MEMORANDUM AND ORDER
In thе adversary proceeding below, Irving H. Picard (the “Trustee”), as Trustee for the substantively consolidated Securities Investor Protection Act (“SIPA”)
I. Background
On December 8, 2010, the Trustee filed a complaint (the “Complaint”) against Appellant and several related funds, “seeking the avoidance of certain transfers, including the recovery of subsequent transfers to Maxam Limited.” Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC,
On July 11, 2011, Maxam Limited filed an answer to the Trustee’s Complaint. On or about the same day, Maxam Limited filed an action in the Grand Court of the Cayman Islands (the “Cayman Action”) seeking (1) a declaration that Maxam Limitеd is not liable to the Trustee for either
The Trustee’s Application to the Bankruptcy Court followed. On October 12, 2011, the Bankruptcy Court issued its Order, which deemed the Cayman Action and any relief derived from it void ab initio. The Order also, among other things, enjoined Maxam Limited 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].” (Order at 3.) The Order further directed Maxam Limited to dismiss thе Cayman Action as well as any other claims and requests for declaratory judgment or other relief against the Trustee or BLMIS in the Grand Court of the Cayman Islands.
The Bankruptcy Court explained its reasoning for the Order in a separate bench memorandum. See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC,
Maxam Limited filed this appeal from the Order on November 29, 2011. (Dkt. No. 1.)
II. Discussion
In reviewing final decisions of bankruptcy courts, a district court acts as an appellate court. See In re Sanshoe Worldwide Corp.,
A decision to grant or deny an injunction is reviewed for abuse of discretion. See Nevada Power Co. v. Calpine Corp. (In re Calpine Corp.),
Appellant Maxam Limited argues that the Bankruptcy Court’s Order should be reversed because the automatic stay, the stay orders, the Barton Doctrine, the relevant sections of SIPA, and the Bankruptcy Court’s injunctive power all lack extraterritorial effect. (Appellant’s Br. (Dkt. No. 6).) Appellant also argues that the Order should be reversed in the interests of comity toward the courts of the Cayman Islands. (Id.) The Court concludes that the automatic stay and the Bankruptcy Court’s injunctive power have extraterritorial effect, that the Cayman Action violates the automatic stay, and that the Bankruptcy Court was not restricted by interests of comity in this case. Accordingly, the Order must be affirmed.
A. Extraterritoriality of the Automatic Stay
Appellant argues that the Bankruptcy Court “erred in applying the automatic stay extraterritorially against MAXAM Limited” because the automatic stay lacks extraterritorial effect. (Id. at 21-22.) As discussed below, federal statutes, case law, and policy considerations all support the conclusion that the automatic stay does have extraterritorial reach. Appellant’s arguments to the contrary, addressed below in a separate section, are unavailing.
1. Authority for the Automatic Stay and its Extraterritorial Reach
Under § 541(a) of the Bankruptcy Code, commencement of a bankruptcy action creаtes a worldwide estate of all of the legal or equitable interests, “wherever located,” held by the debtor at the time of that commencement. See Nakash v. Zur (In re Nakash),
The Bankruptcy Code’s automatic stay, “applicable to all entities,” 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.” 11 U.S.C. § 362(a). “The purpose of the stay is to give the debtor a breathing spell from litigation and collection activities.” In re Gold & Honey, Ltd.,
In Chapter 11 cases, the automatic stay must prohibit litigation to ob
It is important to note, however, that none of these cases stands for the notion that a United States court can exercise control over a foreign court. Rather, a bankruptcy court can enforce the automatic stay extraterritorially only against entities over which it has in personam jurisdiction.
[T]he extraterritorial jurisdiction of the United States courts for these purposes is in personam rather than in rem. If a creditor causes property of a title 11 estate to be seized in a foreign country, that creditor has violated the automatic stay. Whether that creditor can be punished, however, is a function of that creditor’s amenability to United States process.
