Opinion ID: 3163898
Heading Depth: 2
Heading Rank: 1

Heading: Asset Freeze Order and Automatic Stay

Text: The Relief Defendants’ first (and principal) claim—that the Bankruptcy Code’s automatic stay provision precluded the issuance of the asset freeze order—tests the scope of this Court’s opinion in SEC v. Brennan. To evaluate it, we must first explore the meaning of the automatic stay provision, an exception to that provision, and an exception to the exception.
Bankruptcy Code § 362 automatically stays virtually all proceedings against a debtor, including “any act to obtain possession of property of the estate or of property from the estate or In re Sims, 534 F.3d 117, 132 (2d Cir. 2008) (internal quotation marks, 33 alteration, and citations omitted); see also In re The City of New York, 607 F.3d 923, 943 n.21 (2d Cir. 2010) (explaining that “abuse” is a nonpejorative “term of art”). 34 Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 206 (2d Cir. 2014). 15 to exercise control over property of the estate.”35 The automatic stay of Section 362 thus serves “one of the core purposes of bankruptcy,” by enabling “the bankruptcy court to centralize all disputes concerning property of the debtor’s estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas.”36 As relevant here, the Code also contains an exception to Section 362 known as the “governmental unit” exception, which provides that the automatic stay provision does not extend to the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s or organization’s police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power.37 As we explained in Brennan, the purpose of the governmental unit exception “is to prevent a debtor from ‘frustrating necessary 11 U.S.C. § 362(a)(3). We assume without deciding that the non‐debtor 35 Relief Defendants may invoke the automatic stay provision in aid of their claims on appeal. In re U.S. Lines, Inc., 197 F.3d 631, 640 (2d Cir. 1999) (quoting In re 36 Ionosphere Clubs, Inc., 922 F.2d 984, 989 (2d Cir. 1990)). 37 11 U.S.C. § 362(b)(4) (emphasis added). 16 governmental functions by seeking refuge in bankruptcy court.’”38 As the legislative history makes plain, “where a governmental unit is suing a debtor to prevent or stop [a] violation [constituting] fraud . . . or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay.”39 In the instant case, all parties agree that the SEC’s regulatory enforcement action against the Wyly Brothers falls within the governmental unit exception.40 The Relief Defendants assert, however, that this case falls under an exception to the governmental unit exception. This “exception to the exception” provides that actions to enforce money judgments are subject to the automatic stay, even if they were otherwise pursued by a governmental unit in furtherance of the government’s police or regulatory powers.41 Accordingly, the Relief Defendants argue that the asset freeze order is subject to the automatic stay. The SEC counters that the asset freeze order does not fall within the money judgment “exception to the exception” and hence does not trigger the automatic stay. Both parties invoke the case of SEC v. Brennan in aid of their positions. 230 F.3d at 71 (quoting City of New York v. Exxon Corp., 932 F.2d 1020, 38 1024 (2d Cir. 1991)). H.R. REP. No. 95‐595, at 343 (1977), U.S. Code Cong. & Admin. News at 39 6299 (emphasis added); accord S. REP. No. 95‐989, at 52 (1978), U.S. Code Cong. & Admin. News at 5838. 40 See Defs.’ Br. at 15; Pl. Br. at 23. See Brennan, 230 F.3d at 71 (quoting Penn Terra Ltd. v. Dep’t of Envtl. Res., 41 733 F.2d 267, 272 (3d Cir. 1984)). 17 That case, like this one, involved a defendant found liable for securities fraud in an SEC enforcement action, who subsequently filed for bankruptcy protection. Like the Relief Defendants here, the defendant in Brennan then argued that an order in the SEC enforcement action violated the Bankruptcy Code’s automatic stay provision. The order at issue required the defendant to repatriate to the United States assets held in offshore protection trusts and deposit them in a court registry. We vacated the repatriation and deposit order in Brennan. Calling the question “a close one,” we nonetheless found that it constituted a step “preparatory to money collection” that fit within the “exception to the exception” and was thus foreclosed by the operative automatic stay provision.42 The critical question here is whether the asset freeze order at issue was a permissible use of the government’s regulatory power under the “governmental unit exception,” or whether, like its analogue in Brennan, it was an impermissible action to enforce a money judgment under the “exception to the exception.” The District Court carefully analyzed our reasons for vacating the repatriation and deposit order in Brennan and found that the asset freeze at issue here was a permissible use of the government’s regulatory power under the “governmental unit exception.”43 42 Id. at 71‐72 (internal quotation marks omitted). 43 Wyly, 73 F. Supp. 3d at 320. 18 We agree. On de novo review, we hold that the District Court correctly interpreted our controlling precedent in SEC v. Brennan and properly concluded that this asset freeze order is exempt from the Bankruptcy Code’s automatic stay provision. Factual, procedural, and policy considerations distinguish this case from Brennan and lead to our conclusion that this asset freeze order falls within the “governmental unit exception” but not within the “exception to the exception” for actions to enforce a money judgment. We explain each of these considerations below.
