Rimsat, Ltd., Matter of

• Decision Date: 21 November 1996
• Docket Number: Nos. 95-3916,96-1212 and 96-1505,s. 95-3916
• Citation: 98 F.3d 956
• Parties: In the Matter of: RIMSAT, LTD., Debtor. Paul E. UNDERWOOD, Trustee, Plaintiff-Appellee, v. Carl B. HILLIARD, Jr., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 956

98 F.3d 956

29 Bankr.Ct.Dec. 1137

In the Matter of: RIMSAT, LTD., Debtor.

Paul E. UNDERWOOD, Trustee, Plaintiff-Appellee, v. Carl B. HILLIARD, Jr., Defendant-Appellant.

Nos. 95-3916, 96-1212 and 96-1505.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 3, 1996.

Decided Oct. 17, 1996.

Rehearing and Suggestion for Rehearing En Banc Denied Nov. 21, 1996.

Robert M. Beckman (argued), Bode & Beckman, Washington, DC, Jack E. Roebel, Roebel & Associates, Fort Wayne, IN, for Carl B. Hilliard, Jr. in Nos. 95-3916, 96-1212.

Mark A. Warsco (argued), James T. Young, Warsco, Brogan & Strunk, Fort Wayne, IN, for Paul E. Underwood.

Alexander L. Edgar, United State Department of Justice, Ellen Triebold, Office of the United States Trustee, South Bend, IN, for Trustee.

Robert M. Beckman (argued), Bode & Beckman, David M. Kirstein, Beckman & Kirstein, Washington, DC, Jack E. Roebel, Roebel & Associates, Fort Wayne, IN, for Carl B. Hilliard, Jr., in No. 96-1505.

Before POSNER, Chief Judge, and FLAUM and EASTERBROOK, Circuit Judges.

POSNER, Chief Judge.

Paul Underwood, trustee in bankruptcy of Rimsat, Ltd., brought an adversary proceeding in bankruptcy against Carl Hilliard, who appeals from three orders entered in that proceeding. Rimsat had been formed in 1992 to provide satellite communications (using Russian equipment) to Tonga and other islands in the South Pacific. Most of its investors are Malaysian. It was incorporated in the Federation of St. Christopher and Nevis (also known as the Federation of Saint Kitts and Nevis), a Caribbean nation that belongs to the British Commonwealth. (Horatio Nelson, later Admiral Lord Nelson, was married in Nevis.) Its principal place of business is in Fort Wayne, Indiana. Most of its financial assets are there, but its nonfinancial assets, principally leaseholds in satellites, have no terrestrial site.

Rimsat quickly became troubled; and Hilliard, a director and shareholder, began squabbling with the managing director over control of the corporation. In December 1994 Hilliard obtained from the High Court of Nevis an injunction against Rimsat's declaring bankruptcy or continuing to prosecute a suit that it had brought against Hilliard in the United States, and against the managing director's usurping the powers of the board of directors. On January 20, 1995, Hilliard obtained a further order from that court appointing him receiver with full powers to manage Rimsat. Two weeks later several creditors of Rimsat petitioned the corporation into Chapter 11 in the federal bankruptcy court in Fort Wayne. A trustee in bankruptcy was appointed and we are told that he and Hilliard cooperated in formulating a plan for the reorganization of Rimsat. But later the trustee resigned under pressure from the creditors, and a successor trustee, Underwood, was appointed who instituted the adversary proceeding in which the challenged orders were entered. In June 1995, at the trustee's urging, the bankruptcy court enjoined Hilliard from exercising control over property of Rimsat or otherwise interfering with the bankruptcy proceeding. This injunction (as affirmed by the district court) is the first order that Hilliard challenges. The second is a further injunction, issued several months later, commanding Hilliard to turn over all property of Rimsat in his control to the trustee and to file an accounting of that property with the bankruptcy court. The third is an order that Hilliard pay, as a civil contempt sanction for disobeying the second order, $1,000 a day until he complies with it. We were told at argument that he complied this past June, but he has not yet paid the fine, some $180,000, which had accrued to that date. Meanwhile the bankruptcy proceeding is continuing, and we are told that one of Rimsat's major creditors has submitted a plan of reorganization that is now under consideration by the bankruptcy court.

