SEC v. Byers (Injunction Against Bankruptcy Filing/Stay of Proceeding Against Receivership Entities)

Re: Injunction Against Bankruptcy Filing/Stay of Proceeding Against Receivership Entities

In the matter of SEC v. Byers, 2008 WL 5236644 (S.D.NY 2008), the Court addressed a motion by a group of creditors to modify certain language included in the order appointing a receiver for entities involved in a Ponzi scheme, which barred third parties from filing lawsuits and filing bankruptcy petitions against the receivership entities. Byers, 2008 WL 5236644 * 1.

The Court ruled that it had the authority to enjoin non-parties from filing an involuntary bankruptcy petition. However, the Court modified the appointment order to provide that a party could petition the Court to file an involuntary bankruptcy petition if it could show that the bankruptcy would be in the best interest of the receivership. The Court also upheld language in the receivership order that allowed the receiver to place the receivership entities in Chapter 11 bankruptcy and remain in control of the assets as a debtor-in-possession. In such case, the Court determined that the matter would be transferred to the Bankruptcy Court.

The Court also concluded it had authority to enter a stay of litigation in the receivership matter based on it’s jurisdiction over the receivership property. Id. citing SEC v. Wencke, 622 F.2d 1363, 1365 (9th Cir. 1980), Liberte Capital Group, LLC v. Capwill, 462 F.3d 543,552 (6th Cir. 2006). The Court considered the three “Wencke II” factors to determine whether the Court ought to lift the stay imposed to allow litigation against the receivership entities. The Wencke factors are:

“(1) whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the moving party’s underlying claim.”

Byers, supra at * 3 citing SEC v. Wencke, 742 F.2d 1230, 1231 (9th Cir. 1984) (“Wencke II”). As to the first factor, the Court ruled that maintaining the stay preserved the status quo as it preserved the interests of the creditor body as a whole, and not just the interests of the Movants. Byers, supra at * 3. As to the second factor, the Court determined that since the case had only just begun it was not appropriate to lift the stay. Id. at *4. As to the third factor, the Court admitted it did not have sufficient information to determine the merits of the Movant’s claims, but the “other two Wencke factors weigh heavily against lifting the injunction.” Id.

– Phillip S. Stenger