Sinatra v. Gucci (In re Gucci),
2. Appellant’s Arguments Against Extraterritoriality of the Automatic Stay
Maxam Limited argues that the automatic stay lacks extraterritorial effect because of the presumption established in E.E.O.C. v. Arabian American Oil Co.,
In the bankruptcy context, Congress has expressed its intent that bankruptcy courts (by delegation from district courts) are to have jurisdiction over a debtor’s estate of “property, tvherever located and by whomever held.” 11 U.S.C. § 541(a) (emphasis added); 28 U.S.C. § 1334(e); 28 U.S.C. § 157(a); 28 U.S.C. § 151. Because the automatic stay is key to protecting a bankruptcy court’s jurisdiction, the language Congress used in § 541(a) is, as the Seventh Circuit has noted, evidence of congressional intent that the automatic stay would apply extraterritorially. In re Rimsat,
Maxam Limited also points to AW Treu-hand Wirtschaftsprufungsgesellschaft v. Peregrine Sys. (In re Peregrine Sys.), No. 04-1325,
On appeal, the District Court for the District of Delaware held that the automatic stay found in 11 U.S.C. § 362(a)(1) did not apply to AAWS’s German action because that section applies only to “a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the [bankruptcy case], or to recover a claim against the debtor that arose before the [bankruptcy case].” 11 U.S.C. § 362(a)(1); Peregrine,
In contrast, this case is about 11 U.S.C. § 362(a)(3) because, here, the question is whether Maxam Limited has performed an “act to ... exercise control over property of the estate.” Because Peregrine did not concern that section, Peregrine does not inform the resolution of this case.
Rather, this Court follows the many оther courts discussed above that have addressed the extraterritoriality of the automatic stay, concluding that it protects a bankruptcy court’s in rem jurisdiction extraterritorially by way of in person-am jurisdiction over those who would take actions prohibited by the stay. Here, Maxam Limited’s Cayman Action seeks a declaratory judgment concerning the merits of the Trustee’s claim (which is, itself, property of the BLMIS estate) to funds transferred during the preference period as well as costs. The Cayman Action constitutes an act by Maxam Limited “to exercise control over property of the еstate” in violation of 11 U.S.C. § 362(a)(3).
The Trustee correctly notes that Maxam Limited “does not dispute that, had its lawsuit been filed in the United States, it would have violated the automatic stay.” (Appellee’s Br. (Dkt. No. 12) at 2.) Maxam Limited’s argument that the automatic stay does not bar the Cayman Action depends entirely on the asserted lack of extraterritorial effect of the automatic stay. Because the automatic stay does apply ex-traterritorially, Maxam Limited violated the automatic stay by filing the Cayman Action.
B. Extraterritоriality of the Bankruptcy Court’s Injunctive Power
Under 11 U.S.C. § 105(a), a bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].” Maxam Limited argues that the Bankruptcy Court’s Order should be reversed because this injunctive authority does not empower the Bankruptcy Court to issue an order with extraterritorial effect. (Appellant’s Br. at 17-18.)
Appellant essentially rehashes its argument discussed above that the presumption against extraterritoriality should control, noting that 11 U.S.C. § 105(a), like the automatic stay, does not explicitly establish its extraterritorial effect vis-á-vis a non-debtor. (Appellant’s Br. at 17-18.)
In fact, bankruptcy courts have previously utilized § 105(a) to enjoin extraterritorial violations of the automatic stay. See, e.g., In re Lykes Bros. S.S. Co., 191
As discussed above, Congress expressed its intent in statute that bankruptcy courts are to have jurisdiction over a bankruptcy estate’s “property, wherever located and by whomever held.” 11 U.S.C. § 541(a) (emphasis added); 28 U.S.C. § 1334(e); 28 U.S.C. § 157(a); 28 U.S.C. § 151; see also In re Rimsat,
Appellant adds that § 105(a) “does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law.” (Appellant’s Br. at 17 (quoting Solow v. Kalikow (In re Kalikow),
Accordingly, the Bankruptcy Court had the power to issue the injunc-tive portions of its Order.
C. Interests of Comity
Appellant Maxam Limited focuses much of its argument for the Order’s reversal on the interests of comity. The Supreme Court has explained the contours of comity in the United States as follows:
‘Comity,’ in the legal sense, is neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will upon the other. But it is the rеcognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to the international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws.
Hilton v. Guyot,
In China Trade & Development Corp. v. M.V. Choong Yong,
When these threshold requirements are met, five factors are suggested in determining whether the foregoing action should be enjoined: (1) frustration of a policy in the .enjoining forum; (2) the foreign action would be vexatious; (3) a threat to the issuing court’s in rem or quasi in rem jurisdiction; (4) the proceedings in the other forum prejudice other equitable considerations; or (5) adjudication of the same issues in separate actions would result in delay, inconvenience, expense, inconsistency, or a race to judgment.
