Securities and Exchange Comm'n v. Brennan

• Decision Date: 01 August 1999
• Docket Number: Docket No. 00-6128
• Citation: 230 F.3d 65
• Parties: (2nd Cir. 2000) SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. ROBERT E. BRENNAN, Defendant-Appellant
• Court: U.S. Court of Appeals — Second Circuit

Page 65

230 F.3d 65 (2nd Cir. 2000)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. ROBERT E. BRENNAN, Defendant-Appellant.

Docket No. 00-6128

August Term, 1999

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: August 9, 2000

Decided: October 26, 2000

Appeal from an order of the United States District Court for the Southern District of New York (Richard Owen, Judge), requiring defendant, a debtor in bankruptcy, to repatriate the assets of an offshore asset protection trust and deposit those assets in the registry of the Court. On appeal, defendant argues, inter alia, that the order violates 11 U.S.C. §362(a), the automatic stay provision of the Bankruptcy Code. We agree.

Vacated.

[Copyrighted Material Omitted] MARTIN L. PERSCHETZ (Alan R. Glickman and Adam J. Freedman, on the brief), Schulte Roth & Zabel LLP, New York, NY, for Defendant-Appellant.

MARK PENNINGTON, Assistant General Counsel (David M. Becker, General Counsel; Jacob H. Stillman, Solicitor; Christopher Paik, Special Counsel; and Meyer Eisenberg, Deputy General Counsel, on the brief), Securities and Exchange Commission, Washington, D.C., for Plaintiff-Appellee.

Before: CALABRESI, CABRANES, and POOLER, Circuit Judges.

Judge Calabresi dissents in a separate opinion.

JOSE A. CABRANES, Circuit Judge:

This appeal requires us to interpret the automatic stay provision of the Bankruptcy Code, an exception to that provision, and an exception to that exception. Specifically, the question presented, as a matter of first impression, is whether an order obtained by the Securities and Exchange Commission (the "SEC") from the United States District Court for the Southern District of New York (Richard Owen, Judge), requiring defendant Robert E. Brennan, a debtor in bankruptcy, to repatriate the assets of an offshore asset protection trust violates the automatic stay provision. The SEC argues that the order fits within an exception to the automatic stay provision for any "action or proceeding by a governmental unit ... to enforce such governmental unit's ... police and regulatory power." 11 U.S.C. §362(b)(4). Brennan contends that the order violates the automatic stay provision because it fits within an exception to this "governmental unit" exception for any effort to enforce a money judgment. For the reasons stated below, we conclude that the order of the District Court must be vacated.

I.

In 1985, the SEC began an action in the District Court against Brennan and First Jersey Securities, Inc. ("First Jersey"), a discount broker-dealer run by Brennan specializing in the underwriting, trading, and distribution of low-priced securities. The SEC alleged that First Jersey, at Brennan's direction, had defrauded its customers by inducing them to buy certain securities at excessive prices unrelated to prevailing market prices, with the result that First Jersey and Brennan gained more than $27 million in illegal profits. In July 1995, following a 41-day bench trial held the previous year, Judge Owen entered judgment in the SEC's favor (the "July 1995 Judgment"), finding that Brennan and First Jersey had perpetrated a "massive and continuing fraud" on their customers in violation of the federal securities law and ordering them, inter alia, jointly and severally to disgorge approximately $75 million in ill-gotten gains and prejudgment interest. SEC v. First Jersey Sec., Inc., 890 F. Supp. 1185, 1195, 1213 (S.D.N.Y. 1995), aff'd in part rev'd in part, 101 F.3d 1450 (2d Cir. 1996), cert. denied, 522 U.S. 812 (1997). On August 7, 1995, Brennan filed a petition for Chapter 11 bankruptcy protection.

Some time during the 1994 trial, before the July 1995 Judgment was entered against Brennan and before he filed for bankruptcy protection, Brennan established an offshore asset protection trust in Gibraltar, called the Cardinal Trust, and funded the trust with $5 million in municipal securities.¹ Brennan's three adult sons and the "Robert E. Brennan Foundation, Inc." are the beneficiaries of the Cardinal Trust. Nevertheless, the trust terms provide that the trustee has no obligation to make payments to these beneficiaries during the life of the trust. Moreover, under the terms of the trust, the principal and accumulated interest revert to Brennan after ten years (or at some point thereafter as established by the trustee). Notwithstanding this reversionary interest, Brennan did not list the Cardinal Trust as property of his estate in his original bankruptcy petition. After law enforcement authorities discovered the existence of the trust, Brennan amended his petition to include the trust, but he valued his interest at $0.

