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, according to District Judge Barry W. Ashe of New Orleans.
In his July 28 opinion, Judge Ashe also held that the plaintiffs could seek attorneys’ fees were they to be successful in state court, because the suit was based on postpetition actions by the church.
The appeal involved the Archdiocese of New Orleans, which filed a chapter 11 petition in 2020 to deal with sexual abuse claims. Long before bankruptcy, schools in the archdiocese had a policy of denying admission to students with disabilities.
Two years into the chapter 11 case, 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.
The plaintiffs filed a motion in bankruptcy court seeking a so-called comfort order, where they asked the bankruptcy judge to rule that the state court suit did not violate the automatic stay in Section 362(a).
The bankruptcy judge declined to issue a comfort order, concluding that the automatic stay halted the suit because the claim could have been brought before bankruptcy.
On appeal, Judge Ashe first decided that the bankruptcy court had subject matter jurisdiction under 28 U.S.C. § 1334 to rule on the motion for a comfort order. He reasoned that the bankruptcy court had “arising in” jurisdiction because the underlying motion involved a cause of action created by the Bankruptcy Code.
On the merits of the applicability of the automatic stay, Judge Ashe undertook de novo review. Citing the Collier treatise and Fifth Circuit precedent, he said that the automatic stay does not apply to claims that arise postpetition.
Judge Ashe characterized the Fifth Circuit as concluding “that a prepetition relationship between the debtor and claimant is required for the automatic stay to apply when the debtor’s conduct occurred prepetition, but the manifestation of the claimant’s injury occurred post-petition.”
Parsing the complaint, Judge Ashe said that postpetition conduct alone was “implicated” because the plaintiffs were “presently” seeking to enroll their children in archdiocese schools.
Although the archdiocese said its policy had been in place “for many years” before bankruptcy, Judge Ashe said that “the record on appeal is devoid of evidence to support the conclusion that Appellants themselves were aggrieved by these questions at any point prepetition.” [Emphasis in original.] Furthermore, he said that none of the children in the suit “had a specific prepetition relationship with the Archdiocese.”
“And critically,” Judge Ashe said, the plaintiffs disclaimed damages, seeking only an injunction. He therefore found no violation of Section 362(a)(1), which bars commencement or continuation of an action that could have been brought before bankruptcy.
Judge Ashe turned to Section 362(a)(3), which precludes actions to obtain possession or control of estate property. To frame the question, he quoted the Supreme Court for saying, “§ 362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo.” City of Chicago v. Fulton, 141 S. Ct. 585, 591 (2021).
The suit, as Judge Ashe read it, was not a “collection effort,” nor would it disturb the church’s “legal or equitable interests in any estate property.” Instead, he said the suit seeks “to enjoin current and future conduct.” Citing the Sixth Circuit and other courts, he said, “Federal courts around the country have concluded that suits based on allegedly tortious or unlawful post-petition conduct are not subject to the automatic stay provisions of § 362(a).”
Since the plaintiffs “seek only to enjoin post-petition conduct they allege to be discriminatory,” Judge Ashe found no violation of Section 362(a)(3).
Finally, the church argued there was a stay violation because the plaintiffs were seeking attorneys’ fees in state court. Judge Ashe disagreed with a district court in California that had found a stay violation in similar circumstances. He located “no binding authority that would necessitate the conclusion that, by appending a request for attorney’s fees to a suit to enjoin unlawful post-petition conduct, a case that would not be stayed under the long line of authorities . . . would become subject to a stay under § 362(a)(3).”
Remanding, Judge Ashe reversed the bankruptcy court’s order denying the motion for a comfort order, also finding no violation of Section 362(a)(3) from a prayer for attorneys’ fees in state court.
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, according to District Judge Barry W. Ashe of New Orleans.
In his July 28 opinion, Judge Ashe also held that the plaintiffs could seek attorneys’ fees were they to be successful in state court, because the suit was based on postpetition actions by the church.
The appeal involved the Archdiocese of New Orleans, which filed a chapter 11 petition in 2020 to deal with sexual abuse claims. Long before bankruptcy, schools in the archdiocese had a policy of denying admission to students with disabilities.
Two years into the chapter 11 case, 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.
The plaintiffs filed a motion in bankruptcy court seeking a so-called comfort order, where they asked the bankruptcy judge to rule that the state court suit did not violate the automatic stay in Section 362(a).