Noram Res., Inc. v. Peterson: If creditors attempt to comply, a stay violation is limited to actual damages.

Case AnalysisDavid Kemper Helsabeck III

Noram Res., Inc. v. Peterson (In re Noram Res., Inc.), No. 08-38222, 2015 WL 5965654 (Bankr. S.D. Tex. Oct. 9, 2015).

Opinion issued: Oct. 9, 2015. Westlaw Link.

Written by: David Kemper Helsabeck III, Staff Member

To raise capital, debtor performed an equity offering; however, later the same year, the debtor defaulted on the debenture and filed for bankruptcy.[1] After filing for bankruptcy, some of the investors sued the debtor for negligence and negligent failure to disclose material facts in state court.[2] The trustee attempted to intervene in the state court action, and the investors requested the bankruptcy court to determine if their claims were property of the estate.[3] The court determined that since the negligent misrepresentation claim was a direct injury, it belonged to the bankruptcy estate.[4] Although the court dismissed the trustee’s argument that all damages resulted from the negligence claim, the court determined that the investors violated the automatic stay “by settling a lawsuit which included claims belonging to the estate.”[5] The trustee then sought sanctions for the automatic stay violation under 11 U.S.C. § 105(a).[6]

Civil contempt disallows punitive damages and is applicable “to coerce the defendant into compliance with a court order and/or to compensate the complainant for losses sustained.”[7] In a contempt action for a violation of the automatic stay, the focus is on whether the conduct of the contemnors complied with the court order.[8] The court determined that the investors attempted to mitigate the automatic stay violation by requesting the court to ascertain if claims were property of the estate and by allowing the trustee to intervene in their state court proceeding against the debtor.[9] Given these facts, the court determined a monetary fine was not necessary to ensure the investor’s compliance with the automatic stay.[10] Still, despite the investors’ attempts in complying with the stay, the court held the trustee may recover actual damages for items such as attorney fees.[11]

This case demonstrates another avenue for trustees to recover damages for violation of an automatic stay. Courts have discretion in granting violation of stay relief under § 105 because  § 362(k) is inapplicable to corporate debtors.[12] It is important for attorneys to note that the recovery of attorney fees is limited to the amount actually spent, not the potential amount, if there is a contingent fee agreement, relief under § 105 will be limited to the amount actually paid to the attorney.[13]

[1] Noram Res., Inc. v. Peterson (In re Noram Res., Inc.), No. 08-38222, 2015 WL 5965654, at *1 (Bankr. S.D. Tex. 2015). The debtor initially filed for chapter 11 Bankruptcy, but it was transferred to chapter 7 and a trustee was subsequently appointed. Id.

[2]Id. at *2.

[3] Id.

[4] Id.

[5] Id. at *3.

[6] Id. at *4. The trustee sought damages under 11 U.S.C. § 105 instead of damages under § 362 because “a majority of circuit and lower courts within this circuit held that corporate debtors cannot recover under § 362(k).” Id.

[7] Id. at *5.

[8] Id. at *6.

[9] Id.

[10] Id.

[11] Id.

[12] Id. at *4.

[13] Id. at *6.