September 19, 2022Client Alert

Federal Court of Appeals Explains Jurisdictional Requirements Over Foreign Lenders in Bankruptcy Cases

Bankruptcy law has its own set of rules.  When a company files for Chapter 11 reorganization under the Bankruptcy Code, the filing triggers an automatic stay that prohibits any attempts by creditors to exercise control over any property of the bankruptcy estate; the bankruptcy court then has jurisdiction over all property of the estate, which includes all property “wherever located and by whomever held.”  See 11 U.S.C. §541(a); 28 U.S.C. §1334(e)(1).  As a recent Seventh Circuit Court of Appeals case demonstrates however, in cases of foreign-held assets, the bankruptcy court must also have personal jurisdiction over a foreign lender for the automatic stay to apply to foreclosure proceedings in a foreign country.  Sheehan v. Breccia Unlimited Company, et al., Case No. 21-2954 (7th Cir. Sept. 7, 2022).

As background, a debtor, Sheehan, lives in Illinois.  Beginning in 2006, he borrowed money from an Irish bank to buy an interest in an Irish medical company and real estate in Ireland. He pledged the equity to secure the loans and the lender took a mortgage on the real estate. In 2010, Sheehan defaulted on the loans.

Breccia Unlimited Company also owned an equity interest in the medical business and, when Sheehan defaulted, it bought Sheehan’s loans from the original lender, then foreclosed on the collateral.  Breccia is based in Dublin, so it sued in Ireland to collect on the loans.  An Irish Appellate Court ruled in Breccia’s favor and authorized it to appoint a receiver to take possession of Sheehan’s equity interest and real estate.  

In response, Sheehan filed a petition for Chapter 11 reorganization in the Bankruptcy Court for the Northern District of Illinois.  He then invoked the automatic stay provisions of Chapter 11 and filed an adversary claim (a separate lawsuit within the bankruptcy proceeding), in an attempt to halt the receivership proceedings in Ireland.  The bankruptcy court, affirmed by the federal district court, held, in part, that the bankruptcy court lacked personal jurisdiction over the Irish defendants because none of them conducted any activity related to the adversary claims in the United States.  The Seventh Circuit affirmed.

Although bankruptcy proceedings operate under the bankruptcy code, bankruptcy courts are still subject to constitutional standards.  Due process requires that out-of-forum defendants must have “certain minimum contacts with [the forum] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”  Int’l. Shoe Co. v. Washington Office of Unemployment Comp. & Placement, 326 U.S. 310, 316 (1945).  A bankruptcy court has in rem jurisdiction over all the property in the bankruptcy estate, including real estate located in a foreign country or shares of stock of foreign corporations.  Although the filing of a bankruptcy petition triggers the automatic stay prohibiting attempts to exercise control over property of the state, prohibitions on attempts by creditors to reach such property, however, cannot be enforced if a court does not have personal jurisdiction over the party holding the property.  Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 448 (2004) (“because the court’s jurisdiction is premised on the res, however, a non-participating creditor cannot be subject to personal liability”).  

For more information on this case, or to discuss bankruptcy matters in general, contact your Michael Best attorney or John D. Finerty, Jr. at 414-225-8269.

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