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Underwood v. Hilliard

October 17, 1996




Appeals from the United States District Court for the Northern District of Indiana, Fort Wayne Division. Nos. 95 C 367, 95 C 369 & 95-MC-28 William C. Lee, Judge.

Before POSNER, Chief Judge, and FLAUM and EASTERBROOK, Circuit Judges.

POSNER, Chief Judge.



Paul Underwood, trustee in bankruptcy of Rimsat, Ltd., brought an adversary proceeding in bankruptcy against Carl Hilliard, who appeals from three orders entered in that proceeding. Rimsat had been formed in 1992 to provide satellite communications (using Russian equipment) to Tonga and other islands in the South Pacific. Most of its investors are Malaysian. It was incorporated in the Federation of St. Christopher and Nevis (also known as the Federation of Saint Kitts and Nevis), a Caribbean nation that belongs to the British Commonwealth. (Horatio Nelson, later Admiral Lord Nelson, was married in Nevis.) Its principal place of business is in Fort Wayne, Indiana. Most of its financial assets are there, but its non-financial assets, principally leaseholds in satellites, have no terrestrial site.

Rimsat quickly became troubled; and Hilliard, a director and shareholder, began squabbling with the managing director over control of the corporation. In December 1994 Hilliard obtained from the High Court of Nevis an injunction against Rimsat's declaring bankruptcy or continuing to prosecute a suit that it had brought against Hilliard in the United States, and against the managing director's usurping the powers of the board of directors. On January 20, 1995, Hilliard obtained a further order from that court appointing him receiver with full powers to manage Rimsat. Two weeks later, several creditors of Rimsat petitioned the corporation into Chapter 11 in the federal bankruptcy court in Fort Wayne. A trustee in bankruptcy was appointed and we are told that he and Hilliard cooperated in formulating a plan for the reorganization of Rimsat. But later the trustee resigned under pressure from the creditors, and a successor trustee, Underwood, was appointed who instituted the adversary proceeding in which the challenged orders were entered. In June 1995, at the trustee's urging, the bankruptcy court enjoined Hilliard from exercising control over property of Rimsat or otherwise interfering with the bankruptcy proceeding. This injunction (as affirmed by the district court) is the first order that Hilliard challenges. The second is a further injunction, issued several months later, commanding Hilliard to turn over all property of Rimsat in his control to the trustee and to file an accounting of that property with the bankruptcy court. The third is an order that Hilliard pay, as a civil contempt sanction for disobeying the second order, $1,000 a day until he complies with it. We were told at argument that he complied this past June, but he has not yet paid the fine, some $180,000, which had accrued to that date. Meanwhile the bankruptcy proceeding is continuing, and we are told that one of Rimsat's major creditors has submitted a plan of reorganization that is now under consideration by the bankruptcy court.

The basis of the first two orders that Hilliard challenges is that the Bankruptcy Code vests control over the assets and business of the debtor in the trustee in bankruptcy (if a trustee is appointed), 11 U.S.C. sec. 323(a), and that as a receiver Hilliard was a custodian of Rimsat's assets, sec. 101(11)(A), and therefore obligated by section 543(b) of the Bankruptcy Code to deliver any of the debtor's assets that were under his control to the trustee and to file with the bankruptcy court an accounting of those assets. Hilliard objects to these orders on the principal ground that the bankruptcy court should have suspended or dismissed all proceedings before it in deference to his receivership; if that had been done the orders would not have been issued, or if issued before the suspension or dismissal of the bankruptcy proceeding would have been rescinded. The Bankruptcy Code authorizes, though it does not (as Hilliard seems to believe) command, such dismissal or suspension if "there is pending a foreign proceeding." sec. 305(a)(2)(A). This is defined as a proceeding "in a foreign country in which the debtor's domicile, residence, principal place of business, or principal assets were located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization." sec. 101(23). Rimsat's domicile is in Nevis, because a corporation's domicile is the state of incorporation. Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519, 588 (1839); Restatement (Third) of the Foreign Relations Law of the United States sec. 213 (1987); 1 Collier on Bankruptcy para. 3.02[b][ii] (Lawrence P. King ed., 15th ed. 1996).

