While U.S. bankruptcy courts are reorganizing large companies headquartered and operating chiefly abroad, the Seventh Circuit laid down rules barring U.S. bankruptcy courts from stopping foreign creditors from taking action against a debtor’s assets abroad when the U.S. court has no general or specific personal jurisdiction over the creditors.
The debtor was a U.S. citizen who borrowed money from a bank in Ireland to purchase stock in an Irish company and real property in Ireland. The debtor gave the bank a lien on the stock and real property to secure the loan.
After the debtor defaulted on the loan, the bank sold the loan to an Irish purchaser, whom we shall call the creditor. The creditor began foreclosure proceedings in Ireland. After lengthy litigation, the Irish court appointed an Irish receiver to take possession and sell the stock and the real property.
Before the receiver sold the collateral, the debtor filed a chapter 11 petition in Chicago, notified the creditor and the receiver about the bankruptcy, and demanded that the receiver return possession of the property to the debtor. The creditor and the debtor declined.
So, the debtor filed an adversary proceeding in the Chicago bankruptcy court, contending that the creditor and the receiver were violating the automatic stay. The debtor wanted the bankruptcy court to return possession of the collateral to the debtor.
The receiver and the creditor filed a motion to dismiss for lack of personal jurisdiction. The bankruptcy court granted the motion, and the district court agreed that the bankruptcy court lacked personal jurisdiction over the receiver and the creditor. The debtor appealed to the circuit.
In an opinion on September 7, Circuit Judge Ilana Rovner affirmed.
The appeal was measured against the demands of due process that a defendant from elsewhere must have minimum contacts with the forum and that maintenance of the suit must not offend notions of fair play and substantial justice.
Neither the receiver nor the creditor had any connections with Illinois, but the debtor contended that the bankruptcy court’s in rem jurisdiction over the collateral conferred personal jurisdiction over the defendants.
The debtor’s argument went nowhere. Judge Rovner conceded that the U.S. court had jurisdiction over the property in Ireland, but she said that a U.S. bankruptcy court cannot enforce the stay abroad unless the court has personal jurisdiction over the party holding the property.
Next, the debtor tried a legal fiction: The debtor’s property abroad is subject to the legal fiction of being located in Illinois. Based on the fiction, the debtor contended that the actions by the receiver and the creditor “must have occurred (fictionally) in Illinois,” Judge Rovner said.
Judge Rovner saw no authority for the idea “linking personal jurisdiction to in rem jurisdiction.” Instead, she said the court must have either general or specific personal jurisdiction over the party. The debtor admitted that there was no general jurisdiction over the defendants, who were Irish citizens and conducted business in Ireland.
So, Judge Rovner turned to specific personal jurisdiction. She said it requires that the defendants must have “purposefully directed their actions at the forum state” and that the alleged injury must have arisen from forum-state activities. In addition, the exercise of jurisdiction must comport with notions of fair play and substantial justice.
Granted, the defendants had contacts with the debtor, but “the defendants’ minimum contacts must be with the forum itself and not merely with a person who resides there,” Judge Rovner said. Similarly, she said, the “focus on a defendant’s activities means that it is not enough that the defendant took some action that ultimately had an effect on the plaintiff in the forum.”
Focusing on the facts, Judge Rovner said that the “Irish defendants directed their activity at Irish property located in Ireland and which served as collateral for a loan made by an Irish bank . . . . None of the defendants did anything to reach out to the United States and affiliate themselves with the United States or Illinois.” She said that specific personal jurisdiction “cannot be based on the plaintiff’s mere presence in the forum or on the ‘unilateral activity’ of a plaintiff.”
Likewise, Judge Rovner said, “the fact that the defendants could have foreseen that their conduct would affect [the debtor] in Illinois was insufficient to establish personal jurisdiction.”
Concluding that the creditor and the receiver had no minimum contacts with the U.S., Judge Rovner upheld dismissal and therefore had no reason to decide whether exercising personal jurisdiction would violate notions of fair play and substantial justice.
While U.S. bankruptcy courts are reorganizing large companies headquartered and operating chiefly abroad, the Seventh Circuit laid down rules barring U.S. bankruptcy courts from stopping foreign creditors from taking action against a debtor’s assets abroad when the U.S. court has no general or specific personal jurisdiction over the creditors.
The debtor was a U.S. citizen who borrowed money from a bank in Ireland to purchase stock in an Irish company and real property in Ireland. The debtor gave the bank a lien on the stock and real property to secure the loan.
After the debtor defaulted on the loan, the bank sold the loan to an Irish purchaser, whom we shall call the creditor. The creditor began foreclosure proceedings in Ireland. After lengthy litigation, the Irish court appointed an Irish receiver to take possession and sell the stock and the real property.
Before the receiver sold the collateral, the debtor filed a chapter 11 petition in Chicago, notified the creditor and the receiver about the bankruptcy, and demanded that the receiver return possession of the property to the debtor. The creditor and the debtor declined.
So, the debtor filed an adversary proceeding in the Chicago bankruptcy court, contending that the creditor and the receiver were violating the automatic stay. The debtor wanted the bankruptcy court to return possession of the collateral to the debtor.