First, the order at issue here differs significantly from the order in Brennan. There, we vacated an order directing the debtor to repatriate assets held abroad and deposit them in a court registry. Here, the applicable order is merely an asset freeze, which, unlike the order in Brennan, neither transfers ownership, nor vests control over assets in the courts, nor—given its numerous exemptions for legal, medical, educational, and other uses, as well as generous living expenses—entirely deprives the Relief Defendants of their use. To be sure, the asset freeze order entered by the District Court does temporarily burden the use of certain assets. It does not, however, rise to the level of impermissible enforcement of a money judgment. Unlike the repatriation and deposit order in Brennan, the asset freeze seeks not to modify or transfer assets in any way, but rather, merely to “preserve the status quo in anticipation of a final 19 judgment.”44 We regarded as “a close one” the question of whether Brennan’s substantially more burdensome repatriation and deposit order constituted enforcement of a money judgment.45 The significantly less onerous asset freeze at issue here falls on the other side of the line. Relief Defendants attempt to characterize the freeze as an impermissible “step []preparatory to money collection” that is functionally equivalent to Brennan’s repatriation and registry deposit order.46 The argument is strained and unpersuasive. By that logic, many or most aspects of statutorily unstayed governmental unit actions could be characterized as “steps preparatory to money collection,” so long as the initial complaint sought monetary relief. We decline to adopt the interpretation of the exception urged by Relief Defendants, which would effectively swallow the rule.
As the District Court noted, the procedural posture of this case also significantly differs from that of Brennan. There, the repatriation and deposit order arose as part of the SEC’s post‐ 44 Id. 45 Brennan, 230 F.3d at 71. 46 Defs.’ Br. at 15‐16. 20 judgment collection procedures.47 Here, the November 2014 asset freeze order was imposed before the entry of final judgment on February 26, 2015 as to the Wyly Brothers.48 In Brennan, we instructed that “the line between [unstayed] police or regulatory power on the one hand, and [stayed] enforcement of a money judgment on the other, [must] be drawn at entry of judgment.”49 In other words, “up to the moment when liability is definitively fixed by entry of judgment, the government is acting in its police or regulatory capacity. . . . However, once liability is fixed and a money judgment has been entered, the government necessarily acts only to vindicate its own interest in collecting its judgment.”50 The pre‐judgment asset freeze at issue here thus does not implicate the same concerns as did the post‐judgment repatriation and deposit order in Brennan. Moreover, the SEC persuasively The repatriation and deposit order was issued after the SEC moved for 47 an ex parte order to show cause as to why Brennan should not be held in civil contempt for failing to comply with the disgorgement order. On July 7, 2015, the District Court denied the Wylys’ motion for 48 judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b), or, in the alternative, for a new trial pursuant to Federal Rule of Civil Procedure 59. On September 4, 2015, the Wylys filed a notice of appeal as to the February 26, 2015 final judgment and the July 7, 2015 order denying their Rule 50(b) and Rule 59 motions. 49 230 F.3d at 72 (internal quotation marks and alteration omitted). 50 Id. at 73. 21 argues that the relevant judgment is not the one entered in February 2015 against the Wyly Brothers, but rather, the judgment which has yet to be entered against the Relief Defendants, who only answered the complaint against them in April 2015. Even if the February 2015 judgment against the Wyly Brothers were the operative judgment, however, the later‐occurring entry of final judgment alone does not operate to transform a permissible pre‐judgment asset freeze into an impermissible post‐judgment enforcement act. We did not intend in Brennan to impose a one‐ factor timing test whereby orders entered pre‐judgment are always exempt from the automatic stay provision while orders entered (or with continuing force) post‐judgment are always subject to the stay. As the Relief Defendants note, such a simplistic standard could permit procedural end‐runs that would defeat the spirit and purpose of the statute, whereby any manner of incursion would be permitted so long as it technically predated the entry of a final judgment. To be sure, the timing of the order’s entry constitutes a crucial factor in our analysis, but it is not invariably dispositive.51 We note that the timing here neatly exemplifies the distinction between 51 the asset freeze order in this case and the repatriation and deposit order that violated the automatic stay in Brennan. Asset freeze orders like the one entered here are routinely issued pre‐judgment in actions for equitable remedies, well before damages have been fixed or a money judgment entered. See, e.g., Gucci Am., Inc. v. Weixing Li, 768 F.3d 122, 131 (2d Cir. 2014) (noting that district courts have equitable power to issue a pre‐judgment asset freeze where such relief was traditionally available). By contrast, repatriation and deposit orders, like the one 22 Consistent with the statutory imperative, our focus remains whether a given order constitutes “enforcement of a judgment other than a money judgment.”52 Here, the asset freeze did not enforce a money judgment because, as of the date of issuance of the freeze order, no judgment had yet been entered.