When a motion to dismiss the bankruptcy proceeding on the ground that the receivership created by the High Court of Nevis was "for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization" was first made (by an ally of Hilliard's), the bankruptcy judge denied it. His ground was that, so far as he could make out, the receivership was a device by which Hilliard had wrested control of Rimsat away from the corporation's managing director, rather than anything in the nature of an insolvency proceeding. In other words, it was not an equity receivership, the kind of thing to which the definition of "foreign proceeding" that we have quoted points; it was merely an operating receivership. Because it was not an equity receivership, the adversary proceeding did not run afoul of Barton v. Barbour, 104 U.S. 126, 128-29 (1881), which held that a suit against an equity receiver could not be maintained without the permission of the court that had appointed him. The purpose of that ruling (we need not decide to what extent it has been supplanted by subsequent bankruptcy statutes) was to prevent creditors from circumventing the receivership proceeding by suing the receiver in a different court. The plaintiff in the present adversary proceeding is the trustee in bankruptcy, not a creditor seeking to go around the trustee. And the defendant was not at the time of the challenged ruling an equity receiver but merely someone whose actions were making it difficult for the trustee to do his job.

Shortly after the denial of the motion to dismiss, Hilliard went back to the High Court of Nevis and obtained an order adding to the receiver's original duties (or perhaps only making explicit, though Hilliard doesn't argue this) the duty of paying, adjusting, and if necessary discharging the debts of Rimsat. Hilliard then renewed the motion in bankruptcy court to dismiss the bankruptcy proceeding, citing the ruling by the Nevis court. Maybe "renewed" is not quite the right word. He urged dismissal in the adversary proceeding brought by the trustee rather than in the underlying bankruptcy proceeding. No matter. You can defend against an adversary proceeding on grounds that, if valid, knock out the whole proceeding and not just the claim against yourself. See, e.g., In re Cash Currency Exchange, Inc., 762 F.2d 542, 544-45 (7th Cir. 1985). It is commonplace, in bankruptcy adversary proceedings as in other kinds of case, to make arguments that if accepted have potentially catastrophic implications for litigants in related proceedings. For an example from bankruptcy, see In re MacFarlane Webster Associates, 121 B.R. 694 (Bankr. S.D.N.Y. 1990).

Hilliard's effort to vacate the denial of the motion to dismiss by invoking the "foreign proceeding" provision of the Code must fail for a variety of independent reasons. By going back to the Nevis court for an order enlarging his powers over the assets of the debtor he violated the automatic stay of proceedings relating to the debtor's estate that went into effect when the bankruptcy petition was filed. 11 U.S.C. sec. 362. Although the primary use of the automatic stay is to prevent the debtor's estate from being picked to pieces by creditors, e.g., Martin-Trigona v. Champion Federal Savings & Loan Ass'n, 892 F.2d 575, 577 (7th Cir. 1989), the stay is not limited to that use. Its use here is consistent with both the statutory language, see secs. 362(a)(1) and (a)(3), and the statutory purpose of preventing a " 'chaotic and uncontrolled scramble for the debtor's assets in a variety of uncoordinated proceedings in different courts.' " In re Holtkamp, 669 F.2d 505, 508 (7th Cir. 1982); see also In re Falls Bldg., Ltd., 94 B.R. 471, 480-81 (Bankr. E.D. Tenn. 1988). Unlike a creditor's action, Hilliard's recourse to the Nevis court did not threaten to deplete the estate directly. But it did imperil the orderly administration of the bankruptcy proceeding, and by doing so it posed an indirect threat to the estate. Compare Rett White Motor Sales Co. v. Wells Fargo Bank, 99 B.R. 12, 14-15 (N.D. Cal. 1989).

