Affirming a decision by the district court, the Fifth Circuit held that a postpetition lawsuit in state court to enjoin archdiocese schools from enforcing a discriminatory prepetition policy did not violate the automatic stay, because the plaintiffs based their complaint entirely on postposition activities and sought no monetary damages.

The procedural history was somewhat complex but boiled down to this:

The Suit for an Injunction

The Archdiocese of New Orleans filed a chapter 11 petition in 2020 to deal with sexual abuse claims. Years earlier, archdiocese schools allegedly had adopted a policy of denying admission to students with disabilities.

Two years after the chapter 11 filing, the plaintiffs filed a class action in state court aiming to enjoin the archdiocese’s schools from engaging in future discriminatory admissions practices. The plaintiffs disclaimed any desire to seek monetary damages but did want an award of attorneys’ fees.

The plaintiffs sought a so-called comfort order from the bankruptcy court, hoping for a ruling that the state court suit did not violate the automatic stay in Section 362(a). The bankruptcy judge refused to issue a comfort order, believing that the automatic stay halted the suit because the claim could have been brought before the archdiocese’s bankruptcy.

On the first appeal, the district judge found subject matter jurisdiction to review the comfort order. On the de novo review of the merits, the district court reversed, citing the Collier treatise and Fifth Circuit precedent in holding that the automatic stay does not apply to claims that arise postpetition. In re Roman Catholic Church of Archdiocese of New Orleans, 653 B.R. 524 (E.D. La. July 28, 2023). To read ABI’s report, click here.

The church appealed, but the Fifth Circuit affirmed in a nonprecedential opinion on July 17 by Circuit Judge Edith H. Jones. Circuit Judge Carolyn Dineen King was also on the panel.

Standing

Before reviewing the merits, Judge Jones examined the plaintiff’s appellate standing to determine whether there was subject matter jurisdiction for the appeal.

The church advocated the more rigorous “person aggrieved” test for the idea that the plaintiffs lacked appellate standing.

In a precedential opinion on May 13, also by Judge Jones, the Fifth Circuit questioned the continuing validity of the “person aggrieved” doctrine. Adams v. Roman Catholic Church of the Archdiocese of New Orleans (In re Roman Catholic Church of the Archdiocese of New Orleans), 101 F.4th 400, 408 (5th Cir. May 13, 2024). To read ABI’s report, click here.

Consistent with what she called “the traditional Article III standing test,” Judge Jones concluded that the plaintiffs had appellate standing because they “demonstrated a cognizable injury in this case.” She observed that the church had already accused the plaintiffs of multiple stay violations.

Judge Jones found appellate standing because the plaintiffs had “established a sufficiently credible threat of enforcement” of the automatic stay.

The Merits

The church argued that the lawsuit was subject to the automatic stay under Section 362(a)(1), because it could have been brought before bankruptcy, and under Section 362(a)(3), because it could affect estate property.

Section 362(a)(1) precludes “the commencement or continuation . . . of a judicial . . . action or proceeding against the debtor that was or could have been commenced before the commencement of the case . . . .”

“Simply put,” Judge Jones said, the plaintiffs’ “lawsuit filed in 2022 that only seeks prospective relief cannot enjoin conduct that occurred in 2020, before the Archdiocese filed for bankruptcy.”

Alluding to the aim of the suit to control admission to church schools and the request for attorneys’ fees, the church contended there was a violation of Section 362(a)(3), which prevents “any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.”

“This broad reading of Section 362(a)(3), if accepted,” Judge Jones said, “would effectively immunize debtors from all suits seeking post-petition prospective equitable relief to abate a debtor’s post-petition tortious conduct . . . . Operating the business necessarily implies operation in conformity with non-bankruptcy law.”

“Moreover,” Judge Jones said, “the automatic stay is not implicated merely because the debtor may be required to ‘expend funds.’” The plaintiff’s aim to obtain injunctive relief, she said, does not involve the core function of the automatic stay to prevent a race to the courthouse or prevent dismemberment of the estate.

Similarly, Judge Jones said that the goal of obtaining an award of attorneys’ fees “does not invoke the automatic stay.” Were there an award, she said it would be an administrative claim that would “play[] no role in evaluating the Section 362(a)(3) issue.”

Judge Jones affirmed the district court, which had reversed the bankruptcy court’s decision imposing the automatic stay.