How to Modify a Bankruptcy Stay to Proceed with Related Litigation

Parties involved in litigation subject to the automatic bankruptcy stay of 11 U.S.C. § 362 have options to pursue their claims. In particular, a party with a pending personal injury action may seek to have the stay modified to continue pursuing the claim. For example, a personal injury plaintiff may seek to have the stay lifted to the extent that there is insurance coverage by limiting the recovery to the amount of available insurance coverage.

Under 11 U.S.C. § 362(d)(1), Federal Courts have the authority to grant relief from the stay for “good cause” on a case-by-case basis.[1] Specifically, Courts have granted relief from the automatic stay to allow a creditor to obtain a judgment against a debtor in name only in order to recover the insurance policy proceeds from the debtor’s insurer when the claims are covered by the policy.[2] Since there is no depletion of assets that would be otherwise available to satisfy general, unsecured claims, this type of recovery may be permissible.[3] However, lifting the stay is not automatic.

In addition, 11 U.S.C. § 362(d)(2) provides relief from an automatic stay for a secured creditor with respect to an act against property of the bankruptcy estate based on two requirements. First, the value of the property must not exceed the amount of debt secured by the liens on the property. Second, the property of the debtor must not interfere with a successful reorganization of the bankruptcy estate.

In addition to the aforementioned, the provisions within 11 U.S.C. § 362(d)(3) and 11 U.S.C. § 362(d)(4) also provide a Court the authority to modify a stay. A party may be able to modify the stay under these sections if he or she has a secured interest in a property.

After a motion for relief from the bankruptcy stay has been filed, Courts will consider several factors in deciding whether to grant relief from the stay. This fact-sensitive approach usually requires analysis on a case-by-case basis.

If you or your business are involved in litigation involving a party that has filed for bankruptcy or is contemplating filing for bankruptcy, please contact Joseph V. Leone, Joshua A. Filzer or Stephen M. Hennessy or call us at (732) 545-4717.    

 

[1] In re Tucson Estates, Inc., 912 F.2d 1162, 1166 (9th Cir. 1990)

[2] International Business Machines v. Fernstrom & Van Co. (In re Fernstrom & Van Co.) 938 F.2d 731 (7th Cir. 1991)

[3] 3 Collier on Bankruptcy 362.07[3][a][1] (Lawrence P. King, ed. 15th Ed. Revised 1999)