Finally, the policy concerns underlying the disposition in Brennan weigh in favor of a different outcome here. In Brennan, we concluded that “the policies behind § 362 as a whole weigh strongly in favor of applying the automatic stay in these circumstances.”53 We cited two specific policies: (1) the general purpose of the automatic stay “to allow the bankruptcy court to centralize all disputes concerning property of the debtor’s estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas,”54 and (2) the general purpose of the governmental unit exception “to prevent a debtor from ‘frustrating necessary governmental functions by seeking refuge in bankruptcy court.’”55 vacated in Brennan, are typically reserved for post‐judgment collection proceedings. 52 11 U.S.C. § 362(b)(4). 53 230 F.3d at 75. 54 Id. (quoting In re United States Lines, Inc., 197 F.3d at 640). 55 Id. (quoting Exxon Corp., 932 F.2d at 1024). 23 In this case, the asset freeze order does not jeopardize either of these policy objectives; on the contrary, it complements both. In Brennan, the SEC had tried and failed to obtain from the Bankruptcy Court a repatriation order for the offshore trusts. Only after that failure did the SEC seek in the district court precisely the same relief that the Bankruptcy Court had previously rejected. Thus, the specter of forum‐shopping and inefficient, uncoordinated proceedings loomed large in our analysis of the policy concerns presented in Brennan. Not so here. No conflict exists between the proceedings in the District Court and those in the Bankruptcy Court. This asset freeze order is narrowly framed to exclude assets in the bankruptcy proceeding and to be lifted as soon as the assets are clearly under the control of the Bankruptcy Court. Indeed, the Bankruptcy Court itself endorsed the freeze as “neatly avoiding duplication of judicial effort between the SEC Action and these bankruptcy cases.”56 What is more, the Bankruptcy Court determined that enforcing the automatic stay “may ultimately accomplish little” since the SEC would likely seek relief from the stay to proceed against the Relief Defendants in its enforcement action.57 Though it stopped short of deciding such a hypothetical motion, the Bankruptcy Court strongly indicated its own inclination to avoid extending the automatic stay to cover this case: “From the standpoint of judicial economy, it 56 In re Wyly, 526 B.R. at 196 n.4. 57 Id. at 202. 24 likely would make the most sense for the District Court, in one coordinated proceeding, to liquidate the amount of alleged ill‐gotten gains of the securities fraud that all relief defendants allegedly received and still possess.”58 Under these circumstances, the entry of the asset freeze order here does not contravene the first policy of “centraliz[ing] all disputes concerning property of the debtor’s estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas.”59 Moreover, the asset freeze order is fully consistent with the second policy of “prevent[ing] a debtor from frustrating necessary governmental functions by seeking refuge in bankruptcy court.”60 The Wylys initiated bankruptcy proceedings and invoked the automatic stay mere days after the SEC filed its then‐pending motion for an asset freeze. The timing speaks loudly for itself. Finally, there is reason to doubt the Relief Defendants’ representation that the District Court’s involvement is unnecessary because “the frozen assets are property of the bankruptcy estates [of the Wyly Brothers] . . . [and therefore] are under the exclusive jurisdiction of the Bankruptcy Court.”61 In their bankruptcy 58 Id. 59 Brennan, 230 F.3d at 75 (quoting In re United States Lines, Inc., 197 F.3d at 640). 60 Id. (quoting Exxon Corp., 932 F.2d at 1024). 61 Defs.’ Br. at 13‐14. 25 proceedings, Samuel and Caroline Wyly have refused to take a position on whether they own the IOM trust assets, leaving in doubt whether they fall within the bankruptcy court’s jurisdiction.62 Further, the Bankruptcy Court may not be able to address dissipation of offshore assets by third parties, which some evidence suggests may be already underway.63 Notwithstanding the ongoing bankruptcy proceedings, there is a clear need for the independent asset freeze to preserve the status quo. In light of the legal, factual, procedural, and policy concerns at issue here, we conclude that the asset freeze order is consistent with the Bankruptcy Code’s automatic stay provision and our governing precedent in Brennan.