Limiting Creditors Rights SECs Authority to Prevent Involuntary Bankruptcy Petitions in SEC v. Byers

By: Mark Sicari
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In S.E.C. v. Byers[1], the Second Circuit determined that the district court had the equitable authority to enter an anti-litigation injunction that prohibited creditors from filing an involuntary bankruptcy petition against a debtor that is in an SEC receivership.[2] Responding to a $250 million Ponzi scheme perpetrated by the debtor companies, the SEC requested immediate injunctive relief from the district court.[3] The court appointed a receiver and entered an anti-litigation injunction.[4] Specifically, the injunction prevented creditors from filing an involuntary bankruptcy petition.[5] The Second Circuit affirmed the injunction, explaining that the district court’s equitable powers enabled it to keep the receivership assets out of bankruptcy.[6]

In reaching this conclusion, the Second Circuit modified its previous position regarding anti-litigation injunctions.[7] Previously, the SEC receivership could only enjoin a bankruptcy proceeding until (1) the SEC receiver gained control over the wrongdoer’s assets and (2) the court established the need for liquidation.[8] Once the district court determined that liquidation was necessary, bankruptcy was assumed to be the appropriate forum. [9] Also, the Second Circuit previously held that receiverships must yield to bankruptcy filings, except in the unusual circumstance where the receivership was already liquidating the debtor. [10] 

The Byers court, however, departed from the principle that bankruptcy should be preferred over federal receiverships.[11] The court relied on decisions from the Sixth and Ninth Circuits that affirmed a district court’s ability to enjoin non-parties from filing suits pertaining to assets in a receivership because of its equitable power to hold such assets.[12] Byers applied this principle of shielding receivership assets from non-party actions in the context of preventing creditors from filing involuntary bankruptcy petitions.[13] The Second Circuit relied on its previous ruling in United States v. Royal Business Funds Corp.,[14] where it determined that debtors subject to federal receiverships had no absolute right to file voluntary bankruptcy petitions.[15] Although one circuit found that such an absolute right to file bankruptcy existed under the 1898 Bankruptcy Act,[16] Royal Business Funds Corp. and Byers both found that there is no such right under the Bankruptcy Code.[17] Accordingly, Byers reasoned that the district courts have authority to enjoin involuntary petitions since no absolute right to file bankruptcy exists.[18]

Byers is significant because it has enabled the SEC to keep control of Ponzi schemes by preventing creditors from filing bankruptcy petitions once the SEC initiated a receivership. Instead of limiting anti-bankruptcy injunctions to situations where the receivership had already started to liquidate the debtor, Byers has empowered the SEC to enjoin involuntary bankruptcy proceedings as soon as a receivership is established. [19] Thus, Byers has made the creditors’ ability to file bankruptcy petitions depend entirely upon whether an SEC receivership has been filed. [20] This change in policy poses a serious threat to creditors by ultimately allowing the SEC to trump their rights to file involuntary bankruptcy petitions and choose their preferred forum for liquidation. Because bankruptcy procedures afford creditors greater protections and more certainty than equitable receiverships, many creditors would normally opt for liquidation occurring through bankruptcy.[21]  Byers, however, forced the creditors to accept the broad and uncertain relief available through equitable receiverships.


[1] 609 F.3d 87 (2d Cir. 2010). 

[2] S.E.C. v. Byers, 609 F.3d 87, 90 (2d Cir. 2010). 

[3] Id. at 90.

[4] Id.

[5] Id.at 90-91.

[6] Id. at 91–93.

[7] See S.E.C. v. Am. Bd. of Trade, Inc., 830 F.2d 431, 436–38 (2d Cir. 1987) (describing problems of district court acting as substitute for bankruptcy court); Esbitt v. Dutch-American Mercantile Corp., 335 F.2d 141, 143 (2d Cir. 1964) (warning against federal receiverships performing functions of bankruptcy court).

[8] See Am. Bd. of Trade, 830 F.2d at 436–38; SEC v. S&P National Corp., 360 F.2d 741, 750–51 (2d Cir. 1966); Lankenau v. Coggeshall & Hicks, 350 F.2d 61, 63 (2d Cir. 1965).

[9] See Am. Bd. of Trade, 830 F.2d at 436–38; S&P National Corp., 360 F.2d at 750–51; Coggeshall & Hicks, 350 F.2d at 63. 

[10] Am. Bd. of Trade, 830 F.2d at 437-38. 

[11] S.E.C. v. Byers, 609 F.3d 87, 91–93 (2d Cir. 2010).

[12] Libertie Capital Group, LLC v. Capwill, 462 F.3d 543, 551-52 (6th Cir. 2006) (regarding district court’s authority of receivership assets as including its ability to bind non-parties from filing suits against such assets); S.E.C. v. Wenke, 622 F.2d 1363, 1369 (9th Cir. 1980) (affirming district court’s authority to grant SEC injunctive relief and issue stay prohibiting non-party action against entities in receivership).

[13]  See 11 U.S.C. § 303 (2006); S.E.C. v. Byers, 609 F.3d 87, 91–92 (2d Cir. 2010). 

[14] 724 F.2d 12, 15-16 (2d Cir. 1983).

[15]  Byers, 609 F.3d at 92 (citing United States v. Royal Business Funds Corp., 724 F.2d 12, 15–16 (2d Cir. 1983)). 

[16] Bankruptcy Act of 1898§ 4, ch. 541, 30 Stat. 547 (1898), as amended by ch. 412, 36 Stat. 839 (1911) (repealed 1978); In re Yaryan Naval Stores Co., 214 F. 563, 565 (6th Cir. 1914).

[17] Byers, 609 F.3d at 92; Royal Business Funds Corp., 724 F.2d at 15–16.

[18]  S.E.C. v. Byers, 609 F.3d 87, 91–92 (2d Cir. 2010).   

[19] Id. at 91–93.

[20] Moore, supra note 17, at 50. 

[21] Esbitt v. Dutch-American Mercantile Corp., 335 F.2d 141, 143 (2d Cir. 1964); Los Angeles Trust Deed & Mortg. Co. v. S.E.C., 285 F.2d 162, 182 (2d Cir. 1960); Moore, supra note 17, at 50.