How a Bankruptcy Stay Impacts Ongoing Litigation

Once a bankruptcy petition is filed, all proceedings are stayed. This is fine and well when you have one plaintiff and one defendant. However, often litigation involves multiple parties and the stay impacts them differently. How does this stay affect litigation involving multiple parties?

Generally, federal bankruptcy law holds the stay only applies to the debtor. This means that any claims made against the party who filed for bankruptcy are halted pending the outcome of the bankruptcy proceeding. In addition, the automatic stay does not extend to actions against parties other than the debtor. However, there are times when the stay will prevent further proceedings as to all defendants. This usually occurs when the identity between the debtor and the co-defendant are the same. The stay gives the bankrupt party a bit of “breathing room,” allowing it to get its affairs in order. As to the other parties in litigation, they are left in limbo since all further proceedings are halted by the bankruptcy stay. However, the parties have the option to file a motion for relief from the stay, thereby allowing their claims to proceed. A party wishing to proceed with ongoing litigation or collection activities runs the potential of violating the bankruptcy stay.

There can be serious implications for a party that violates a bankruptcy stay. These violations include costs, attorneys’ fees, possible punitive damages and the acts are void or voidable. Thus, there is some serious risk for parties involved in litigation with a bankrupt party, or a party contemplating filing bankruptcy.

The year 2020 was interesting to say the least. The COVID-19 pandemic impacted the lives of everyone. As a result, many businesses have seen a decline in work throughout the past year. To some extent, this has led well-known names such as Neimann Marcus, JC Penney, J. Crew and Hertz to file for bankruptcy. Litigants should be aware of the potential impact bankruptcy filings can have regarding ongoing litigation.

Hoagland Longo has handled multiple cases involving parties who have filed for bankruptcy during litigation. If you are involved in litigation with a party who filed for bankruptcy, or a party who is contemplating bankruptcy, please contact Joseph V. Leone, Joshua A. Filzer or Stephen M. Hennessy or call us at (732) 545-4717 to better understand the impact of the bankruptcy on your case.