B.A.P. applies automatic stay to non-debtor to protect estate claims

In a decision discussing the scope of the automatic stay to third parties, on June 22, 2026, the Ninth Circuit Bankruptcy Appellate Panel (the B.A.P. or the Court) affirmed a decision from the Central District of California Bankruptcy Court in the Chapter 7 proceeding of Jordan Gene Pearlman (the Debtor). The Debtor filed a Chapter 7 petition after Peter Brown Kleidman (the Plaintiff) obtained a judgment against the Debtor and sought to enforce that judgment through fraudulent transfer litigation against the Debtor and the Debtor’s (non-debtor) wife in both California and New York. The B.A.P. held that the Plaintiff violated the automatic stay by continuing the New York action against the Debtor’s wife, and awarded the Debtor attorneys’ fees as damages.

Background

Prior to the Debtor’s Chapter 7 filing, the Plaintiff successfully sued the Debtor in New York for breach of a guaranty. In re Pearlman, 2026 WL 1791719 (B.A.P. 9th Cir. June 22, 2026) at 1. To collect on that judgment, the Plaintiff filed complaints against the Debtor and his wife, Elizabeth Ann Hunter, in New York and California, alleging that the Debtor fraudulently executed a premarital agreement to shield community property assets from creditors. Id.

On September 11, 2025, while both lawsuits were pending, the Debtor filed for Chapter 7. Id. The wife did not file for bankruptcy. The Plaintiff received notice of the filing but nonetheless filed an ex parte motion in the New York action on September 25, 2025, requesting leave to serve Hunter by alternative means and an extension of the service deadline, arguing that the statute of limitations might otherwise expire. Id. at 2. The Plaintiff did not inform the New York court of the Debtor’s bankruptcy filing or that he intended to proceed against Hunter alone. Id. Unaware of the bankruptcy case, the New York court granted the motion, and the Plaintiff served Hunter on October 28, 2025. Id.

On November 6, 2025, the Debtor moved to hold the Plaintiff in contempt for violating the automatic stay and requested attorneys’ fees and costs. Id. In response, the Plaintiff finally disclosed the Debtor’s bankruptcy filing. Id. The bankruptcy court found that the Plaintiff had violated the automatic stay and awarded the Debtor $5,880 in attorneys’ fees. Id. The Plaintiff timely appealed. Id.

Continuing litigation against a non-debtor transferor violated the automatic stay 

The Court began by emphasizing the importance of the automatic stay, noting that Congress structured Section 362 to place the burden of seeking stay relief on creditors and to prevent piecemeal dismemberment of a debtor’s estate. Id. at 3. The Court further explained that Section 362(k) ensures the expense of enforcing the stay is borne by the offending creditor, not the debtor or the estate. Id. at 4.

The Court noted that the Plaintiff chose to continue litigating based on his own interpretation of Section 362(a) rather than pausing the litigation or seeking stay relief from the bankruptcy court. Id.

The Court rejected the Plaintiff’s argument that litigation against a non-debtor did not implicate Section 362’s initial prongs, finding a textbook violation of Sections 362(a)(1) and 362(a)(3). Id. As to Section 362(a)(1), the Court held that post-petition prosecution of a fraudulent transfer claim against a non-debtor transferee violates the automatic stay, relying on In re Koeberer, 632 B.R. 680 (9th Cir. BAP 2021). In Koeberer, a bank continued a prepetition fraudulent transfer action against a non-debtor transferee after the debtor-transferors filed for Chapter 7, and the B.A.P. concluded that an action against a third party to recover a claim against the debtor violates the stay. See id. at 684-86. The Court found that, as in Koeberer, albeit proceeding against the non-debtor wife, the Plaintiff clearly intended to recover against the Debtor through the fraudulent transfer action, thereby violating Section 362(a)(1). Id.

The Court found that the Plaintiff’s actions violated Section 362(a)(3) because the underlying fraudulent transfer claims become property of the Debtor’s estate upon a bankruptcy filing. Pearlman at 6-7. The Plaintiff’s claims were therefore estate property, and his continued prosecution constituted an attempt to exercise control over that property in violation of the stay. Id.

Attorneys’ fees are actual damages under Section 362(k)

The Court also rejected the Plaintiff’s argument that no attorneys’ fees should have been awarded. Id. at 7. The Plaintiff contended that Section 362(k) permits recovery of attorneys’ fees only where other compensatory damages are also awarded, asserting that fees alone do not qualify as “actual damages” on their own. Id.

The Court disagreed, holding that Section 362(k)(1) provides that an individual injured by a willful stay violation “shall recover actual damages, including costs and attorneys’ fees.” Id. The Court reasoned that the word “including” indicates Congress viewed attorneys’ fees as a category of actual damages – had Congress intended otherwise, it could have used “and,” as it did in distinguishing punitive damages elsewhere in the statute. Id.

In so holding, the Court relied on the Ninth Circuit precedent of In re Schwartz-Tallard, 803 F.3d 1095 (9th Cir. 2015), in which the Ninth Circuit held that Section 362(k)(1) permits recovery of attorneys’ fees even where the stay violation has ended by the time a debtor seeks damages. Id. at 1097. The Ninth Circuit observed that (1) courts should be reluctant to limit the broad reach of Section 362(k); (2) attorneys’ fees are actual damages in their own right; (3) an award of attorneys’ fees is mandatory upon a stay violation; and (4) fee recovery is a vital tool to encourage debtors to bring stay violations to the bankruptcy court’s attention. See id. On this basis, the Court held that the Plaintiff’s position was untenable and affirmed the fee award under Section 362(k).

Additionally, the Court held that the bankruptcy court did not err in calculating damages, given the wide discretion bankruptcy courts enjoy in assessing the reasonableness of attorneys’ fees. Pearlman at 9-10. The Plaintiff argued that the Debtor’s counsel’s hourly rate and hours expended were unreasonable and that the bankruptcy court should have required additional evidence supporting the reasonableness of the fee. Id. The Court disagreed, noting that the B.A.P. has endorsed a trial court’s reliance on its own knowledge of customary rates and on affidavits in the record, and that the award fell within the bankruptcy court’s “great deal of discretion.” Id. at 10.

Why this case matters

The B.A.P.’s ruling reaffirms that claims against non-debtors can nonetheless be subject to the automatic stay where the underlying claims are part of the bankruptcy estate or the action targets non-debtor transferees. Creditors pursuing fraudulent transfer litigation with a nexus to a pending bankruptcy should carefully assess whether stay relief is necessary before continuing any action or risk liability for attorneys’ fees and costs, which are recoverable without proof of additional compensatory injury.

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Summer associate John Learned assisted in the preparation of this article.