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Bankruptcy in a Civil Law State (Louisiana):
Traps for the Unwary and Strategies for the Wary |
Volume 1, Issue 2
| July 2012
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Damages for Automatic Stay Violations: A Strong Incentive to Monitor Automatic Billing Procedures
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A corporate client was sued recently in a Chapter 13 case, where the individual debtors claimed that client repeatedly and abusively continued to violate the automatic stay by sending $50 invoices on a monthly basis to the debtors after they filed for bankruptcy. The invoices were sent automatically each month. The attorney representing the debtors filed an 81 paragraph, 19 page complaint seeking actual damages, attorneys' fees, costs and expenses, damages for emotional distress, prejudgment interest, post judgment interest, and punitive damages arising out of the stay violation. There was no way to deny that the invoices had been sent and that the stay had been violated, no matter how minor such violations may have been. Moreover, the amounts and types of damages claimed were substantial.
We decided it would be best to settle the case quickly and cheaply, if possible, and were able to do so. Below is a quick synopsis of the various types of damages which were being claimed. While obtaining a recovery for stay violations is not necessarily easy, it is difficult to predict whether or when a court may decide to make an example of a creditor to deter future stay violations, no matter how minor the violations may be. For this reason, it is important for businesses that automatically issue invoices for non-payment to create protocols to stop such issuances when they are notified that a debtor has filed for bankruptcy.
Actual Damages. In order to recover actual damages, there must be a "causal connection" between the stay violations and the damages claimed. A "[f]ailure to proffer credible evidence of damages results in an inability for Debtors to qualify for damage awards." In re Still, 117 B.R. 251 (Bankr. E.D. Tex. 1990). Thus, the damages must be actual and real, and not speculative. In our case, the debtors did not allege any specific actual damages, but we were fairly confident that they would seek to prove such damages at a trial.
Attorneys' Fees. Bankruptcy Code Section 362(k) permits an individual injured by a stay violation to recover attorneys' fees related to the enforcement of the stay. This was a big concern, because the debtors had already filed a detailed 81 paragraph, 19 page complaint. To the extent that the litigation continued, our client would be faced with the prospect of having to pay an award for the debtors' continuing, burgeoning attorneys' fees. We did find a helpful case where the debtor's actual damages related to the stay violation ($1400) were deemed to be disproportionate to the attorneys' fees sought to be recovered ($23,000), and the court in that case was unwilling to award any of the attorneys' fees. In re Still, 117 B.R. 251 (Bankr. E.D. Tex. 1990) (likening attorneys' fees incurred in prosecution of de minimis stay violation case to "killing an ant with an elephant gun"). However, one can never predict how a court may decide a discretionary award of attorneys' fees in a particular case.
Emotional Distress Damages. The Fifth Circuit has not adopted a precise standard for whether and under what circumstances a court can award emotional distress damages for stay violations. However, it has suggested that the debtor's burden is a high one. The Fifth Circuit has held that because emotional distress damages are easy to manufacture, a debtor is required to set forth "specific information" concerning the damages caused by his emotional distress, rather than relying on "generalized assertions." In re Repine, 536 F.3d 512 (5th Cir. 2008). Thus, mere testimony that the debtor was "upset" or that the experience was "very traumatic" is insufficient.
Punitive Damages. Section 362(k) allows punitive damage in "appropriate circumstances." The Fifth Circuit has found that "appropriate circumstances" include "egregious, intentional misconduct on the violator's part." In re Repine, 536 F.3d at 521.
Based on the foregoing, a creditor has serious, uncertain exposure for stay violations. While a recovery for a debtor alleging a stay violation is never certain, the litigation costs for a defendant can be burdensome. That is why, combined with the risks of a large damages award, it is important for businesses to be vigilant when it comes to adjusting their collection procedures when a debtor files bankruptcy. |
Are Life Insurance Proceeds Exempt? Going from a De Minimis Recovery to 100% Recovery for All Unsecured Creditors
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For years we have represented a brokerage company in connection with a Ponzi scheme orchestrated by one of its brokers. The scheme was revealed when the broker passed away, and the investors commenced an NASD arbitration proceeding against the brokerage company. In connection with the investors' claims, the brokerage company asserted third party claims for indemnification against, among others, the broker's son, who was affiliated with the brokerage company. The brokerage company's claims against the son were ultimately arbitrated in a FINRA proceeding and resulted in an arbitration judgment. Days later, the son filed a chapter 7 bankruptcy proceeding in order to hinder the brokerage company's collection of the judgment.
The debtor's schedules revealed that he was very solvent. He scheduled mostly assets which he claimed were exempt under Louisiana's exemption scheme, yet unsecured claims in amounts far less than his assets. Because of the lack of nonexempt assets, unsecured creditors would have likely been paid only a small fraction of their claims, if any. His exempt assets included substantial life insurance proceeds from (ironically) his deceased mother. In reviewing Louisiana's statute governing the exemption of life insurance proceeds (La. R.S. 22:912(A)), we realized that all life insurance proceeds are not exempt as a matter of course. Rather, the statute exempts life insurance proceeds from "all liability for any debt" of the beneficiary that existed "at the time the proceeds or avails are made available for his own use." Thus, if the mother's life insurance proceeds were made available to the son prior to when the brokerage company's debt or claim arose, then the insurance proceeds should not be exempt as to such debt.