The basis of the first two orders that Hilliard challenges is that the Bankruptcy Code vests control over the assets and business of the debtor in the trustee in bankruptcy (if a trustee is appointed), 11 U.S.C. § 323(a), and that as a receiver Hilliard was a custodian of Rimsat's assets, § 101(11)(A), and therefore obligated by section 543(b) of the Bankruptcy Code to deliver any of the debtor's assets that were under his control to the trustee and to file with the bankruptcy court an accounting of those assets. Hilliard objects to these orders on the principal ground that the bankruptcy court should have suspended or dismissed all proceedings before it in deference to his receivership; if that had been done the orders would not have been issued, or if issued before the suspension or dismissal of the bankruptcy proceeding would have been rescinded. The Bankruptcy Code authorizes, though it does not (as Hilliard seems to believe) command, such dismissal or suspension if "there is pending a foreign proceeding." § 305(a)(2)(A). This is defined as a proceeding "in a foreign country in which the debtor's domicile, residence, principal place of business, or principal assets were located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization." § 101(23). Rimsat's domicile is in Nevis, because a corporation's domicile is the state of incorporation. Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519, 588, 10 L.Ed. 274 (1839); Restatement (Third) of the Foreign Relations Law of the United States § 213 (1987); 1 Collier on Bankruptcy p 3.02[b][ii] (Lawrence P. King ed., 15th ed. 1996).

When a motion to dismiss the bankruptcy proceeding on the ground that the receivership created by the High Court of Nevis was "for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization" was first made (by an ally of Hilliard's), the bankruptcy judge denied it. His ground was that, so far as he could make out, the receivership was a device by which Hilliard had wrested control of Rimsat away from the corporation's managing director, rather than anything in the nature of an insolvency proceeding. In other words, it was not an equity receivership, the kind of thing to which the definition of "foreign proceeding" that we have quoted points; it was merely an operating receivership. Because it was not an equity receivership, the adversary proceeding did not run afoul of Barton v. Barbour, 104 U.S. 126, 128-29, 26 L.Ed. 672 (1881), which held that a suit against an equity receiver could not be maintained without the permission of the court that had appointed him. The purpose of that ruling (we need not decide to what extent it has been supplanted by subsequent bankruptcy statutes) was to prevent creditors from circumventing the receivership proceeding by suing the receiver in a different court. The plaintiff in the present adversary proceeding is the trustee in bankruptcy, not a creditor seeking to go around the trustee. And the defendant was not at the time of the challenged ruling an equity receiver but merely someone whose actions were making it difficult for the trustee to do his job.

Shortly after the denial of the motion to dismiss, Hilliard went back to the High Court of Nevis and obtained an order adding to the receiver's original duties (or perhaps only making explicit, though Hilliard doesn't argue this) the duty of paying, adjusting, and if necessary discharging the debts of Rimsat. Hilliard then renewed the motion in bankruptcy court to dismiss the bankruptcy proceeding, citing the ruling by the Nevis court. Maybe "renewed" is not quite the right word. He urged dismissal in the adversary proceeding brought by the trustee rather than in the underlying bankruptcy proceeding. No matter. You can defend against an adversary proceeding on grounds that, if valid, knock out the whole proceeding and not just the claim against yourself. See, e.g., In re Cash Currency Exchange, Inc., 762 F.2d 542, 544-45 (7th Cir.1985). It is commonplace, in bankruptcy adversary proceedings as in other kinds of case, to make arguments that if accepted have potentially catastrophic implications for litigants in related proceedings. For an example from bankruptcy, see In re MacFarlane Webster Associates, 121 B.R. 694 (Bankr.S.D.N.Y.1990).

Hilliard's effort to vacate the denial of the motion to dismiss by invoking the "foreign proceeding" provision of the Code must fail for a variety of independent reasons. By going back to the Nevis court for an order enlarging his powers over the assets of the debtor he violated the automatic stay of proceedings relating to the debtor's estate that went into effect when the bankruptcy petition was filed. 11 U.S.C. § 362. Although the primary use of the automatic stay is to prevent the debtor's estate from being picked to pieces by creditors, e.g., Martin-Trigona v. Champion Federal Savings & Loan Ass'n, 892 F.2d 575, 577 (7th Cir.1989), the stay is not limited to that use. Its use here is consistent with both the statutory language, see §§ 362(a)(1) and (a)(3), and the statutory purpose of preventing a " 'chaotic and uncontrolled scramble for the debtor's assets in a variety of uncoordinated proceedings in different courts.' " In re Holtkamp, 669 F.2d 505, 508 (7th Cir.1982); see also In re Falls Bldg., Ltd., 94 B.R. 471, 480-81 (Bankr.E.D.Tenn.1988). Unlike a creditor's action, Hilliard's recourse to the Nevis court did not threaten to deplete the estate directly. But it did imperil the orderly administration of the bankruptcy proceeding, and by doing so it posed an indirect threat to the estate. Compare Rett White Motor Sales Co. v. Wells Fargo Bank, 99 B.R. 12, 14-15 (N.D.Cal.1989).

The fact that the stay affected proceedings in a foreign country would be relevant to a motion to lift the automatic stay (§ 362(d)), had one been made (none was). The movant could argue for relief from the stay...