Last week we reported on a decision where the Fifth Circuit held in an SEC receivership that the court must have personal jurisdiction over a third party before enforcing an injunction. SEC v. Stanford International Bank Ltd., 23-10726, 2024 BL 276508, 2024 US App Lexis 20152 (5th Cir. Aug. 9, 2024). To read ABI’s report, click here.

If Stanford were applicable in bankruptcy cases, the result would be near catastrophic because discharge and the automatic stay would be ineffective unless the court had personal jurisdiction over the offending party.

A reader brought our attention to an opinion from 2016 by Bankruptcy Judge Timothy A. Barnes of Chicago, who explained why bankruptcy’s statutory injunctions do not require personal jurisdiction.

The case before Judge Barnes was a chapter 15 case where the foreign liquidators sought interim relief barring actions by a creditor.

In chapter 15, there is no automatic stay upon the filing of a petition. Rather, the automatic stay under Section 362 only comes into effect upon foreign main recognition. See Section 1520(a)(1). However, Section 1519(a) allows a foreign representative to obtain a stay before recognition by showing that relief “is urgently needed to protect the assets of the debtor or the interests of the creditors.”

That’s what the foreign representative had done in the case before Judge Barnes. The bankruptcy court preliminarily enjoined a lawsuit that had been brought by a third party against the debtor. The liquidators had given notice of the injunction motion to the third party being enjoined.

In later proceedings brought by the third party who had been enjoined, Judge Barnes had occasion to explain the basis for the interim injunction. The third party was arguing, among other things, that an interim injunction could only be obtained through an adversary proceeding, which would have required personal jurisdiction.

“While put forth in a manner that suggests an injunction,” Judge Barnes said that he viewed “this issue as nothing other than a request that the stay apply provisionally.” He then said that the “Bankruptcy Code clearly allows for the stay to be applied by motion.”

Judge Barnes then made the critical distinction when he said, “the protections of section 362, while injunctive in nature, are not the same as an injunction.” He then proceeded to make distinctions between injunctions and prohibitions that arise by statute.

Although “modern parlance collapses stays and injunctions,” Judge Barnes said, “an injunction normally arises from the court’s jurisdiction and inherent authority over individuals and property, and the power to issue such injunctions is presently codified in the All Writs Act, 28 U.S.C. § 1651.”

“The stay, on the other hand,” Judge Barnes said, “is rooted in the law of moratory, the governmental power to safeguard the diffuse economic interests of the people, see, e.g., East N.Y. Savs. Bank v. Hahn, 326 U.S. 230, 231-32 (1945) (upholding state use of moratory authority), often used to stay collection activity. See also Wright v. Union Central Life Ins. Co., 304 U.S. 502, 515-56 (analyzing the Bankruptcy Act’s moratorium authority, not under the court’s injunction authority, but Congress’s constitutional authority to legislate).”

“Though the stay is not solely in rem,” Judge Barnes said, “the bankruptcy stay is consistent with the law of moratory.”

In short, Judge Barnes identified Supreme Court authority explaining why statutory injunctions like the automatic stay and the discharge injunction do not require personal jurisdiction.