Vol. 18, No. 4 - 17. Bankruptcy Litigation: Some Practical Pointers.

Authorby J. Robert Nelson

Utah Bar Journal

Volume 18.

Vol. 18, No. 4 - 17.

Bankruptcy Litigation: Some Practical Pointers

Bankruptcy Litigation: Some Practical Pointersby J. Robert NelsonIntroduction

The premise of this article, that litigation frequently spawns bankruptcy, is not a novel insight. The recent spate of mass tort suits involving asbestos and dangerous drugs have pushed numerous companies to respond with Chapter 11 filings. Mass tort situations aside, the substantial costs of litigating even one complex case have driven some defendants to seek bankruptcy protection. The mere possibility of a large adverse judgment leads others to bankruptcy. Even the inability to post an undertaking in connection with appeal of an adverse judgment has resulted in bankruptcy filings. Although the circumstances vary, bankruptcy has become a frequently used response to litigation.

Trial lawyers encounter bankruptcy in a wide variety of settings. Some of the more common include:

* pursuing a motion for relief from automatic stay to permit prosecution of a pre-bankruptcy suit against a debtor;

* submitting a proof of claim against a debtor and handling an objection to the claim;

* opposing a debtor's motion to assume or reject a lease or contract;

* objecting to the dischargeability of a debt of an individual debtor;

* defending a preference or fraudulent conveyance action; and

* defending a tort or contract action by a debtor.

While this list is not exhaustive, it will serve in this article to illustrate a number of features of bankruptcy litigation and provide a backdrop for some practical suggestions for litigators.

Bankruptcy Litigation: The Setting

Those who have encountered it can attest that, from the litigators' stand point, things change after a bankruptcy filing. Probably the most dramatic change relates to state and federal court suits pending against a debtor at the time of bankruptcy. Those suits are frozen by the automatic stay under 11 U.S.C. (the "Bankruptcy Code") §362. That section stays and enjoins, among other things, "the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of a case under title 11." Although the bankruptcy court has the discretion to lift the stay for cause (Bankruptcy Code § 362(d)(1)), it is rare that pre-bankruptcy suits are permitted to proceed to trial in a non-bankruptcy court. One reason is that there is no need for pre-bankruptcy suits against a debtor to go forward because the Bankruptcy Code includes its own system for submission and resolution of claims against a debtor. That system is based on an adjudication by the bankruptcy court rather than by a state or other federal court, even if a suit was pending against a debtor at the time of bankruptcy.

Another change initiated by a bankruptcy filing relates to the trial forum. Bankruptcy has its own court system. After a filing, most disputes are adjudicated by bankruptcy judges. When the position of bankruptcy judge was created under the Bankruptcy Reform Act of 1978, bankruptcy judges, who replaced bankruptcy referees under the old system, were given broad power to adjudicate all disputes arising in or related to bankruptcy cases. Unlike federal district judges, however, bankruptcy judges were not appointed under Article III of the Constitution and were not tenured judges. In light of this, the broad grant of jurisdiction to bankruptcy judges was...

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