A Creditor May Recover Damages for Stay Violation

Bankruptcy Articles — Sun, 02 May 2010 02:18:14 +0000

By: Jacquelyn L. Mascetti

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently the Fifth Circuit, in St. Paul Fire & Marine Ins. Co. v. Labuzan,[i]expanded the definition of “individual” in 362(k) to include creditors as parties able to bring an action for a violation of the automatic stay. Debtor, Contractor Technology, Ltd. (“CTL”), construction company owned by the Labuzans. St. Paul Fire & Marine Ins. Co. (“St. Paul”), the insurer, issued performance and payment bonds on behalf of CTL for its ongoing projects as insurance for the projects owners in case CTL was unable to complete construction. The Labuzans entered into an indemnity agreement with St. Paul and agreed to be held liable if St. Paul had to pay the bonds to the project owners. After facing some financial difficulty, CTL decided to reorganize and voluntarily filed chapter 11. Shortly thereafter, St. Paul contacted the owners of CTL’s current projects and threatened to reduce the bond insurance on the projects if the owners made any payments to CTL for any work done towards the completion of the project.[ii] Caving to the threats, the project owners stopped sending payments to CTL, which drained its remaining assets to pay expenses, and forced the company to convert its proposed reorganization into chapter 7 liquidation.

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A Creditor May Recover Damages for Stay Violation