District Court for the Southern District of New York Reaffirms Extraterritorial Effect of the Automatic Stay

On May 4, 2012, Judge J. Paul Oetken of the United States District Court of the Southern District of New York held that the Bankruptcy Court has the injunctive power to enforce the automatic stay against entities falling within the Bankruptcy Court's in personam jurisdiction, and that, in this case, the enforcement of the automatic stay did not violate interests of comity. Sec. Investor Prot. Corp v. Bernard L. Madoff Inv. Sec., LLC (In re Bernard L. Madoff Inv. Sec., LLC), No. 11 Civ. 8629 (JPO), 2012 WL 1570859 (S.D.N.Y. May 4, 2012).

1. Background

   On December 8, 2010, the SIPA trustee for Bernard L. Madoff Investment Securities LLC brought an avoidance action against appellant MAXAM Absolute Return Fund LTD, an entity incorporated in the Cayman Islands, but with all its assets in the United States. Contemporaneously with filing its answer, the appellant commenced an action in the Cayman Islands seeking (i) a declaration that the transfers at issue in the trustee's avoidance action are not avoidable and recoverable by the trustee and (ii) reimbursement for costs and any other relief. The trustee then brought an application for an injunction against the appellant in the Bankruptcy Court. Finding that the appellant's Cayman action violated, inter alia, the automatic stay of section 362(a) of the Bankruptcy Code, applicable in SIPA liquidations pursuant to 15 U.S.C. § 78fff(b), the Bankruptcy Court granted the application, deemed the Cayman action void ab initio, enjoined the appellant from participating in the Cayman action, and directed the appellant to dismiss the Cayman action. This appeal followed.

2. Analysis

   On appeal, the appellant first argued that the automatic stay lacks extraterritorial effect, and the Bankruptcy Court therefore erred in applying it extraterritorially against the appellant. The District Court rejected this argument and held that the appellant violated the automatic stay by filing the Cayman action. Pursuant to section 541(a) of the Bankruptcy Code, the commencement of a bankruptcy case creates an estate of the debtor's assets "wherever located," which includes property located outside of the United States, and bankruptcy courts have in rem jurisdiction over those assets. The automatic stay of section 362(a) of the Bankruptcy Code, in turn, protects the debtor's assets, and the bankruptcy courts' jurisdiction, from acts to obtain possession of or exercise control over estate property. Accordingly, because estate...