It is well recognized that there are penalties for violating the automatic stay.  It does not follow, however, that any entity may seek to enforce the automatic stay.  Recently, the United States Bankruptcy Court for the Southern District of New York rendered a decision that serves as a reminder to litigants that an entity seeking to enforce the automatic stay must have standing – both Article III standing and prudential standing.  The decision is In re Ampal-Am. Israel Corp., 2013 Bankr. LEXIS 5240; 2013 WL 6576500 (S.D.N.Y. December 16, 2013).

Violation of the Automatic Stay

In In re Ampal-Am. Israel Corp., former officers and directors of a debtor company brought a motion seeking enforcement of the automatic stay, as well as damages for violation of the stay.  What prompted the motion was a demand letter that the former officers and directors received from the legal counsel of certain creditors of the debtor company. The letter alleged that that the officers and directors had breached their fiduciary duties, committed waste, and mismanaged the company.  The letter then made the following demand:

You are hereby required to pay our clients, immediately, the entire debts of the Company towards our clients or, alternatively, to immediately provide us with proper securities in order to guarantee full coverage of any sum that the Company does not pay our clients as part of the Company’s liquidation proceedings.

In effect, the letter was an attempt to demand and collect payment on the debts being adjudicated in the company’s bankruptcy proceeding.  As such, it constituted a clear violation of the automatic stay provision of 11 U.S.C. § 362.  Claims against the company’s officers and directors, if any, would belong to the bankruptcy estate.  “Under New York law, claims for waste, mismanagement and breach of fiduciary duty belong to the corporation, and once bankruptcy ensues, become property of the estate that the trustee alone has standing to assert.”  Id. at *27.  Accordingly, the court found that the creditors had violated the stay.  Id. at *29.

Standing to Assert Violation of the Automatic Stay

The immediate contention of the offending creditors was that the officers and directors lacked any standing to assert a violation of the automatic stay, and this point was addressed in detail by the court.

At first glance, paragraph (k)(1) of Section 362 appears to grant a rather broad right to assert a violation of the stay:

Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages

11 U.S.C. § 362(k)(1).  Given this language, it may seem that someone who receives a threatening letter and demand for payment, signed by legal counsel, would have recourse with the court.  A finding of standing, however, depends upon additional considerations:  “[T]he question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues.  This inquiry involves both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise.”  In re Ampal-Am. Israel Corp., 2013 Bankr. LEXIS 5240 at *12-13.

Article III Standing

First, a would-be litigant must show that it has Article III standing.  It can accomplish this by presenting “an injury that is concrete, particularized, and actual or imminent; fairly traceable to the defendant’s challenged behavior; and likely to be redressed by a favorable ruling.”  Id. at *12.  In other words, there must be “some probability of a tangible benefit from winning the suit.”  Id. at *13.  The officers and directors succeeding in showing Article III standing because they claimed they suffered an actual injury from having to incur legal fees in direct response to the creditors’ letter, and their injury would be redressed by a favorable ruling from the court.  Id. at *13-14.

Prudential Standing

Second, a would-be litigant must show that it has prudential standing, which is “a tougher question.”  Id. at *14.  Prudential standing “encompasses the general prohibition on a litigant’s raising another person’s legal rights, the rule barring adjudication of generalized grievances more appropriately addressed in the representative branches, and the requirement that a plaintiff’s compliant fall within the zone of interests protected by the law invoked.”  Id. at *12.  The court noted that within the context of bankruptcy, the concept of prudential standing is “especially important” as there may be “numerous parties who may seek to assert the rights of third parties for their own benefit.”

To assess whether the officers and directors had prudential standing, the court examined whether they were within the zone of interests meant to be protected by the automatic stay.  To this end, the court noted that the automatic stay was meant to protect the debtor, the property of the estate, and also creditors whose claims might be diminished by another creditor’s attempt to seize property of the estate.  In this case, the officers and directors were not the debtor, nor were they creditors of the estate.  Therefore, their non-creditor interests did not fall within the zone of interests meant to be protected by the statute.

Moreover, the court found that the damages alleged by the officers and directors were not the type of damages expected to result from a violation of the automatic stay.  The officers and directors did not assert that they might receive a smaller distribution on their claims, as a creditor of the estate might be able to do.  Instead, their injury was simply that they had to incur attorney fees and legal expenses in responding to the demand letter.  This, according to the court, was not enough.

In the end, the officers and directors lost their motion.  Although the automatic stay had been violated, the Court found that they did not have standing to enforce it or to seek damages for the violation.  In short, although we know that the powers of the automatic stay are broad, they are not broad enough to provide everyone with protection.  This case provides a new reminder of that point.