Two new legal filings emerged on April 29, 2014, in the TelexFree bankruptcy case, just days before a critical May 2 showdown in Nevada federal court. These motions involved the Securities and Exchange Commission and the company, touching on the validity of a temporary restraining order and the venue for bankruptcy proceedings. Separately, Montana issued a cease and desist order against TelexFree.
The SEC filed an objection to TelexFree's motion to invalidate parts of a temporary restraining order (TRO). TelexFree had argued that an automatic stay, triggered by its bankruptcy filing, should override the TRO issued by the SEC. The company cited what the SEC called "outdated law" in its challenge.
Government units, including the SEC, use police and regulatory powers for public interest. Congress grants these units exceptions from automatic stay provisions in the Bankruptcy Code. The SEC stated TelexFree's argument ignored this controlling statute, relying on pre-1998 language. The agency described TelexFree's claim that the TRO violates the automatic stay as "frivolous."
TelexFree also misunderstood the TRO's purpose and effect, according to the SEC. The company believed the TRO equated to an "enforcement of a money judgment." The SEC countered that no money judgment had been made in the case, invalidating this claim.
TelexFree further argued that Section 362(b)(4) of the bankruptcy code did not override the automatic stay in Chapter 11 applications. The SEC called this argument "nonsensical." Section 362(b)(4) allows government entities to use litigation to exercise police and regulatory power, which includes stopping law violations. The District Court had simply ordered TelexFree to stop soliciting investors in an ongoing securities fraud, the SEC added.
TelexFree's assertion that the bankruptcy court's jurisdiction benefited not only the company but also its creditors and the SEC was "flat out wrong," the agency stated.
TelexFree filed its own objection, this time against the SEC's motion to move the bankruptcy proceedings to Massachusetts. The company labeled the SEC's allegations "unsupported and inflammatory." TelexFree argued Nevada remained the proper venue for the bankruptcy, claiming the interest lay in preserving the company's future operations so that creditors could be repaid.