It is, in reality, an issue that is not much discussed by courts, but occasionally it is something that is challenged. That is who exactly owns a claim for an automatic stay violation. It is relevant for a number of different reasons. First, it is an issue of standing. Who may bring a claim and under what circumstances? Second, to whom is the violator of the automatic stay liable, and is it possible that the violator of the stay might have multiple liabilities for the same act? Third, if a claim has already been brought by another and settled, is there an issue of res judicata or collateral estopple? Fourth, is court approval required of a settlement if the cause of action is not brought by the trustee? And fifth, who is entitled to the recovery of funds if there is a settlement?
In the past the answer with most courts has unofficially been that under 11 U.S.C. § 362(k)(1) (or previously under the pre-BAPCPA rule of 11 U.S.C. § 362(h)) that each individual injured by a willful violation of the stay could maintain a separate cause of action against the one violating the stay. Also, that the cause of action did not belong to the estate in that it constituted a private cause of action or a private remedy which belong to, and could be settled by, the individual presumably injured. However, there have been some mixed exception to this rule in our Texas courts, especially in the area of Chapter 13 bankruptcies.
Although brought in the context of a Chapter 11 bankruptcy, the 5th Circuit Court of Appeals has, in a case of first impression, gone a long way in formalizing these more unofficial views expressed from the bench by the majority of our bankruptcy courts.
In St. Paul Fire & Marine Ins. Co. vs. Labuzan, the Court had to analyze these issues in order to reach the conclusion it was required to decide. In doing so, the 5th Circuit established the analysis that automatic stay violations brought under § 362(k)(1) constitute "private remedies" (meaning they can be multiple remedies for multiple parties suing over the same set of facts and circumstances) that do not belong to the bankruptcy estate (meaning the claims are not property of the bankruptcy estate) and thus the recovery or remedy belongs to the person(s) bringing those actions and not the trustee in bankruptcy.
Labuzan concerned itself with the question of whether non-corporate creditors could maintain there own cause of action against a violator of the stay in a Chapter 11 bankruptcy even when the Trustee had settled its own stay violation action with the violator for the exact same set of facts and circumstances? The conclusion of the Court was yes because the proposed cause of action brought by, in this case, a man and wife creditor did not belong to the Trustee in that the cause of action under § 362(k)(1) was not property of the bankruptcy estate.
This conclusion is worth repeating in that it is vitally important in the resolution of the issues raised in the opening paragraph of this post. Claims or causes of action, and their remedies or recoveries, brought by an individual, whether that individual is a creditor or debtor, is "NOT PROPERTY OF THE BANKRUPTCY ESTATE". (Emphasis added).
Before the decision in Labuzan, most bankruptcy judges, I think, had come to accept that money recovered pursuant to a § 362(k)(1) action does not belong to anybody but the debtor or party bringing the action, but there are few notable exceptions to this sentiment in which the bankruptcy judge believed the award constitutes property of the bankruptcy estate, requiring a Rule 9019 motion to be filed and the Court's subjective determination of whether the settlement was reasonable or a benefit to the estate. This sentiment has caused problems in that it discourages debtors, and other parties, from bringing violators of the automatic stay to account for their willful actions, it substantially increases the costs of the litigation, and it discourages settlements on reasonable terms. It also raises other issues, such as, if the claim is property of the estate, does the debtor's attorney have to get permission to represent the estate before agreeing to go forward with the litigation, whether any settlement must also benefit the unsecured creditors or the estate apart from just the aggrieved individual, or whether the trustee is a necessary party to the litigation other than for notice?
Although this decision does not fully clear up the argument in regard to a stay violation case brought under a Chapter 13, it comes close enough in my estimation, and the decision confirms what we have been stating all along. A "private cause of action" is exactly that. It does not belong to the estate. The recovery does not belong to the estate. If the estate also has a private cause of action, then the estate needs to bring its own case and seek its own recovery under 11 U.S.C. § 105.
