruptcy Code (including the automatic stay) under section 105(a).  

  1. Interests of Comity.

Finally, the District Court held that the interests of comity did not warrant reversal of the Order. Comity “is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws.”9 Though the power of federal courts to enjoin foreign suits by persons subject to their jurisdiction is well-established, federal courts have adopted standards for determining when to enjoin such proceedings based on concerns for comity.10 The Second Circuit follows a restrictive approach under which anti-foreign-suit injunctions are “used sparingly.”11 Under this approach, a court should only enjoin a foreign suit if (a) the parties to both suits are the same, and the resolution of the case before the enjoining court would be dispositive of the enjoined action, and among other factors, (b) the foreign action threatens the jurisdiction and the strong public policies of the enjoining forum.12

Appealing to principles of comity, Maxam argued that even if it had violated the automatic stay, an injunction of a foreign proceeding like the Cayman Action must always satisfy the multi-factor, anti-foreign-suit injunction standard adopted by the Second Circuit. 13  

The Bankruptcy Court disagreed, finding that the factors had no application in a case where the foreign action violated U.S. law and interfered with the exclusive jurisdiction of the U.S. bankruptcy court. The District Court affirmed, citing the Bankruptcy Court’s reasoning that Maxam “cannot use notions of international comity to undermine this Court’s exclusive jurisdiction and interfere with the administration of the estate.” 14

Both courts nonetheless considered the Second Circuit’s anti-foreign-suit injunction standards and concluded that if they applied, they warranted enjoining the Cayman Action. The threshold factors were satisfied because both suits involved the Trustee and Maxam: the resolution of the Trustee’s action in the Bankruptcy Court was dispositive of the Cayman Action, which sought a determination of non-liability in the Trustee’s action. Other factors also favored issuing the injunction, including: (a) the Cayman Actions’ threat to erode the strong public policies underlying SIPA, which protects investors and their faith in the securities market by expeditiously returning customer funds to investors, (b) the vexatiousness of the Cayman Action in threatening potential double litigation of the same issues, (c) the Cayman Action’s challenge to the Bankruptcy Court’s exclusive in rem jurisdiction over the Debtor’s worldwide assets, and (d) the delay, inconvenience, expense and inconsistency threatened by the Cayman Action.  

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The District Court’s ruling reaffirms the global reach of the automatic stay in a plenary bankruptcy case, as well as the bankruptcy court’s broad power to enjoin creditors subject to its jurisdiction (even foreign ones) from taking actions violating the stay. Notably, the case involved a plenary proceeding and turned in part on the statutory creation of an “estate” that included property “wherever located” and by “whomever held.” In contrast, proceedings under chapter 15 of the Bankruptcy Code, which are ancillary to insolvency proceedings pending outside the U.S., do not create the same “estate.” Chapter 15 recognition orders that trigger application of the automatic stay accordingly may not provide a similar justification for enforcing broad anti-foreign-suit injunctions enjoining proceedings filed outside the territorial jurisdiction of the United States.15 In addition, while the automatic stay in a plenary bankruptcy case may prohibit foreign litigation by a creditor that interferes with the U.S. bankruptcy case, the District Court noted that a bankruptcy court can enforce the automatic stay extraterritorially only against entities over which it has in personam jurisdiction. The decision, accordingly, does not stand for the notion that a U.S. bankruptcy court can exercise control over a foreign court. Instead, if an entity violates the automatic stay, whether the entity can be punished proves a function of that entity’s amenability to U.S. process. Despite its broad scope, therefore, limitations to the automatic stay’s global reach and the bankruptcy court’s power remain.