Contributed by Dana Hall
Section 362(k) of the Bankruptcy Code permits an individual injured by a third party’s willful violation of the automatic stay to recover actual and punitive damages, including attorneys’ fees, from that third party. In In re Ampal-American Israel Corp., however, the United States Bankruptcy Court for the Southern District of New York provided a useful reminder that an individual seeking to recover damages pursuant to section 362(k) must still establish constitutional and prudential standing to assert a claim.
In Ampal-American, counsel to several of the debtor’s noteholders sent a letter to certain former officers and directors of the debtor asserting that the debtor’s liquidation had resulted from the officers’ and directors’ fraud and mismanagement, and demanding that the officers and directors pay the outstanding balance on the notes directly to the bondholders. The former officers and directors responded by filing a motion asking the bankruptcy court to enforce the automatic stay so as to prevent the bondholders from asserting claims purportedly held by the estate, grant the movants standing to enforce the stay on behalf of the debtors, and award the movants damages pursuant to section 362(k) of the Bankruptcy Code. The movants’ request for prospective relief to enforce the automatic stay was rendered moot by subsequent events and, as a result, the Ampal-American opinion deals solely with the movants’ request for damages. The movants’ asserted damages consisted almost entirely of legal fees and expenses incurred in connection with their response to the noteholders’ letter and prosecution of their motion.
As a threshold issue, the court analyzed the constitutional and prudential standing of the former officers and directors to assert their damages claims. Although the court found that they had constitutional standing because their attorneys’ fees were a “concrete, particularized, and actual” injury, the court held that the movants lacked prudential standing. To satisfy the judicially-created, prudential standing requirement, a plaintiff bears the burden of establishing that his or her injury is within the zone of interests that the applicable statute or constitutional provision at issue is meant to protect. Prudential standing also prohibits plaintiffs from asserting generalized grievances or seeking to vindicate a third party’s legal rights.
The court found that the movants failed to show that their alleged injuries fell within the zone of interests protected by the automatic stay. Although the court recognized that “any violation of the automatic stay that impairs a creditor’s distribution falls within the zone of interests protected by the automatic stay,” the movants in Ampal-American failed to offer any evidence that they held claims against the estate, for indemnification or otherwise. Further, even if the movants had been creditors, the court noted that section 362(k) “was not designed to protect potential defendants who also happen to be creditors of the estate.” Although the bondholders had likely violated the automatic stay by demanding payment on account of an estate claim, the movants did not allege an injury resulting from that action. Rather, the movants’ injury arose out of a need to defend against the bondholders’ direct payment demands. As aptly stated by the court – “if any of the [m]ovants are not creditors, they will still suffer precisely the same injury as the [m]ovants that are creditors, a sure sign that the injury is unrelated to any [m]ovant’s status as a creditor.”
The court also found that the possible harm that could result from the bondholders’ assertion of estate claims – i.e. the diminution in value of property of the estate – was not a harm particular to the movants, but rather a harm general to all creditors. As a result, the trustee, as the representative of the estate’s interests, was the appropriate person to assert a damages claim pursuant to section 362(k), not an individual creditor or creditor constituency. By contrast, the court provided the example of a willful stay violation that impairs a secured creditor’s interest in specific property of the estate. Such a claim, based on a discrete harm not general to all creditors and within the zone of interests protected by section 362 of the Bankruptcy Code, would likely satisfy the prudential standing requirements.
The court’s decision illustrates the inherent difficulties of establishing standing to assert a claim for damages pursuant to section 362(k) of the Bankruptcy Code. Although it is easy to imagine circumstances in which a third party might be harmed by the actions of another in connection with a bankruptcy case, the circumstances in which those harms are both within the zone of interests protected by section 362, and unique to a particular creditor, are much more limited.