Id. (citation omitted). Applying these factors, the China Trade court held that the district court there had erred in enjoining a (non-bankruptcy) lawsuit in Korea because the foreign suit did not implicate the most important of the relevant factors: threats to an American court’s jurisdiction and to important American public policies. Id. at 36-37.
The Bankruptcy Court here considered the comity arguments based on China Trade and determined that,
given that the foreign proceeding in China Trade did not violate any law of the United States оr interfere with the exclusive jurisdiction of a U.S. court, this Court finds the comity-based China Trade factors inapplicable to the instant proceeding. Maxam Limited cannot use notions of international comity to undermine this Court’s exclusive jurisdiction and interfere with the administration of the estate.
In this appeal, Maxam Limited argues that China Trade should control in light of the Third Circuit’s holding in Stonington Partners v. Lemout & Hauspie Speech Prods. N.V.,
The Trustee here correctly notes further that the claims at issue in Stonington (both in the United States and Belgium) were claims of a creditor and were therefore not “property of the debtor’s estate” under § 541(a) and the automatic stay. (Appellee’s Br. at 27.) Since the Trustee’s action below presented claims of the BLMIS estate while the Cayman Action, concerning claims of the estate, was brought by a creditor in a foreign forum where the BLMIS had not filed a parallel proceeding, Stonington appears inapposite.
Moreover, the Bankruptcy Court held that, “[e]ven assuming every injunction affecting a foreign proceeding must meet the China Trade factors, enjoining Maxam Limited from continuing the Cayman Action is warranted thereunder.”
The Bankruptcy Court’s application of the China Trade factors, reviewed de novo, is sound. It is worth emphasizing that “SIPA serves dual purposes: to protect investors, and to protect the securities market as a whole.” In re Bernard L. Madoff Inv. Sec. LLC,
The Bankruptcy Court exhibited appropriate restraint in not deciding whether China Trade controls this case since the injunction at issue would be appropriate whether China Trade is applicable or not. This Court does likewise.
III. Conclusion
As stated above, the Order sub judice represents an appropriate use of the Bankruptcy Court’s injunctive authority under § 105(a) because the Cayman Action violated the automatic stay and bеcause the Second Circuit’s holding in China Trade does not constrain the Bankruptcy Court from exercising its authority here. As such, it is not necessary for the Court to give additional consideration to Appellant’s arguments concerning the extraterritorial effect of the stay orders, the Barton Doctrine, and SIPA.
Notes
. 15 U.S.C. § 78aaa et seq. References to sections of SIPA hereinafter replace “15 U.S.C.” with "SIPA.”
. The facts contained in this Background section are not disputed and are, unless otherwise noted, drawn from the Background section оf the Bankruptcy Court's Bench Memorandum Determining Trustee's Motion for Entry of an Injunction. See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC,
. In this opinion, 11 U.S.C. §§ 101 et seq. is referred, to as the Bankruptcy Code.
. Because the grounds stated above are sufficient to support the Order, it is not necessary for this Court to reach Appellant’s additional arguments concerning the extraterritorial effect of the stay orders, the Barton Doctrine, and SIPA.
. See also Lykes Bros. S.S. Co. v. Hanseatic Marine Serv. (In re Lykes Bros. S.S. Co.),
. The Seventh Circuit's reasoning is relevant here, though the facts in Rimsat were different. There, the court held that the automatic stay prohibited foreign litigation by "a U.S. citizen to prevent his interfering with a U.S. bankruptcy proceeding in which the debtor is a corporation headquartered in the United States.” Rimsat,
. Indeed, the Peregnne court suggested that the automatic stay might have applied extra-territorially in that case if a true "claim” were at issue.
. There are additional reasons that Peregnne does not control this case. Most notably, AAWS had "formally preserved its jurisdictional defenses and ha[d] never submitted itself to the claims process, either directly or indirectly.” Peregrine,
. Maxаm Limited’s counterarguments on these points are unavailing. It first argues that the Order does not satisfy China Trade's threshold requirements because neither the adversary proceeding here nor the Cayman Action would be automatically dispositive of the other and that, rather, the effect of each would depend on the comity extended by the other sovereign. (Appellant's Br. at 11-12.) This argument is spurious. The issues raised in the Cayman Action are identical to issues raised in the adversary proceeding below. Maxam Limited cannot negate the Bankruptcy Court’s conclusion that “resolution of the Trustee’s action ... is dispositive of the Cayman Action which seeks a determination of non-liability in the Trustee’s action.’’