Securities and Exchange Commission v. Miller
62 Bankr. Ct. Dec. (CRR) 2, 808 F.3d 623, 74 Collier Bankr. Cas. 2d 1274 (2015)
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Rule of Law:
A pre-judgment asset freeze by a governmental regulatory agency to preserve the status quo is not considered the "enforcement of a money judgment" under 11 U.S.C. § 362(b)(4). Therefore, it falls within the governmental unit exception and is not barred by the Bankruptcy Code's automatic stay.
Facts:
- Samuel Wyly and Charles Wyly were officers, directors, and shareholders of four publicly traded corporations.
- Beginning in the early 1990s, the Wyly Brothers transferred millions of stock options they received from these corporations into an extensive system of offshore trusts in the Isle of Man (IOM).
- For over a decade, these IOM trusts exercised the options and traded securities, generating profits of more than $550 million.
- During this period, the Wyly Brothers failed to disclose their beneficial ownership of the securities held and traded by the IOM trusts, as required by law.
- Evidence indicated that some of the proceeds from the IOM trusts were transferred to the Wyly Brothers' family members.
Procedural Posture:
- The Securities and Exchange Commission (SEC) sued Samuel and Charles Wyly in the U.S. District Court for the Southern District of New York for securities fraud.
- After a six-week trial, a jury returned a verdict finding the Wyly Brothers liable on nine claims.
- During the subsequent remedies phase, the District Court issued an opinion ordering the Wyly Brothers to disgorge approximately $300 million.
- Following the disgorgement opinion, the SEC requested a temporary asset freeze against the Wyly Brothers and their family members to prevent the dissipation of assets.
- While the SEC's request for an asset freeze was pending, Samuel Wyly and the widow of Charles Wyly filed for Chapter 11 bankruptcy protection, triggering an automatic stay.
- The SEC then filed an amended complaint naming sixteen Wyly family members as 'Relief Defendants.'
- The District Court granted the SEC’s motion and issued the temporary asset freeze order.
- Fifteen of the Relief Defendants (appellants) appealed the District Court's asset freeze order to the U.S. Court of Appeals for the Second Circuit, arguing it violated the automatic stay.
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Issue:
Does a pre-judgment asset freeze order, entered in an SEC enforcement action to preserve allegedly ill-gotten gains after the defendants have filed for bankruptcy protection, violate the Bankruptcy Code's automatic stay provision?
Opinions:
Majority - Cabranes, J.
No, the pre-judgment asset freeze order does not violate the Bankruptcy Code's automatic stay. The order falls within the 'governmental unit' exception to the automatic stay because it is a valid exercise of the SEC's police and regulatory power, not an impermissible enforcement of a money judgment. The court distinguished this case from its precedent in SEC v. Brennan based on three key considerations. First, the factual nature of the order here is a mere asset freeze to preserve the status quo, which is less burdensome than the repatriation and deposit order in Brennan. Second, the procedural posture is different; this asset freeze was entered pre-judgment, whereas the order in Brennan was post-judgment. The court emphasized that the line between regulatory action and enforcement of a money judgment is typically drawn at the entry of final judgment. Third, policy considerations support the freeze, as it was designed to cooperate with the bankruptcy court and prevent the defendants from using bankruptcy to frustrate the SEC's regulatory function, especially given the timing of their bankruptcy filing.
Analysis:
This decision clarifies the scope of the 'governmental unit' exception to the bankruptcy automatic stay, particularly in the context of SEC enforcement actions. By distinguishing its prior holding in SEC v. Brennan, the court established that pre-judgment, prophylactic measures like asset freezes are permissible regulatory actions, not prohibited collection efforts. This provides government agencies like the SEC with a critical tool to prevent the dissipation of ill-gotten gains when defendants strategically file for bankruptcy post-liability but pre-judgment. The case signals to future litigants that the timing (pre- vs. post-judgment) and nature (preserving vs. collecting) of a court order are determinative in analyzing whether the automatic stay applies to a government action.
