In an equity receivership, the Fifth Circuit says that the court must have personal jurisdiction over third parties to enforce an injunction.

The holding would be huge if applicable to injunctions in bankruptcy, such as the automatic stay and discharge. This writer doubts that the holding would or should apply in bankruptcy. We invite readers to state their views in the “Comment” box at the foot of this report.

The Allen Stanford Ponzi Scheme

From entities located in Texas and on the island of Antigua, Allen Stanford operated a Ponzi scheme. When the fraud blew up in 2009, the Securities and Exchange Commission brought a securities fraud action in federal district court in Dallas, where the SEC obtained appointment of a receiver given “full power of an equity receiver under common law.”

The receiver’s powers included collecting and managing the assets, bringing actions against anyone who improperly received assets, and performing tasks necessary to administer the receivership estate.

Nine days after appointment of the receiver in Dallas, authorities in Antigua commenced a receivership against the Antiguan bank that was part of the failed Stanford empire. The Antiguan receivership was converted to a liquidation with the appointment of joint liquidators. The Antiguan bank was among the assets under the control of the U.S. receiver.

To enhance their authority over the bank’s assets, the liquidators filed a chapter 15 petition. The district court declined to designate the Antiguan proceedings as a foreign main proceeding regarding the Stanford bank. However, the district court anointed the Antiguan proceedings as a foreign nonmain proceeding.

Under Section 1510, the filing of the chapter 15 petition did “not subject the foreign representative to the jurisdiction of any court in the United States for any other purpose.”

Later, the liquidators and the receiver entered into a cross-border protocol authorizing each to prosecute lawsuits in jurisdictions where they were “recognized.” Thus, the receiver could sue in the U.S., but the liquidators could not.

Conversely, the liquidators could sue in Switzerland, where they were recognized, but the receiver could not.

The receiver made a settlement with a Swiss bank that the liquidators were aiming to sue. The settlement would permanently enjoin the liquidators from suing the Swiss bank.

The ‘Waiver Trap’

The district court in Dallas notified the liquidators of the settlement but said that anyone submitting an objection to the settlement would have submitted to the jurisdiction of the district court for the purposes of the settlement and the injunction. In his opinion for the Fifth Circuit on August 9, Circuit Judge Andrew S. Oldham referred to it as a “waiver trap.”

The waiver trap went on to say that anyone who did not object would have waived any objection and would be forever barred from objecting.

The liquidators objected in their chapter 15 case, but not in the receivership action, which was in the same court. At the ensuing hearing as recounted by Judge Oldham, the liquidators’ counsel did not speak after being told by the district judge that words other than “good morning” would be a general appearance.

The district judge approved the settlement and the injunction, but the liquidators appealed to the Fifth Circuit.

In Rem Jurisdiction

The appeal raised questions of in rem and personal jurisdiction, Judge Oldham said. He began with in rem jurisdiction.

Judge Oldham said that the receivership order gave the district court “exclusive jurisdiction of all the Stanford assets, including [the Antiguan bank].” He then made distinctions about the extent of in rem jurisdiction.

Judge Oldham said that “a court with in rem jurisdiction over a piece of land can consider and decide all of the potential claims to that land, regardless of whether all of the potential claimants are within its jurisdiction.”

Citing the Supreme Court, Judge Oldham said,

But it is another thing entirely for a court to enjoin the whole world from bringing suits related to that piece of land. Injunctions bind people, not property, so all injunctions require in personam jurisdiction. [Emphasis in original.]

Distinguishing facially contrary Fifth Circuit precedent, Judge Oldham said,

True, we have previously held that a district court’s power over a receivership enables it to enjoin third parties or non-parties from pursuing certain claims involving the res of the receivership estate.

However, he said that those cases

implicated the equitable remedies available to the district court and not its jurisdiction. No one objected to personal jurisdiction in those cases, likely because any such objection would have been frivolous.

Judge Oldham went on to cite US v. Hall, 472 F.2d 261 (5th Cir. 1972), which, he said, holds “that injunctions can only attach through in personam jurisdiction.” In the Fifth Circuit after Hall, he said “that injunctions always and everywhere require in personam jurisdiction.”

Regarding personal jurisdiction, Judge Holdman held that “federal injunctions in receiverships, as in all cases, can stand only if the court has in personam jurisdiction over the enjoined defendant.”

Personal Jurisdiction

Judge Oldham turned to the question of personal jurisdiction over the liquidators, having held that enforcement of an injunction in an in rem action also requires personal jurisdiction. Although he did not cite Section 1510, recall that filing the chapter 15 petition did not subject the liquidators to jurisdiction “for any other purpose.”

With regard to offshore entities, personal jurisdiction comes in two forms: general and specific jurisdiction. For liquidators based in Antigua, Judge Oldham said there was no general jurisdiction. There was no decent argument that the liquidators satisfied the three requirements of specific jurisdiction. So, he immediately noted that specific jurisdiction is “waivable” and can come in the form of implied consent.

“Thus, if foreign defendants are dragged before the forum court over their protestations,” Judge Oldham cited Fifth Circuit precedent to say that “they have not consented to personal jurisdiction.” Citing World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 292 (1980), he went on to say “that ‘traditional notions of fair play and substantial justice’ prohibit the district court’s so-called waiver trap.”

Judge Oldham vacated the district court’s waiver trap and also vacated the injunction barring the liquidators from suing the Swiss bank. Otherwise, he remanded to the district court for further proceedings.

The Concurrence

Circuit Judge Stephen A. Higginson concurred in the judgment. He would only have reversed and remanded based on the waiver trap.

Judge Higginson would have sent the case back for the district court to consider all of the liquidators’ objections, including their defense of personal jurisdiction.

Consequently, the opinion by Judge Oldham could be seen as a 2/1 opinion.

Observations

Does Judge Oldham’s opinion apply across the board to bankruptcy cases? Must the bankruptcy court first obtain personal jurisdiction over creditors to enforce the automatic stay and the discharge injunction? Does the opinion mean that creditors are not enjoined by the stay and discharge until they have filed claims or the bankruptcy court has taken action to obtain personal jurisdiction?

If the Fifth Circuit opinion applies across the board in bankruptcy, it’s a new world.

Bankruptcy courts can obtain personal jurisdiction through regular mail, but what about creditors who are not scheduled? Does the automatic stay apply to them? Creditors without notice or knowledge of the case will not be subject to contempt, but are bankruptcy courts unable to set aside actions taken by creditors who acted without knowledge or notice?

Equity receiverships are largely actions at common law, unlike bankruptcy cases that are governed top to bottom by the Bankruptcy Code. Is bankruptcy therefore excepted altogether from the holdings spelled out in the Stanford receivership opinion?

We urge readers to comment in the box below. Is the opinion applicable at all in bankruptcy? Are there aspects of the opinion that are applicable in bankruptcy? Would other circuits disagree with the Stanford opinion? Does the Supreme Court’s 5/4 decision in Purdue suggest that the Supreme Court might disagree with the Fifth Circuit?