Joining several other circuits, the Third Circuit ruled that an action under Section 362(k) to recover damages for a willful violation of the automatic stay may exist independent of the underlying bankruptcy case. Indeed, the appeals court said, Section 362(k) creates a private right of action that may be maintained without reopening a closed or dismissed bankruptcy case.
The Facts in Bankruptcy Court
Investors in related investment funds filed an involuntary petition against the manager of the funds, with the objective of ousting the manager. Strangely, the petitioners did not serve the fund manager, so the court entered an order for relief.
The creditors removed the fund manager and substituted a new one. Also without authorization from the bankruptcy court, the new manager dissolved the funds.
After learning about the bankruptcy, the ousted fund manager appeared and prevailed on the bankruptcy court to vacate the order for relief. Having already achieved their objective of removing the manager and dissolving the funds, the investors filed a motion to dismiss the petition voluntarily.
The ousted manager opposed dismissal, telling the bankruptcy judge that it intended to bring claims under Section 303(i) for filing the petition in bad faith.
The bankruptcy court granted the motion for voluntary dismissal of the petition while retaining jurisdiction over claims brought by the ousted manager for “damages, including without limitation, fees and costs, pursuant to 11 U.S.C. § 303(i) or otherwise.”
After dismissal, the ousted manager filed a motion in bankruptcy court for damages under Section 303(i).
The fund manager contended that being ousted without authorization from the court was a violation of the automatic stay under Section 326(a). The fund manager therefore filed a separate adversary proceeding for damages under Section 362(k). (N.B. It is unclear to this writer how the manager could maintain an action under Section 362(k) because it allows “an individual” to recover damages for a willful stay violation.)
Interpreting its order for voluntary dismissal, the bankruptcy court ruled that the fund manager was only entitled to pursue a claim under Section 303(i). The bankruptcy court therefore dismissed the suit under Section 362(k). The district court upheld dismissal of the Section 362(k) adversary proceeding.
Section 362(k) Carries Independent Jurisdiction
In an opinion on October 22 by Circuit Judge Morton I. Greenberg, the Third Circuit reversed and reinstated the Section 362(k) adversary proceeding, but not for reasons advanced by the ousted manager.
Judge Greenberg said that the Fourth, Fifth, Seventh and Tenth Circuits “have held that § 362(k) actions are separate and apart from any related bankruptcy cases, and thus stand on their own.” He quoted the Tenth Circuit as saying that a claim under Section 362(k) will not be dismissed even though the underlying bankruptcy has been dismissed. The Denver-based court said there must be power to compensate victims of a stay violation even after conclusion of the bankruptcy case itself.
Judge Greenberg went on to agree with the Tenth Circuit’s statement that the debtor is not even required to reopen the bankruptcy before proceeding under Section 362(k).
Judge Greenberg went beyond the Tenth Circuit in identifying the foundation for jurisdiction over a post-dismissal Section 362(k) action. Even if the claim were not “core,” he said, there still would be jurisdiction in the bankruptcy court under 28 U.S.C. §§ 1334(b)(2) and 157(b)(1) as a proceeding “arising under title 11.”
Having concluded that there was jurisdiction over a private right of action, Judge Greenberg said that the bankruptcy court did not have authority to limit claims that the manager could bring after dismissal. He cited the black-letter law that “federal courts must hear matters within their jurisdiction.”
Judge Greenberg reversed and remanded with instructions to reinstate the Section 362(k) adversary proceeding.
Joining several other circuits, the Third Circuit ruled that an action under Section 362(k) to recover damages for a willful violation of the automatic stay may exist independent of the underlying bankruptcy case. Indeed, the appeals court said, Section 362(k) creates a private right of action that may be maintained without reopening a closed or dismissed bankruptcy case.
The Facts in Bankruptcy Court
Investors in related investment funds filed an involuntary petition against the manager of the funds, with the objective of ousting the manager. Strangely, the petitioners did not serve the fund manager, so the court entered an order for relief.
The creditors removed the fund manager and substituted a new one. Also without authorization from the bankruptcy court, the new manager dissolved the funds.
After learning about the bankruptcy, the ousted fund manager appeared and prevailed on the bankruptcy court to vacate the order for relief. Having already achieved their objective of removing the manager and dissolving the funds, the investors filed a motion to dismiss the petition voluntarily.
The ousted manager opposed dismissal, telling the bankruptcy judge that it intended to bring claims under Section 303(i) for filing the petition in bad faith.