The expansive reach of the automatic stay imposed pursuant to Section 362 of the Bankruptcy Code – aimed at prohibiting actions against a debtor or its assets by any party – is often said to be global. Practically, however, its impact is limited to the extent that the bankruptcy court does not have personal jurisdiction over the entity purportedly violating the stay. This limit was recently highlighted in a ruling in the chapter 11 proceedings of Avianca Holdings S.A.,1 which may be relevant in future multinational restructurings.
On July 14, 2020, the Avianca debtors sought a declaration that the automatic stay was violated as well as a temporary restraining order and injunction against an Ecuadorian vendor (the “Foreign Vendor”) and its Florida-based parent (the “U.S. Parent”) enjoining the Foreign Vendor’s attempts to collect on unpaid service contracts, including through the institution of local Ecuadorian mediation proceedings, threats of formal litigation, and taking steps to attach the debtors’ bank accounts in Ecuador. The Debtors argued that the Foreign Vendor’s conduct was a violation of the automatic stay and the requested relief was necessary to avoid further disruption of “a key component of the Debtors’ early stage restructuring efforts.”
On July 17, Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York denied the debtors’ injunction request based on a lack of personal jurisdiction. Personal jurisdiction – the court’s authority over a “person” (an individual or corporate entity) that enables the court to order that entity to appear and comply with its orders – requires that a foreign defendant have certain contacts with the jurisdiction (i.e., location) such that the court’s exercise of authority is fair and reasonable.2 The decision signals that the debtors’ complaint – which alleged that the U.S. Parent “indirectly owns and controls” the Foreign Vendor – was insufficient to demonstrate that the Foreign Vendor had purposefully availed itself of the requisite minimum contacts with the United States to establish personal jurisdiction. Moreover, Judge Glenn noted the dearth of allegations that the U.S. Parent played any role in the alleged stay violation. Instead, the bankruptcy judge suggested that debtors would need to show that the U.S. Parent was somehow responsible for the Foreign Vendor’s course of conduct, such as by engaging in communication that could be seen as encouraging a violation of the automatic stay.
This decision highlights limitations on the enforceability of the automatic stay, which is generally very broad and infrequently challenged. Given the global nature of today’s economy, most market participants will have some nexus to the U.S., and thus will likely be subject to the personal jurisdiction of a U.S. bankruptcy court. These entities are well advised not to violate the automatic stay, as the consequences can be significant. However, to the extent an entity has no connections to the U.S., this decision affirms that they may be outside of the practical reach of the automatic stay. Specifically, the decision makes clear that the mere allegation that a foreign creditor is owned by a U.S. company is not enough to support a finding of personal jurisdiction over foreign entities. As such, those alleging violations of the automatic stay by foreign actors must ensure that they address the particular nexus between the foreign entity and the United States such that the court finds its exercise of personal jurisdiction is proper.
The COVID-19 pandemic has left many international corporations struggling, including airlines and cruise lines which have significant foreign operations and creditors. To the extent that such entities seek to utilize the chapter 11 process, personal jurisdiction issues could arise. Seward & Kissel’s Corporate Restructuring & Bankruptcy Group will continue to monitor developments in this space. If you have questions related to any distressed scenario or the reach of the automatic stay, please don’t hesitate to reach out to the attorneys listed below, or your primary contact at S&K.