Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs., 474 B.R. 76 (2012)

The trustee for the Securities Investor Protection Act ("SIPA") liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") filed a complaint in the bankruptcy court against Maxam Absolute Return Fund Ltd. ("Maxam"), seeking the return of about $100 million distributed to Maxam by BLMIS.  Maxam answered the complaint and then sued the trustee in the Cayman Islands seeking a declaration that it was not required to return the money. 

In the bankruptcy court, the trustee brought an application seeking injunctive relief against Maxam preventing Maxam from pursuing the case in the Cayman Islands.  Concluding that the Cayman action violated the automatic stay established in bankruptcy cases by 11 U.S.C. § 362(a), the bankruptcy court granted the trustee's application and issued an order deeming 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 BLMIS estate, or the estate's assets "in any domestic or extraterritorial jurisdiction without first obtaining leave of [the bankruptcy court]."  The order further directed Maxam to dismiss the Cayman action. 

On Maxam's appeal, the New York district court affirmed the order of the bankruptcy court, concluding 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 bankruptcy court was not restricted by interests of comity in this case.

First, the court found that federal statutes, case law, and policy considerations all support the conclusion that the automatic stay has extraterritorial reach.  The court recognized that, under 11 U.S.C. § 541(a) of the Bankruptcy Code, commencement of a bankruptcy action creates a worldwide estate of all the legal or equitable interests, "wherever located," held by the debtor at the time of that commencement.  In particular, in Chapter 11 cases, the automatic stay must prohibit litigation to obtain possession or control of the estate's property regardless of where such litigation is commenced.  Thus, the automatic stay applies extraterritorially.   Because the automatic stay applies extraterritorially, the court found that Maxam violated the automatic stay by filing the Cayman action.

In addition, the court held that the bankruptcy court had the power to issue the injunctive portions of its order with extraterritorial effect.  The court cited to 11 U.S.C. § 105, under which a bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code."  The court also cited to case law holding that a bankruptcy judge may, under § 105, enjoin proceedings in other courts when it is satisfied that such a proceeding would defeat or impair its jurisdiction with respect to a case before it.

Finally, the court agreed with the bankruptcy judge that Maxam's comity arguments were inapplicable to this case.  Maxam had argued that the court must apply a multi-factor test adopted by the Second Circuit to determine whether an injunction against a foreign suit properly accords with interests of international comity.  However, the court concluded that the injunction at issue would be appropriate whether the multi-factor test was applicable or not.  The court noted that the Cayman action would vexatiously require the trustee to relitigate claims raised in the bankruptcy proceeding, threatened the bankruptcy court's exclusive in rem jurisdiction over the world wide estate of BLMIS assets, and threatened inconsistency with the bankruptcy proceeding.  The court stated that it was difficult to imagine why Maxam would have brought the Cayman action except to seek a more favorable result than it could secure in the bankruptcy court.