Chapter 11, E. "Cause" to Modify the Stay

• Jurisdiction: United States

E. "Cause" to Modify the Stay

In order to modify the automatic stay to allow a claim to be pursued against the debtor or the estate, the bankruptcy court must first determine that "cause" exists. Section 362(d) provides the grounds for relief from the stay for a party-in-interest:

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or
(2) with respect to a stay of an act against property under subsection (a) of this section, if

(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization.

"Cause" is not defined in the Bankruptcy Code and must be determined on a case-by-case basis.³²⁰ Generally, courts will evaluate certain specific criteria to ascertain whether or not "cause" exists. Most bankruptcy courts will consider the following factors:

1. the prejudice to the debtor or the debtor's bankruptcy estate from allowing the civil litigation to continue;
2. whether the hardship to the party seeking relief considerably outweighs the hardship to the debtor; and
3. the creditor's probability of prevailing on the merits of the litigation.³²¹

The burden of showing "cause" is on the party moving for relief from the stay. If the movant makes a showing of cause, the burden then shifts to the debtor to show prejudice.³²²

In an effort to show prejudice, debtors will often make the argument that permitting an action to proceed in another tribunal will interfere with the pending bankruptcy case.³²³ Depending on the circumstances of the particular case, the bankruptcy court may agree with the debtor that prejudice exists. For example, the court in In re Towner Petro. Co. ³²⁴ refused to lift the stay because the requested discovery would require the debtor to expend sufficient time and effort away from its attempt to reorganize, which would prejudice its reorganization efforts.

An insurer seeking to have the automatic stay modified to enable it to pursue adjudication in a nonbankruptcy forum would argue that it is appropriate for the proceeding to continue in the court of origin. The legislative history indicates that such a circumstance was specifically contemplated by Congress: "[I]t will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from any duties that...