Possibly the single most powerful tool available to a debtor in a bankruptcy proceeding is the automatic stay, which generally prevents creditors and other parties from taking action against the debtor’s property without court permission. Failure to obtain such permission can result in significant damages being awarded against the offending party. It is fair to say that most practitioners assume that standing to enforce the stay and to recover damages for a stay violation belongs solely to the debtor even when a non-debtor third party was harmed.
On Aug.18, however, the 5th U.S. Circuit Court of Appeals issued an opinion that will likely change that assumption. In St. Paul Fire & Marine Insurance Co. v. Theodore F. Labuzan and Deeann S. Labuzan , the court held, in a case of first impression for its circuit, that pre-petition creditors of a debtor company had standing to pursue damage claims for an insurer’s alleged violation of the automatic stay pursuant to Section 362(k) of the Bankruptcy Code.
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