The Automatic Stay

AuthorBy Marcus A. Banks, Joel Buckberg, and David S. Catuogno
Pages71-94
71
I. THE AUTOMATIC STAY—GENERALLY
A. EFFECT AND IMPACT OF THE STAY
1. The Basics
As a practical matter, the franchisor may have various enforcement
postures applicable to a franchisee’s relationship when the franchisee
commences a case and the automatic stay arises. The ling is almost
always the next step in a remedial process that started when the fran-
chisee suffered from payment or performance issues. These postures
would include suspension of services, access to technology or data,
marketing program participation, automatic deductions or setoff of
franchisee debt against payments due to the franchisee, enhanced
scrutiny or inspections, training activities and other higher levels of
franchisor interaction. Counsel must be diligent to instruct the franchi-
sor to restore the franchise to all rights and participation in franchise
support activities as if there was no default, or seek immediate guid-
ance from the bankruptcy court as to what positions can continue or
be subject to timely payment of current obligations. This restorative
aspect of the automatic stay is most difcult for lay persons to under-
stand and accept, so careful explanation may be appropriate.
In general, ling a bankruptcy petition immediately does two
things—it creates a new estate, that is the bankruptcy estate, and it
also triggers an “automatic stay” that prohibits any creditor’s attempt
to continue to collect from the debtor or against the property of the
newly formed bankruptcy estate.1 “The automatic stay is often likened
to closing the window and locking the doors” to prevent any depre-
ciation of assets.2 The automatic stay is a fundamental component of
1. 11 U.S.C. § 362(a); Jove Eng’g, Inc. v. I.R.S., 92 F.3d 1539, 1546 (11th Cir. 1996).
2. Warren Westbrook,
The Law of DebTors anD CreDiTors
(6th ed. 2009).
The AuTomATic STAy
By Marcus A. Banks, Joel Buckberg, and David S. Catuogno 3
9781641051972_CH03.indd 71 29/06/18 4:19 PM
72 Chapter 3
the Bankruptcy Code.3 As explained by Congress, the automatic stay provides
the debtor “a breathing spell from [its] creditors. It stops all collection efforts,
all harassment, and all foreclosure actions. It permits the debtor to attempt a
repayment or reorganization plan, or simply to be relieved of the nancial pres-
sures that drove [it] into bankruptcy.”4 The automatic stay is vital because it
protects a debtor from its creditors while it formulates and pursues the optimal
strategy to regain its nancial footing.5
The automatic stay serves a second vital purpose—by preserving the debtor’s
bankruptcy estate from being diminished piecemeal by creditors’ lawsuits and sei-
zures of property, it provides for equitable distribution of the estate among credi-
tors in accordance with the priority scheme of the Bankruptcy Code.6 The automatic
stay enables the bankruptcy court to centralize all disputes concerning property of
the debtor’s estate in order for reorganization to proceed more efciently.7
The scope of the automatic stay is intended to be broad.8 The stay operates
against any attempt to obtain possession or control of property of the estate;
it operates against any attempt to create, perfect, or enforce a prepetition lien;
it operates against any setoff of a prepetition debt; it stops any proceedings
before the U.S. Tax Court; and, importantly, it operates as a stay against “any
act to collect, assess, or recover a claim against the debtor that arose before
the commencement of the case under this title.”9 However, the automatic stay is
not unlimited and the automatic stay does not typically extend to stay actions
against nondebtor codefendants.10 The scope of actions stayed is outlined in
3. See
h.r. rep. no.
595, 95th Cong., 1st Sess. 340 (1977), reprinted in 1978 U.S. Code Cong. &
Admin. News 5787, 5963, 6296–97; In re Rush-Hampton Indus., Inc., 98 F.3d 614, 616–17 (11th Cir. 1996).
4.
h.r. rep. no.
95-595, 95th Cong., 1st Sess. 340 (1977).
5. In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992).
6. See, e.g., Martin-Trigona v. Champion Fed. Sav. & Loan Assoc., 892 F.2d 575, 577 (7th Cir.
1989); S.E.C. v. Brennan, 230 F.3d 65, 70 (2d Cir. 2000) (citing Penn Terra Ltd. v. Department of Envtl.
Resources, 733 F.2d 267, 271 (3d Cir.1984)).
7. Id. (citing In re U.S. Lines, Inc., 197 F.3d 631, 640 (2d Cir. 1999)); see also Shaw v. Ehrlich, 294
B.R. 260, 267 (W.D. Va. 2003), aff’d sub nom. In re Wiencko, 99 F. App’x 466 (4th Cir. 2004) (“Without
the protections of the automatic stay, creditors would engage in a race to collect from a debtor
before a decision could be made by a bankruptcy court. The result would be an impoverished
debtor and a system that rewarded the fastest, but not necessarily the most deserving, creditors.”).
8. Midlantic Nat’l Bank v. New Jersey Dep’t of Envtl. Prot., 474 U.S. 494, 504 (1986) (recognizing
that, “in enacting §362 in 1978, Congress signicantly broadened the scope of the automatic stay”).
9. 11 U.S.C. §362(a)(1)-(8); see, e.g., In re Everchanged, Inc., 230 B.R. 891, 894 (Bankr. S.D. Ga.
1999) (holding in personam actions against debtor barred during bankruptcy). Similarly, section
362(a)(8) prohibits the commencement or continuation of certain proceedings before the United
States Tax Court regarding a tax liability of a debtor that is a corporation for a taxable period or
concerning the tax liability of a debtor who is an individual for a taxable period ending before the
date of the order for relief under this title. 11 U.S.C. § 362(a)(8).
10. See, e.g., Arnold v. Garlock, Inc., 278 F.3d 426, 436 (5th Cir. 2001). However, the automatic
stay may apply to an action against nondebtor defendants under limited circumstances regarding
the nondebtors’ relationship to the debtor. See Reliant Energy Ser vs., Inc. v. Enron Can. Corp., 349
F.3d 816, 825 (5th Cir. 2003). For instance, a bankruptcy court might extend the automatic stay to
a nondebtor codefendant if there is such an identity between the debtor and the nondebtor code-
fendant that the debtor may be said to be the real party defendant and that a judgment against the
nondebtor codefendant will in effect be a judgment or nding against the debtor. Reliant, 349 F.3d
at 816 (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)).
9781641051972_CH03.indd 72 29/06/18 4:19 PM

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