We objected to the exemption arguing that the brokerage company's claim arose, at the earliest, when the company's indemnification claims arose, and at the latest, upon entry of the arbitration judgment, each of which occurred after the insurance proceeds were made available. The parties extensively briefed the issues - there was no law directly on point and it was a matter of first impression - and the court requested further briefing after the hearing on the matter. The issues raised were many and complex: Should the date when the debtor's debt arose be analyzed under state law or under the Bankruptcy Code's broad definition of claim? Does the exemption statute require the bankruptcy court to separately classify claims that arose before the insurance proceeds were made available from those that arose after? Does the Bankruptcy Code preempt the state's power to define and limit exemptions when the two are in conflict?
Ultimately, these issues were resolved in favor of denying the exemption and upholding the brokerage company's objection in a reported decision: In re Bordelon, 443 B.R. 725 (Bankr. M.D. La. 2011). The bankruptcy court did not have to decide if and how it would separately classify claims based on when they arose, because they all arose after the proceeds were made available. Moreover, the debtor's aggregate allowed unsecured claims were less than the amount of the insurance proceeds and therefore, all unsecured creditors (including our client) received a 100% recovery on their claims. |
"Related to" Jurisdictional Issues in Bankruptcy - A Recent Louisiana Case
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The intersection between the jurisdiction of federal courts under Article III of the Constitution and bankruptcy has had a bumpy past. From the adoption of the Bankruptcy Code in 1978 to the Supreme Court's decision in Northern Pipeline in 1982, to Congress's enactment of the Bankruptcy Amendments and Federal Judgeship Act in 1984, to the Supreme Court's more recent decision in Stern v. Marshall, the jurisdiction of bankruptcy courts has been pushed and pulled by all three branches of the federal government. A recent Louisiana case helps shed some light on this jurisdictional push and pull.
Gulf Fleet Holdings, Inc. operated maritime vessels in the Gulf of Mexico. It filed for chapter 11 in May 2010. Prior to filing for bankruptcy, it had contracted with a builder to construct the M/V Gulf Tiger and subsequently transferred its interests in the contract to an affiliate of its parent, Gulf Fleet Tiger Acquisition, LLC ("GFTA"). Subsequently, a dispute arose between GFTA and builder over who had title to the vessel. GFTA claimed that builder never delivered the vessel pursuant to the contract, and builder claimed that it lawfully asserted its rights as owner due to GFTA's failure to pay timely under the contract. Meanwhile, in Gulf Fleet's bankruptcy, Gulf Fleet filed an adversary proceeding against builder, claiming that it had valid maritime liens on the vessel for services and goods provided.
GFTA sued builder in federal district court claiming both diversity jurisdiction and "related to" bankruptcy jurisdiction under 28 U.S.C. § 1334(b). Builder filed a motion to dismiss, based on lack of subject matter jurisdiction. Without ruling on the question of diversity, the court initially ruled that "related to" jurisdiction existed, because (i) Gulf Fleet had asserted a maritime lien against the Gulf Tiger in the adversary proceeding; (ii) such lien could be a significant estate asset; and (iii) Gulf Fleet would have an easier time enforcing the lien against GFTA than builder, because GFTA was an "amicable related entity."
Meanwhile, upon confirmation of Gulf Fleet's plan and the occurrence of the effective date, Alan Goodman was appointed as Gulf Fleet's liquidating trustee. He effected a settlement of Gulf Fleet's adversary proceeding against builder and signed an affidavit which generally stated that Gulf Fleet did not have any valid maritime liens on the M/V Gulf Tiger and that Gulf Fleet's interests were materially adverse to GFTA. On the eve of trial in the federal district court case, builder used this affidavit to argue that Gulf Fleet did not have a valid lien on the vessel and Gulf Fleet and GFTA were not "amicable parties." Therefore, the basis for the court's previous finding of "related to" jurisdiction was lacking. Indeed, Gulf Fleet's estate holds massive claims against its former equity owners (entities affiliated with GFTA), which have now blossomed into full-blown litigation. As the liquidating trustee of Gulf Fleet, we are overseeing this litigation through other counsel.
After builder raised the new jurisdictional issues, the court requested further briefing and recently issued an opinion on the jurisdictional question: Gulf Fleet Tiger Acquisition, L.L.C. v. Thoma-Sea Ship Builders, L.L.C., 2012 WL 1150128 (E.D. La. April 5, 2012). Although the court discussed the "related to" jurisdictional question, it ultimately did not reach a conclusion. Rather, the court permissively abstained from hearing the case pursuant to 28 U.S.C. § 1334(b), which permits a court in the spirit of comity to abstain from hearing a matter where "related to" jurisdiction is asserted and certain other criteria of mandatory abstention are present. The opinion is worth reading if you have issues related to bankruptcy court jurisdiction and abstention. |
Breazeale, Sachse & Wilson Bankruptcy Attorneys
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This electronic newsletter is provided to clients and friends of Breazeale, Sachse & Wilson, L.L.P. The information described is general in nature, and may not apply to your specific situation. Legal advice should be sought before taking action based on the information discussed. Applicable State Bar or Attorney Regulations May Require This Be Labeled as "Advertising." 
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