Background
With Purpose, Inc. (formerly GloriFi), a financial technology startup, filed for Chapter 7 bankruptcy in February 2023. Before the bankruptcy, With Purpose had initiated arbitration claims against the Ayers parties, who included a co-founder and early investors. The Ayers parties countered with claims against both the debtor and Toby Neugebauer, another co-founder.
After the bankruptcy filing triggered the automatic stay, the Ayers parties ceased pursuing their counterclaims against the debtor but continued aggressive pursuit of claims against Neugebauer, including a breach-of-fiduciary-duty claim. Over several months, they sought Neugebauer’s deposition on multiple occasions. Despite his refusals and an arbitrator’s orders, the Ayers parties persisted, filed supplemental claims in May 2023, and threatened sanctions. Neugebauer ultimately moved in bankruptcy court to enforce the automatic stay against the deposition attempts.
In July 2023, the Ayers parties agreed to drop certain claims affecting the estate, including the fiduciary-duty claim, in coordination with the debtor. However, they continued pursuing that very claim against Neugebauer by attempting to depose him. The bankruptcy court found a willful violation of the automatic stay and awarded Neugebauer actual damages and attorney’s fees. Both the district court and the Fifth Circuit addressed whether this determination was correct.
The Court’s Holding
The Fifth Circuit held that Neugebauer had standing to enforce the automatic stay as both a creditor 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 that Neugebauer fell within the plain language of the statute simply by expending substantial resources to combat the violation.
On the merits, the court held that the Ayers parties willfully violated the automatic stay. The breach-of-fiduciary-duty claim belonged to the bankruptcy estate—the Ayers parties had implicitly acknowledged this by agreeing to dismiss it in coordination with the estate—and therefore was subject to the automatic stay under 11 U.S.C. § 362(a)(3). By attempting to depose Neugebauer regarding this estate claim after the stay went into effect, the Ayers parties violated the automatic stay “to exercise control over property of the estate.” The first two elements (knowledge and willfulness) were undisputed; the Ayers parties knew of the stay, had stopped pursuing claims against the debtor, but then deliberately continued with Neugebauer.
Finally, the court affirmed the damage award and attorney’s fees. Although the district court applied an abuse-of-discretion standard to the fees award, the court noted that the statute mandates attorney’s fees and should be reviewed for clear error. The bankruptcy court had carefully reviewed the billing line-by-line and adjusted for unrelated tasks and duplicative staffing. The court also upheld inclusion of fees from Neugebauer’s state-court lawsuit seeking to stay the arbitration, since Neugebauer would not have needed that separate action but for the Ayers parties’ violation of the automatic stay.
Key Takeaways
- Creditors and individuals injured by a willful automatic-stay violation may enforce the stay and recover actual damages and attorney’s fees under 11 U.S.C. § 362(k).
- Fiduciary-duty claims arising from duties owed to the company are estate property and subject to the automatic stay; creditors cannot pursue such claims against non-debtors in parallel arbitrations.
- Willfulness requires knowledge of the stay and intent to take the action that violates it; specific intent to violate the stay is not required, and actions cannot have been inadvertent.
- Fees and costs incurred to defend against or remedy a stay violation—including separate state-court litigation—are recoverable as part of “actual damages.”
- Statutory attorney’s fees awards are mandatory and reviewed for clear error, not abuse of discretion.
Why It Matters
This decision reinforces that the automatic stay is a powerful protection for bankruptcy estates, not merely a procedural rule. By holding that estate property (even when it could theoretically have been released) remains protected from parallel litigation conducted against non-debtors, the court prevents creditors and other litigants from circumventing the bankruptcy process. The decision makes clear that parties who knew of the stay and proceeded anyway face substantial liability, including mandatory attorney’s fees, creating a strong deterrent against continued pursuit of estate-related claims outside the bankruptcy forum.
The ruling also clarifies that the Fifth Circuit will not second-guess damage awards that are carefully calibrated to actual injury, and that courts may properly account for cascading legal costs—here, the state-court action to stop the wrongful arbitration—as foreseeable consequences of the stay violation. For practitioners, the decision underscores the importance of recognizing which claims belong to the estate and promptly asserting the automatic stay to protect estate assets and the orderly administration of the bankruptcy.