Debtor Does Not Have To Repatriate Offshore Trust: 2nd Circuit Ruled Lower Court's Order Violated Automatic Stay Provision

This article originally appeared in the December 29 edition of The Legal Intelligencer

For a change, embattled securities dealer Robert E. Brennan, President of discount securities broker-dealer First Jersey Securities, Inc., has won a round in his long-running battle with the SEC. The U.S. District Court for the Southern District of New York, at the request of the SEC, directed Brennan, a chapter 11 debtor in a case pending in the U.S. Bankruptcy Court for the District of New Jersey, to repatriate the assets of an offshore asset protection trust and to deposit those assets in the registry of the district court. In Securities and Exchange Commission v. Brennan, 230 F.3rd 65 (2nd Cir. 2000), the appeals court vacated that order, holding that it violated the automatic stay provisions of Section 362(a) of the Bankruptcy Code.

The Background

In 1985, the SEC sued First Jersey Securities, Inc. and Brennan in the U.S. District Court for the Southern District of New York, alleging that they had perpetrated a massive fraud against their customers and realized millions in illegal profits. The case was finally heard in 1994 and, after a lengthy bench trial, the district court entered a judgment in the SEC's favor in July 1995 (the "July 1995 Judgment"), directing Brennan and his company used to disgorge millions in ill-gotten gains and prejudgment interest.

Sometime during the 1994 trial and before the July 1995 Judgment, Brennan established an offshore asset protection trust, called the Cardinal Trust, in Gibraltar, funded with $5 million in municipal securities and naming Brennan's three adult sons and the Robert E. Brennan Foundation, Inc. as beneficiaries. The SEC claimed that Brennan was using the trust to fund a lavish lifestyle.

Shortly after the July 1995 Judgment, Brennan filed a chapter 11 petition in the U.S. Bankruptcy Court for the District of New Jersey, eventually (but not initially) listing the Cardinal Trust as property of his estate. He valued his interest at $0. In June 1997, a trustee was appointed for Brennan's chapter 11 case at the request of the SEC, based on a finding that Brennan, inter alia, was not providing adequate financial disclosure. In May 1998, the trustee, joined by the SEC, asked the Bankruptcy Court to require that Brennan repatriate the assets of the Cardinal Trust. The Bankruptcy Court declined to do so and its order was not appealed.

The Cardinal Trust contained a provision called a "flight clause" which required the trustee to relocate the trust upon the occurrence of an "event of duress," including any government action that would attempt to take control of the trust assets. Accordingly, the Cardinal Trust was...