Reported / Citable
Background
With Purpose, Inc., a financial technology startup formerly known as GloriFi, filed for Chapter 7 bankruptcy in February 2023. Prior to the bankruptcy, the company had initiated arbitration claims against the Ayers parties (who included a co-founder and early investors). The Ayers parties filed counterclaims against both the debtor and Toby Neugebauer, another co-founder. When the bankruptcy was filed, the automatic stay prevented further collection efforts against the estate.
The Ayers parties complied with the stay as to their counterclaims against the debtor but continued pursuing claims against Neugebauer personally, including a breach-of-fiduciary-duty claim. They sought Neugebauer’s deposition on multiple occasions between February and May 2023, despite his repeated refusals and the arbitrator’s contempt findings. The Ayers parties filed supplemental claims in May 2023 and threatened sanctions to compel Neugebauer’s appearance. When they moved forward with a fourth deposition, Neugebauer sought bankruptcy court protection, arguing the depositions violated the automatic stay.
The Court’s Holding
The Fifth Circuit affirmed the bankruptcy court’s judgment on all issues. First, the court held that Neugebauer had standing to enforce the automatic stay both as a creditor (under Fifth Circuit precedent in St. Paul Fire & Marine Insurance Co.) and as “an individual injured” by the violation under 11 U.S.C. § 362(k). The court rejected the Ayers parties’ zone-of-interests argument, finding Neugebauer suffered a concrete pocketbook injury from the resources expended defending against the stay violation.
Second, the court determined the Ayers parties willfully violated the automatic stay. The court held that willfulness requires only knowledge of the stay and intent to take the violating action—not specific intent to violate the stay itself. Because the Ayers parties knew of the automatic stay (they had notified the arbitrator and ceased pursuing claims against the debtor) and intentionally pursued depositions afterward, the willfulness element was satisfied. Critically, the court found that the breach-of-fiduciary-duty claim was property of the estate, making efforts to develop that claim through depositions an attempt to “exercise control over property of the estate” in violation of 11 U.S.C. § 362(a)(3).
Third, the court affirmed the damages award including attorney’s fees. The court clarified that § 362(k) makes attorney’s fees mandatory upon a finding of willful violation, not discretionary. Thus, clear-error review applied to the bankruptcy court’s fee calculation, not abuse-of-discretion review. The court found no clear error in the line-by-line review conducted by the bankruptcy court or in including fees from Neugebauer’s state-court action to stay the arbitration, as that action would not have been necessary but for the Ayers parties’ stay violation.
Key Takeaways
- Creditors can enforce the automatic stay under § 362(k) and recover damages caused by willful violations, even when the violation does not directly injure the creditor’s rights to the debtor’s assets.
- Fiduciary-duty claims arising from duties owed by one co-founder to the company are estate property subject to the automatic stay; pursuing those claims through discovery violates the stay.
- Willfulness under the automatic-stay provision requires only knowledge of the stay and intentional action, not specific intent to violate the stay; inadvertence is not possible when the violating party knows of the stay’s existence.
- Attorney’s fees are a mandatory, non-discretionary component of damages under § 362(k), reviewed for clear error; fees incurred in related state-court proceedings to enforce the stay may be included as “actual damages” caused by the violation.
Why It Matters
This decision reinforces the Fifth Circuit’s strong protection of the automatic stay in bankruptcy and clarifies the scope of claims subject to it. For practitioners, the opinion confirms that fiduciary-duty claims arising in the bankruptcy context are estate assets, not personal claims of individual shareholders or investors. This has implications for pre-bankruptcy dispute resolution; parties who continue collecting discovery after bankruptcy is filed do so at substantial risk of damages liability, even if their claims nominally target a non-debtor party. The holding also clarifies that attorney’s fees under § 362(k) are not within a court’s discretion to reduce or deny, providing predictable relief for parties defending against stay violations.
The decision is particularly significant for venture-backed companies or closely-held businesses where co-founder disputes often intertwine with company governance claims. Post-bankruptcy pursuit of such claims through arbitration or litigation can trigger automatic-stay violations and fee liability, making it critical for parties to obtain bankruptcy court relief before continuing discovery or litigation efforts against any party whose claims implicate the estate’s assets.