The Intersection of Bankruptcy and Civil Litigation: Know Enough to Avoid Peril!

• Publication year: 2018
• Author: By John D. Monte

The Intersection of Bankruptcy and Civil Litigation: Know Enough to Avoid Peril!

By John D. Monte

Litigation is stressful, but when a party in the case files a petition in bankruptcy, this adds a layer of confusion to the non-bankruptcy practitioner's angst. Many state court judges are likewise uncomfortable with the intrusion that bankruptcy imposes on cases assigned to them. Yet, every non-bankruptcy practitioner must know what he or she can and cannot do when bankruptcy impacts litigation, or at least must recognize the importance of working with a bankruptcy attorney to get the litigation back on track.

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Under bankruptcy law, the automatic stay, which is effective upon the filing of the petition, is sacrosanct. (11 U.S.C. § 362.) The phrase "automatic stay" is misleading to some because it doesn't sound ominous enough or convey the legal force behind the concept. But the automatic stay is not to be taken lightly. It is a federal injunction that prohibits the commencement or continuation of lawsuits or other proceedings against the debtor and the debtor's property interests. The stay issues with the filing of the bankruptcy petition. No separate application for injunctive relief is required. It is, in fact, automatic.

Bankruptcy courts are quick to impose sanctions for violations of the stay. Even if one did not know that a bankruptcy petition had been filed and proceeded against a debtor or the debtor's interest in property in violation of the stay, albeit unknowingly, one could still be found in the crosshairs of an Order to Show Cause re Contempt. If in doubt as to whether action can be taken against the debtor or the debtor's property interests when a bankruptcy petition is filed, the best advice is to take the safe route and file a motion for relief from stay in the bankruptcy court. It's also important to understand how the stay is applied. While it's easy to comprehend that the stay applies to the debtor personally, application to the debtor's property interests is less clear. Property of the estate is defined in 11 U.S.C. section 541. It's necessary to think broadly here so as not to inadvertently violate the stay. Property of the estate includes every property interest that the debtor held as of the petition date, of whatever kind or character, whether it is contingent, unliquidated, or disputed, tangible or intangible. The purpose of this comprehensive definition is to ultimately bring into the debtor's bankruptcy estate as much value as possible with the goal of liquidating the property interests and delivering a dividend to the debtor's general unsecured creditors.

Consider the application of these basic bankruptcy concepts to the following litigation setting: Susan files a breach of contract action in state court against Boris; his company called First To Do It, Inc...