St. Paul Fire & Marine Ins. Co. v. Labuzan

• Decision Date: 18 August 2009
• Docket Number: No. 08-20229.,08-20229.
• Citation: 579 F.3d 533
• Parties: ST. PAUL FIRE & MARINE INSURANCE COMPANY, Plaintiff-Appellee, v. Theodore F. LABUZAN; Deeann S. Labuzan, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

579 F.3d 533

ST. PAUL FIRE & MARINE INSURANCE COMPANY, Plaintiff-Appellee, v. Theodore F. LABUZAN; Deeann S. Labuzan, Defendants-Appellants.

No. 08-20229.

United States Court of Appeals, Fifth Circuit.

August 18, 2009.

James W. Hamel (argued), Keith Alan Langley, Langley, Weinstein, Hamel, LLP, Dallas, TX, for Plaintiff-Appellee.

Martyn B. Hill (argued), Michael Andrew Harris, Pagel, Davis & Hill, Houston, TX, for Defendants-Appellants.

Appeal from the United States District Court for the Southern District of Texas.

Before REAVLEY, BARKSDALE and GARZA, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

This appeal presents an issue of first impression for our court: to what extent, if any, do Theodore F. Labuzan, and his wife, Deeann Labuzan, creditors of the bankruptcy debtor, have standing to claim damages based on violations of the bankruptcy automatic-stay provision, 11 U.S.C. § 362(k) ("[A]n individual injured by any willful violation of a stay ... shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages".). The Labuzans challenge the district court's ruling they lack standing to pursue a claim under § 362(k). VACATED and REMANDED.

I.

The Labuzans owned 99 percent of the limited, and 100 percent of the general, partnership interest in Contractor Technology, Ltd. (CTL), a construction company. St. Paul Fire & Marine Insurance Company provided payment and performance bonds for several of CTL's projects. In turn, the Labuzans had a personal indemnity agreement with St. Paul in the event it had to pay claims under those bonds.

On 15 May 2005, with several projects ongoing, CTL filed a voluntary petition for Chapter 11 bankruptcy reorganization. Approximately one week later, in claimed violation of the 11 U.S.C. § 362(k) automatic-stay provision, St. Paul contacted the owners of those ongoing projects and advised them: CTL was in bankruptcy; and, if a project owner made payment to CTL and St. Paul was later required to pay under the CTL bonds, St. Paul would reduce its liability to the project owner by any amount paid CTL by that owner.

Because of alleged resulting reduced revenues, CTL was unable to meet its financial obligations. Its Chapter 11 reorganization was converted into a Chapter 7 liquidation proceeding in June 2005.

St. Paul paid over $32 million on its CTL bonds. Along that line, in November 2005, St. Paul sued the Labuzans in district court for breach of their indemnity agreement with St. Paul.

In response, the Labuzans, inter alia, raised as an affirmative defense St. Paul's claimed violation of the § 362(k) automatic-stay provision. The Labuzans claimed such violation prevented CTL from reorganizing successfully and, therefore, caused St. Paul's having to pay on its CTL bonds. The Labuzans claimed the following damages: $51,087,855 for loss of value suffered by CTL; $2,245,000 for judgments against Theodore Labuzan, and $1,167,000 for other possible judgments that might be entered against him; $634,187 for IRS liens against CTL; $414,101 for attorney's fees; and $2,900,000 for loss of Theodore Labuzan's earning capacity.

In January 2007, St. Paul moved for summary judgment on its indemnity claims. On the other hand, that January and February, respectively, the Labuzans and CTL's Bankruptcy Trustee (the Trustee) filed adversary proceedings against St. Paul in bankruptcy court, seeking compensatory and punitive damages based on St. Paul's claimed violation of § 362(k)'s automatic-stay provision.

That May, St. Paul's action against the Labuzans in district court, and the Labuzans' adversary proceeding against St. Paul in bankruptcy court, were consolidated by the district court. That June, the district court granted in part and denied in part St. Paul's summary-judgment motion. The court ruled St. Paul proved its case-in-chief, but the Labuzans retained their § 362(k) defense because material issues of fact existed "concerning whether any portion of St. Paul's CTL bond losses was caused by St. Paul's own unlawful conduct". The district court granted St. Paul's summary-judgment motion regarding a number of the Labuzans' affirmative defenses, including failure to mitigate, assumption of risk, estoppel, discharge, and tortious interference with contractual relations.

