Bankruptcy courts have the authority to enforce the automatic stay by levying sanctions against parties who take actions in violation of the stay.

The United States Bankruptcy Court for the Southern District of Ohio, Eastern Division, (“the Court”) held in In re John Joseph Louis Johnson, III, Case No. 14-57104, 2016 WL 1719149, that a creditor violated the automatic stay by seeking to enforce an arbitration award against nondebtor co-defendants. The automatic stay applies not only to stay actions against the debtor personally but also prohibits “any act to … exercise control over property of the [debtor’s bankruptcy] estate.” 11 U.S.C. § 362(a)(3) includes potential property of the estate, as well as debtor’s rights under a contract and debtor’s claims against a creditor. 

In this contested matter, the debtor sought to enforce the automatic stay provisions against an alleged secured creditor, RFF Family Partnership, LP (“RFF”), and recover damages for a willful violation of the stay. The debtor is a professional hockey player with the Columbus Blue Jackets of the National Hockey League who filed a voluntary petition under chapter 11 of the Bankruptcy Code. RFF contended that the debtor defrauded it. RFF instituted a prepetition arbitration proceeding against the debtor and several related parties who had issued RFF a note allegedly secured by, among other property, the debtor’s player contract. The debtor denied that RFF perfected a security interest in his player contract. Before the arbitration could proceed further, the debtor filed his bankruptcy petition. The player contract provided a multimillion-dollar salary to the debtor spread out into the future. In January 2011, the debtor entered into a contract with the Los Angeles Kings of the National Hockey League that provided him with compensation of $30.5 million over seven years. The Kings assigned the player contract to the Columbus Blue Jackets. The debtor and the debtor’s parents began borrowing against the player contract. The note ultimately was for the sum of $1,862,500 and stated that the borrowers were granting RFF a personal lien on certain property, including the debtor’s multimillion-dollar player contract. The security agreement provided for binding arbitration upon any disputes and/or defaults. 

RFF filed a demand for arbitration before the petition date. The debtor filed a response to the demand prior to the petition date. The debtor denied RFF’s allegations that the note was secured by the player contract and any allegations that the debtor defrauded RFF. The parties had not selected an arbitrator by the time the debtor filed his bankruptcy petition. After the petition date, RFF filed a proof of claim with the clerk of the court. RFF, through legal counsel, advised the arbitrator that only the debtor filed for bankruptcy and the other nondebtor parties had not filed a bankruptcy case. RFF’s position was that the automatic stay applied only to the debtor and that RFF would continue to proceed with the arbitration against the nondebtor parties. 

Without seeking relief from the automatic stay or informing the debtor of its actions, RFF continued the arbitration proceeding under the pretense of asserting claims against nondebtor parties. RFF obtained an arbitration award containing a finding that it had a perfected security interest in the player contract and other findings that would defeat the debtor’s claims against RFF. RFF received at least part of what it was seeking in the debtor’s bankruptcy case-findings to the effect that it had a security interest in the proceeds of the player contract and that it had perfected that interest by filing a financing statement. 

The automatic stay applies to arbitration proceedings. 2016 WL 1719149, at *13. Because the stay is automatic, a debtor does not have to make any formal requests that it be issued or that it be applied to a particular proceeding. Id., * 13. The court noted the law is abundantly clear and the § 362(a)(1) stay of acts against the “debtor” is to be strictly construed. It is axiomatic that § 362(a)(1) does not automatically rise to a general stay of creditors’ rights to pursue nondebtor codefendants even those with some relationship to the debtor. Id. at *14. But the automatic stay applies by its terms not only to actions against the debtor but also to acts to “exercise control over property of the estate” [see 11 U.S.C. § 362(a)(3); Id., *16]. The debtor’s rights under the player contract are part of his bankruptcy estate. The debtor also filed claims against RFF by way of defenses and counterclaims. The debtor’s claims against RFF are property of his bankruptcy estate. As the court noted, the Sixth Circuit has recognized that “it is well established that ‘interest of the Debtor and property include ‘causes of action,’ making causes of action existing as of the commencement of the bankruptcy case property of the estate under § 541(a)(1).” Id., *18. 

The court determined that RFF proceeded on a course of action that intentionally violated the automatic stay. Bankruptcy courts have the authority to enforce the automatic stay by levying sanctions against parties who take actions in violation of the stay. Id. at *21. Once a willful violation of the automatic stay is found, an award of actual damages is mandatory. Id., *22. Debtor’s counsel submitted fee statements during and after the bankruptcy court hearing, seeking payment for attorneys’ fees and expenses. RFF objected to the reasonableness of debtor’s attorneys’ fees. Since the debtor has the burden of proving the requested fees are reasonable, the court will hold a separate evidentiary hearing on the reasonableness of the requested fees. The court will also address whether the debtor is entitled to any punitive damages as a result of the willful violation. Id., *23. 

Most bankruptcy practitioners when asked whether or not an act contemplated by a creditor might violate the automatic stay are likely to advise their clients, out of an abundance of prudence, that it may be safer to ask for permission than forgiveness. RFF’s counsel did not do so. As a result, RFF proceeded in a course that violated the automatic stay. RFF was standing on thin ice when it proceeded to take the course of action to enforce its rights in the arbitration proceeding without the bankruptcy court granting relief from the stay. It may be worthwhile, therefore, to seek permission rather than forgiveness when confronted with the automatic stay. 

For Further Information

If you have any questions about this Alert, please contact Walter J. Greenhalgh, any of the attorneys in our Business Reorganization and Financial Restructuring Practice Group or the attorney in the firm with whom you are regularly in contact.

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