When a defendant in a personal injury lawsuit files for bankruptcy, the “drill” is familiar: a suggestion of bankruptcy is filed, the case is stayed, and no further action can be taken to liquidate the personal injury plaintiff’s claims until the automatic stay is lifted.
So how does a personal injury claimant go about lifting the automatic stay in order to liquidate his or her claim against the debtor? Answer: the claimant will need to file a motion with the applicable bankruptcy court to seek relief from the automatic stay.
The Automatic Stay
First, the basics. The automatic stay is a very powerful protection provided to a debtor in a bankruptcy proceeding. The stay prohibits creditors (including personal injury claimants) from commencing or continuing any proceeding against the debtor which could have been commenced prior to the bankruptcy. Applied to personal injury claimants, the automatic stay prohibits efforts to commence or continue an existing lawsuit against a defendant debtor once it has filed for bankruptcy protection.
Specifically, Section 362(a)(1) of the Bankruptcy Code stays “the commencement or continuation … of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement” of a bankruptcy proceeding. In other words, the automatic stay provides a debtor a “breathing spell” from its creditors.
Relief from the Automatic Stay
In order to liquidate a claim, a personal injury claimant must file a motion to seek relief from the automatic stay. Under Section 362(d)(1) of the Bankruptcy Code, the Bankruptcy Court shall lift the automatic stay for “cause.” If a creditor seeking relief from the automatic stay makes a prima facie case of “cause” for lifting the stay, the burden going forward shifts to the debtor pursuant to Bankruptcy Code Section 362(g). See In re 234-6 West 22nd St. Corp., 214 B.R. 751, 756 (Bankr. S.D.N.Y. 1997).
The term “cause” is not defined by the Bankruptcy Code. Therefore, whether cause exists to lift the automatic stay is determined by bankruptcy courts on a case by case basis. See Izarelli v. Rexene Prod. Co. (In re Rexene Prod. Co.), 141 B.R. 574, 576 (Bankr. D. Del. 1992). Courts determine what constitutes “cause” based on the totality of the circumstances in each particular case. Baldino v. Wilson (In re Wilson), 116 F. 3d 87, 90 (3d Cir. 1997).
Courts conduct a “fact intensive, case-by-case balancing test, examining the totality of the circumstances to determine whether sufficient cause exists to lift the stay.” In re The SCO Group, Inc., 395 B.R. 852, 857-58 (Bankr. D. Del. 2007). The Delaware Bankruptcy Court has considered three factors when balancing the competing interests of debtor and movant: (a) the prejudice to either the bankruptcy estate or the debtor that would result should the stay be lifted; (b) any hardships facing the movant and debtor should the stay be maintained; and (c) the movant’s probability of success if the stay is lifted. Santa Fe Minerals v. BEPCO. L.P. (In re 15375 Memorial Corp.), 382 B.R. 652, 686 (Bankr. D. Del. 2008).
Provided that the above-mentioned factors are met to establish sufficient cause, often times a debtor will stipulate to lifting the automatic stay provided that the claimant agrees not to seek recovery against property of the debtor’s estate, but rather agrees to limit recovery to applicable insurance proceeds. This often involves some level of negotiation with debtor’s counsel, depending on the circumstances of the case and the scope of coverage. A recent example of such a negotiated order entered by the Delaware Bankruptcy Court in the Celadon Group, Inc. bankruptcy proceeding can be found here.
Stay tuned for further posts regarding seeking relief from the automatic stay under Section 362 of the Bankruptcy Code.