That August, St. Paul and the Trustee entered into a global resolution of competing claims in CTL's Chapter 7 bankruptcy. Pursuant to the settlement agreement, and in exchange for St. Paul's reducing or waiving its claims against the bankruptcy estate, St. Paul received $600,000 from it. The Trustee also permitted St. Paul to retain certain funds in an amount over $1 million.

The bankruptcy court approved the settlement agreement in November 2007. In its order approving the settlement, the bankruptcy court allowed, inter alia, the Labuzans' unsecured claim in the amount of $200,000 against the estate.

Earlier, in September 2007, St. Paul raised in district court whether the Labuzans have standing to pursue a claim under § 362(k) based on St. Paul's claimed violation of the automatic stay created by CTL's bankruptcy. In January 2008, the district court ruled the Labuzans lack standing to assert the § 362(k) claim, based on its ruling that CTL, not the Labuzans, owned that claim against St. Paul. The district court reasoned:

Assuming that a violation occurred, the [Labuzans] would be required to show that the claim actually belonged to them as indemnitors. And they would have to show that as indemnitors they are the proper parties to bring this suit.

Now, what the evidence shows is that the [Labuzans], while they were ... owners of CTL, first, they were not creditors of CTL. There were no claims, I believe, made by them against the estate, as I understand it. Additionally, CTL was a separate entity or is a separate entity from the [Labuzans] and, therefore, the [Labuzans] are not and were not the primary owners of any claim that belonged to CTL. Particularly, they were not the owners of the claim that there was a stay violation.

The record shows that CTL resolved its claims against St. Paul and dismissed its adversary proceeding against St. Paul and in that regard, the Court is of the opinion that the [Labuzans] are barred from bringing a claim [on] behalf of CTL, because that would be the way in which it would have to be brought. They have no right to bring a separate and independent claim because the claim does not belong to them.

Transcript of Hearing at 13-14, St. Paul Fire & Marine Ins. Co. v. Labuzan, No. H-05-3811, 2008 WL 887640 (S.D. Tex. 15 Jan. 2008). The district court stated that, on behalf of a debtor, creditors could seek equitable remedies for § 362(k) violations, but they could not recover damages.

Because the district court's ruling precluded the Labuzans from asserting a § 362(k) claim against St. Paul, the Labuzans abandoned their only affirmative defense: St. Paul's claimed automatic-stay violation. Accordingly, the Labuzans allowed the district court to enter judgment for St. Paul in March 2008 for, inter alia, approximately $32 million. The Labuzans' motion for reconsideration was denied.

II.

A district court's rulings on jurisdictional issues, such as standing, and on questions of statutory interpretations are, of course, reviewed de novo. E.g., Texas v. United States, 497 F.3d 491, 495 (5th Cir.2007), cert. denied, ___ U.S. ___, 129 S.Ct. 32, 172 L.Ed.2d 18 (2008). "A district court's factual findings, including those on which the court based its legal conclusions, are reviewed for clear error." Id.

The automatic-stay provision states, inter alia:

[A] petition filed under ... this title ... operates as a stay, applicable to all entities, of—

(1) the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case ..., or to recover a claim against the debtor that arose before the commencement of the case under this title;

...

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

(4) any act to create, perfect, or enforce any lien against property of the estate;

...

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; [and]

(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor....

11 U.S.C. § 362(a). Section 362(k) (formerly § 362(h)) provides in part:

[A]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.

11 U.S.C. § 362(k) (emphasis added).

Our court has held that § 362(k) creates a private remedy for automatic-stay violations. Pettitt v. Baker, 876 F.2d 456, 457-58 (5th Cir.1989) ("We conclude that [§ 362(k)] creates a private remedy for one injured by a willful violation of an automatic stay."). Pettitt was decided, however, in the context of a claim by a debtor. Id. at 457. In this instance, CTL, not the Labuzans, is the debtor. Along that line, dicta in In re Pointer, 952 F.2d 82, 86 (5th Cir.1992), provided: "[I]t seems illogical to conclude that Congress intended to limit § 362[(k)] to debtors when one of the principal purposes behind the automatic stay is to protect creditors from unequal treatment". Id. (holding that creditors do not have standing to invoke avoidance powers under 11 U.S.C. § 549).

Accordingly, at issue is whether, pursuant to § 362(k), individuals other than the debtor, who claim injury from an automatic-stay violation, have standing to pursue a claim for resulting damages. Although § 362(k) was added to the Bankruptcy Code in 1984...