The Automatic Stay Protects WHAT????

You don’t have to hang around the Bankruptcy Court long to figure out a few things about the automatic stay.  After all, it is a pretty simple concept.  The Automatic stay goes into effect automatically upon the filing of a Bankruptcy and it stays (meaning temporarily stops) all collection activity against the Debtor or property of the debtor.  Oh, and there is a private cause of action for damages if the automatic stay is violated.

Pretty simple.  If a Debtor files for Bankruptcy and a creditor tries to collect a debt as to the Debtor or his property (i.e., repos a car, garnishes wages, etc.), then the Debtor can sue in the Bankruptcy Court for damages.

Seems simple enough.  At least, until a Creditor sues another creditor for damages  for violating somebody else’s automatic stay.  SAY WHAT?????  You just know this had to be a case from Texas.  Sure enough, in St. Paul Fire & Marine Insurance Co. v. Labuzan decided today in the 5th Circuit a creditor successfully counterclaimed against another creditor claiming damages resulting from the violation of somebody else’s automatic stay — oh, and it wasn’t even a Chapter 13 with that really cool co-debtor stay.

You just know the facts are convoluted, but in a nutshell, here they are.  Corporation had performance bonds with St. Paul Fire & Marine.  The owners of the Corporation gave personal indemnities to St. Paul Fire & Marine in the event that it had to pay out on the bonds.   Corporation filed for Chapter 11.  St. Paul Fire & Marine then contacted the owners of the corporation’s ongoing projects and basically warned them not to pay the corporation or if St. Paul had to pay off on the bonds, St. Paul would come after the project owners for any amounts that they paid to the corporation.  The corporations cash flow went off a cliff, the reorganization failed, the corporation converted, St. Paul had to pay off on bonds.  St. Paul then sued the owners of the corporation on their indemnity agreements.  The owners counterclaimed on the grounds that it was St. Paul’s violation of the corporation’s automatic stay that destroyed the corporation’s cash flow and made payments on the bonds necessary.  The Fifth Circuit agreed.

Wow, and I thought 72 degrees, overcast and rainy in August was weird.


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