The SEC alleges that, notwithstanding Brennan's bankruptcy and the appointment of a bankruptcy trustee in June 1997, Brennan has exercised, and continues to exercise, control over the Cardinal Trust. Specifically, it contends that Brennan has used the trust to support "a lavish, globetrotting lifestyle" and that he has directed efforts to keep the trust out of his creditors' reach. The SEC notes, in particular, that since entry of the July 1995 Judgment and Brennan's filing for bankruptcy, the Cardinal Trust has been relocated twice, first from Gibraltar to Mauritius and then from Mauritius to Nevis. According to the SEC, these moves were prompted by a provision in the trust indenture called a "flight clause," which requires the trustee to relocate the trust upon occurrence of an "event of duress," including government action in any part of the world that attempts to take control of the trust assets or "any order, decree or judgment of any court ... which will or may ... in any way control, restrict or prevent the free disposal" of trust property.

Since 1998, several efforts have been made to require Brennan to repatriate the assets of the Cardinal Trust. First, in May 1998, with the support of the SEC, the bankruptcy trustee moved in the United States Bankruptcy Court for the District of New Jersey (Kathryn C. Ferguson, Bankruptcy Judge) for an order requiring repatriation. On June 5, 1998, the Bankruptcy Court denied the application, but entered an order-on Brennan's consent-enjoining Brennan from any action that might cause the transfer of assets of the Cardinal Trust. Second, the bankruptcy trustee commenced an action in the High Court of St. Kitts and Nevis, then (and apparently now) the situs of the Cardinal Trust, seeking to recover the trust assets. On July 28, 1999, the High Court dismissed the action for failure to state a claim under Nevis law. Finally, in April 2000, following a deposition of Brennan taken in this action pursuant to Rule 69(a) of the Federal Rules of Civil Procedure, in which Brennan repeatedly invoked the Fifth Amendment to avoid answering questions about his relationship to the trust, the SEC moved before the District Court for an ex parte order to show cause why Brennan should not be held "in civil contempt of the [July 1995] disgorgement judgment" and for certain "ancillary relief," including repatriation of the Cardinal Trust.

In its motion papers, the SEC argued that relief was warranted for the following reasons:

Although the United States Bankruptcy Court ... has held that the [July 1995] judgment rendered by this Court may not be discharged in Brennan's bankruptcy, Brennan has not complied with the judgment, and has asserted the Fifth Amendment in response to all questions about his intent and ability to pay any part of it. Both in anticipation of the judgment, and after its entry, he has transferred funds offshore and dissipated assets, and is now living a lavish lifestyle while refusing to disclose how he is financing it.

At the same time, the SEC asserted that it "is not seeking to collect the judgment now. Rather, it is seeking information and the return of assets transferred by Brennan so as to preserve them for the benefit of all potential claimants." During an ex parte hearing held on the record before the District Court, counsel for the SEC reiterated this assertion, stating that the SEC was seeking "to have all of the assets preserved to the extent possible so they don't go moving around the world again. We are not interested in collecting ourselves. Your Honor, ... we may only be entitled to a pro rata share of this."

After hearing the SEC's application, the District Court entered an order on April 7, 2000 (the "April 7, 2000 Order") requiring Brennan to appear on April 20, 2000 to show cause why he should not be held in contempt of the July 1995 Judgment (the "Contempt Order") and directing him, inter alia, to repatriate the assets of the Cardinal Trust and deposit those assets in the Court registry no later than April 18, 2000 (the "Repatriation Order").² The day before the deadline for repatriation of the trust, Brennan filed a notice of appeal from the Repatriation Order and moved for a stay pending appeal. The District Court denied the stay, but granted an interim stay until April 24, 2000 to allow Brennan to seek relief in this Court. Thereafter, in the course of proceedings before the District Court and this Court, the date for compliance with the Repatriation Order was extended to July 25, 2000, and the date of the hearing on the Contempt Order was adjourned to August 16, 2000. Following oral argument on August 9, 2000, during which counsel for Brennan represented that Brennan was in the process of arranging for repatriation of the Cardinal Trust, we filed an order nostra sponte staying all proceedings then pending before the District Court, including the hearing on the Contempt Order, as well as that portion of the District Court's April 7, 2000 order requiring repatriation of the trust. See post n.6.

II.

On appeal, Brennan challenges the April 7, 2000 Order of the District Court only insofar as it requires him to repatriate the assets of the Cardinal Trust and place those assets in the Court registry. Brennan contends that this aspect of the April 7, 2000 Order,...