The 5th Circuit reaches its conclusion first by citing its 1989 decision in Pettitt v. Baker, which states that § 362(k)(1) creates a "private remedy for one injured by a willful violation of the automatic stay". (Emphasis added). For years now some bankruptcy courts seem to gloss over this ruling and what it means, stating that under 11 U.S.C. § 1306 any cause of action that arises post-petition becomes property of the estate. These Courts equate the "private cause of action" to mean simply that the Debtor can prosecute the estate's cause of action, as opposed to the trustee. A detailed reading of the analysis in Labuzan would strongly suggest otherwise, however.
Although § 362(k)(1) is available to non-debtors that are "within the zone of interests", the 5th Circuit seems to agree that § 362(k)(1) does not apply to non-humans or non-persons, or the trustee, but that decision is dicta in that the Court was not necessarily requested to consider these issues. Since the issue on appeal was whether the Labuzans were asserting a § 362(k)(1) action that belonged to the bankruptcy estate the decision of the Court in this respect is of the most importance. If a § 362(k)(1) cause of action was property of the estate, according to the 5th Circuits test established in Educators Trust, the action could only be brought by the trustee. In Labuzan the Trustee had already brought such an action and the violator had settled that case with the trustee.
To the 5th Circuit, however, the reverse view of the Educators Trust test was the exact reason that § 362(k)(1) causes of action, recoveries and remedies do not belong to the bankruptcy estate. As stated in Educators Trust, "If a cause of action belongs to the estate, then the trustee has exclusive standing to assert the claim". That law is still good. Therefore, since § 362(k) grants a "private cause of action" and a "private remedy" to someone other than the trustee, then by its very nature under the Educators Trust test the cause of action cannot be property of the bankruptcy estate under § 541.
The trustee or any creditor might have standing itself to assert a claim, for the same facts and the same event, for a willful violation of the stay under § 362(k) or § 105, but that standing is not exclusive. This means, or course, that if the trustee brings a cause of action and prevails, that claim and remedy belongs to the estate. If a creditor brings a separate cause of action and prevails, that claim and remedy belongs to that creditor and not the estate or the debtor. If the debtor brings a separate cause of action and prevails, that claim and remedy belongs exclusively to the debtor and does not belong to the estate or the creditors. Neither a debtor's claim or remedy, nor a creditor's claim or remedy belongs to the trustee. Therefore, the recover or claim is not property of the bankruptcy estate.
Of course, as pointed out by the Court, a § 362(k)(1) action cannot be property of the estate under § 541 for the simple reason that a § 362(k)(1) cause of action could have never existed at the time of the filing of the bankruptcy. But, the analysis of applicability under § 541 and the Educators Trust test is vitally important in Chapter 13 analysis. This is because § 1306 includes as property of the bankruptcy estate in a Chapter 13 all property or claims, which arise post-petition, provided that the property or claim would have been property of the estate under § 541 if the claim had arisen pre-petition. This is a fictional analysis that must be applied, but what § 1306 says is that "all property of the kind specified in [§ 541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed or converted" constitutes property of the estate. Therefore, if in the 5th Circuits § 541 analysis, an automatic stay violation under § 362(k)(1) does not constitute property of the estate under § 541, then it will not constitute property of the estate under § 1306.
The 5th Circuit went on to state that it is possible for the bankruptcy estate and a creditor to "own separate claims against a third party arising out of the same general series of events and broad course of conduct", and that these separate claims "are mutually exclusive". And, that there is "nothing illogical or contradictory about saying that [a violator of the automatic stay] might have inflected direct injuries on [the debtor, a creditor and the bankruptcy estate]."
In short, if the debtor or creditor brings a separate cause of action under § 362(k)(1), then that cause of action is not property of the bankruptcy estate. It does not belong to, nor is it owned by, the trustee or the bankruptcy estate. It constitutes a "private cause of action" and a "private remedy" for the person or individual which might bring the cause of action. If the trustee or the bankruptcy estate has been injured separate and apart from these causes of action, the the trustee, on behalf of the estate, should bring its own separate cause of action against the violator of the stay.
Comments