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Summarizing by Lars Fuller

In re Health Care Real Estate Partners

Section 362(k) creates a private right of action that may be maintained even after dismissal of the underlying bankruptcy, the Third Circuit says.

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Case Type:
Case Status:
Reversed and Remanded
18-3267 (3rd Circuit, Oct 22,2019) Published
A bankruptcy court does not have authority to prohibit a debtor from bringing a claim for damages under 11 U.S.C. § 362(k). Section 362(k) creates a private cause of action.
Procedural context:
The district court erred in affirming the bankruptcy court’s dismissal of the debtor’s § 362(k) action based on a prior order of the bankruptcy court authorizing the debtor to seek damages under 11 U.S.C. § 303(i).
The debtor, Healthcare Real Estate Partners, LLC ("Healthcare"), was the manager of certain investment funds. On September 16, 2015, the investors in the funds filed an involuntary bankruptcy petition against Healthcare to seek its removal as the fund manager. Because Healthcare had not been served with process in the bankruptcy case, it did not receive notice of the filing of the petition. Healthcare thus did not contest the petition and the bankruptcy court entered an order for relief on the petition. Healthcare was removed as the fund manager, and the investors installed Summit Healthcare Reit, Inc. (“Summit”) as the new fund manager. Summit then dissolved the funds. Summit and the petitioning creditors are the appellees. Healthcare subsequently found out about the bankruptcy. Healthcare filed a motion with the bankruptcy court seeking to vacate the bankruptcy court’s order for relief on the petition due to the faulty service of process on it. The bankruptcy court granted Healthcare's motion. The appellees moved to dismiss the involuntary bankruptcy petition, and Healthcare opposed the motion, asserting claims under § 303(i). The bankruptcy court granted the appellees' motion for voluntary dismissal, but retained jurisdiction in the order of dismissal stating that “nothing herein shall limit [Healthcare’s] right to seek damages, including without limitation, fees and costs, pursuant to 11 U.S.C. § 303(i) or otherwise.” Healthcare then filed a motion seeking section 303(i) damages and commenced an adversary proceeding asserting section 362(k) claims violation of the automatic stay because Healthcare was removed--and Summit installed--as fund manager without approval of the bankruptcy court. The bankruptcy court dismissed the section 362(k) adversary proceeding based on its prior order authorizing Healthcare to seek damages under section 303(i).

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