The fact that the stay affected proceedings in a foreign country would be relevant to a motion to lift the automatic stay (sec. 362(d)), had one been made (none was). The movant could argue for relief from the stay on the basis of the doctrine of comity, though the argument, as we shall see, might not succeed. But the mere existence of a foreign proceeding affecting the debtor does not, as Hilliard believes, invalidate the stay by giving it an impermissible extraterritorial reach. Hilliard is a U.S. citizen, incontestably within the jurisdiction of the Congress of the United States, which can by statute (the automatic stay) forbid him to conduct proceedings anywhere in the world that would affect the debtor's property. See Blackmer v. United States, 284 U.S. 421, 436 (1932); Restatement, supra, sec. 402(2). There is no authority for allowing the presumption against the extraterritorial application of U.S. statutes (EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991)) to defeat application of the automatic stay to a U.S. citizen to prevent his interfering with a U.S. bankruptcy proceeding in which the debtor is a corporation headquartered in the United States. Compare In re Maxwell Communication Corp., 186 B.R. 807, 818-21 (S.D.N.Y. 1995), aff'd on other grounds, 93 F.3d 1036 (2d Cir. 1996). The efficacy of the bankruptcy proceeding depends on the court's ability to control and marshal the assets of the debtor wherever located (see sec. 541(a)), which in this case required that Hilliard be prevented from exercising control over the debtor. Cf. Stegeman v. United States, 425 F.2d 984, 985-86 (9th Cir. 1970) (en banc); In re Rubin, 378 F.2d 104, 109 (3d Cir. 1967).

The supplementary ruling of the court in Nevis, rather than showing that a foreign proceeding had been pending when the U.S. bankruptcy proceeding was filed, bespoke an effort to derail the bankruptcy proceeding by a foreign proceeding instituted later, the original foreign proceeding having been one to create an operating receivership outside the scope of section 305(a)(2)(A). Hilliard's request to the Nevis court for a ruling converting the operating receivership to an equity receivership in effect instituted the foreign proceeding to which the statute refers. The statute does not require in so many words that the foreign proceeding have been pending since the outset of the U.S. bankruptcy proceeding. But even more clearly it does not require the bankruptcy court to abstain on the basis of a proceeding instituted after, and in an effort to defeat, the bankruptcy proceeding--strategic conduct that is not to be encouraged.

The Nevis receivership has also not been shown to be a sufficiently close substitute for the U.S. bankruptcy proceeding to warrant abstention. Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187, 193 (3d Cir. 1994); Victrix Steamship Co. v. Salen Dry Cargo A.B., 825 F.2d 709, 713-14 (2d Cir. 1987); In re Petition of Hourani, 180 B.R. 58, 64-70 (Bankr. S.D.N.Y. 1995); cf. Canada Southern R.R. v. Gebhard, 109 U.S. 527, 538-39 (1883). Hilliard has not furnished the bankruptcy court with a detailed description of Nevisian insolvency law and procedures. And since all of Rimsat's assets (save a bank account with only $1,700 in it), creditors, and shareholders are located outside of Nevis, Nevis may be an inconvenient forum--still another reason not to abstain in favor of it.

Even if, as we do not for a moment believe, the district court erred in refusing to abstain, it is not at all clear that we can do anything about it. Section 305(c) of the Bankruptcy Code makes an order granting or denying abstention under section 305(a) non-reviewable by the court of appeals. See In re Axona Int'l Credit & Commerce Ltd., 924 F.2d 31 (2d Cir. 1991). Now it is true that orders that are not immediately appealable because of lack of finality ordinarily can be reviewed in conjunction with a final order entered later. E.g., Boire v. Greyhound Corp., 376 U.S. 473 (1964). And sometimes the person against whom the order is directed can precipitate review by disobeying the order and appealing from a resulting judgment for criminal contempt. This is the standard method for obtaining immediate review of a discovery order. Allendale Mutual Ins. Co. v. Bull Data Systems, Inc., 32 F.3d 1175, 1177 (7th Cir. 1994). But if section 305(c) expresses a congressional policy that orders granting or denying abstention under section 305(a) shall never be reviewable by the court of appeals, Hilliard should not be permitted to circumvent it by engaging in contumacious behavior that required the bankruptcy court to issue an injunction, in the hope that by appealing from the injunction he could obtain appellate review of the order refusing to abstain, which underlies the injunction. Cf. Pacific Livestock Co. v. Lewis, ...

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