SEC v. Wyly: Judge Scheindlin Steps Back and Allows Bankruptcy Court To Function

In a brief Order issued December 2, 2014, Judge Shira Scheindlin dialed down her assertion of power in the Wyly case by allowing the Texas bankruptcy court to perform its statutory role in the bankruptcy of Charles Wyly’s widow, Caroline Wyly.  The SEC pressed its position that it was entitled to pursue the assets of Mrs. Wyly as a “relief defendant” even though she filed for bankruptcy before being added as a defendant.  Judge Scheindlin rejected that position, and also emphasized the limits of her freeze order in relation to the functions of the bankruptcy court.  A copy of her order is available here: SEC v Wyly Ruling on Motion by Caroline Wyly.

Mrs. Wyly argued that the applicability of the automatic bankruptcy stay to her was pending before the bankruptcy court, which was the appropriate venue, and that after filing her schedule of assets with that court, “the asset freeze no longer applies to the property of her bankruptcy estate.”  Judge Scheindlin agreed, over SEC objections, stating that “The Bankruptcy Court is the appropriate venue to adjudicate this question.”  She reasoned that “the asset freeze most likely no longer applies to any of Mrs. Wyly’s property, as her schedules of assets have been filed in Bankruptcy Court” and therefore “all her property is now under the Bankruptcy Court’s supervision.”

This willingness to allow the bankruptcy court to perform its statutory function is a welcome relief from earlier decisions in which Judge Scheindlin decided some of those functions should be kept within her jurisdiction.  See our earlier post here: SEC v. Wyly: Judge Scheindlin Ignores Bankruptcy Stay and 2d Circuit To Keep Wylys in Her Charge.  The rule of law survives.

Straight Arrow

December 3, 2014

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