(CN) – Creditors who say they were defrauded in a $225 million Ponzi scheme run by affiliates of Wextrust Capital cannot file involuntary bankruptcy actions against the defendants, the 2nd Circuit ruled, refusing to lift an anti-litigation injunction contained in a 2008 receivership order.
After uncovering the scheme, which allegedly involved hundreds of Wextrust affiliates in the United States, Middle East and Africa, the Securities and Exchange Commission obtained a temporary restraining order freezing the companies’ assets and appointing a temporary receiver. The order included an anti-litigation element that barred “non-parties from filing involuntary bankruptcy proceedings against defendants.”
A group of Wextrust creditors wanted the anti-litigation order be lifted, arguing that such injunctions cannot apply to bankruptcy petitions because the ability to file a bankruptcy petition is a right guaranteed by the Bankruptcy Act.
The district court refused to lift the injunction, but modified the order to allow non-parties to file an involuntary bankruptcy petition after showing that such a petition is “appropriate and would benefit the receivership estate; and allow the bankruptcy court to decide, in the first instance, any challenge to the receiver continuing to serve serving as debtor in possession.”
The committees appealed, but the Manhattan-based appellate panel agreed with the lower court, finding the 2nd Circuit had previously ruled that debtors do not have an “absolute right” to file a bankruptcy petition.
“Simply put, there is no unwaivable right to file an involuntary bankruptcy petition, and, even if there were, the receivership accomplishes what a bankruptcy would,” Judge Rosemary Pooler wrote. “The receivership protects the assets of the estate, just as a stay would in bankruptcy. An anti-litigation injunction is simply one of the tools available to courts to help further the goals of the receivership. While such injunctions are to be used sparingly, there are situations in which they are entirely appropriate.,” she wrote.