Motion for Relief from Stay

Very often in the course of a bankruptcy proceeding, a creditor with a pending lawsuit against the debtor will need to obtain relief from the automatic stay in order to continue to prosecute the pre-petition litigation.   For example, personal injury claimants who seek to recover solely against an insurance policy of a debtor may obtain relief from the automatic stay in certain circumstances.  Such claimants will need to file a motion with the Delaware Bankruptcy Court to obtain relief from the stay in order to pursue their claim to a final judgment.

Relief from Stay

Under section 362(d)(1) of the Bankruptcy Code, the bankruptcy court “shall” lift the automatic stay for “cause.”  If a creditor seeking relief from the automatic stay makes a prima facie case of “cause” for lifting the stay, the burden going forward shifts to the debtor pursuant to Bankruptcy Code § 362(g). See In re 234-6 West 22nd St. Corp., 214 B.R. 751, 756 (Bankr.S.D.N.Y. 1997).

The Bankruptcy Code does not define “cause.” Instead, whether cause exists to lift the automatic stay should be determined on a case by case basis. See Izzarelli v. Rexene Prod. Co. (In re Rexene Prod. Co.), 141 B.R. 574, 576 (Bankr.D.Del. 1992). See also, In re Texas State Optical, Inc., 188 B.R. 552, 556 (Bankr. E.D.Tex. 1995) (finding that “cause” for modification of the automatic stay is “an intentionally broad and flexible concept that permits … [a] [b]ankruptcy [c]ourt, as a court of equity, to respond to inherently fact-sensitive situations.”) Courts determine what constitutes “cause” based on the totality of the circumstances in each particular case. Baldino v. Wilson (In re Wilson), 116 F.3d 87, 90 (3d Cir. 1997).

In re Rexene provides the “balancing test” to determine whether cause exists to lift the automatic stay. 141 B.R. at 576. Under Rexene, the balancing test looks at three factors to decide whether to lift the automatic stay, including: (a.) whether prejudice will be caused to the estate or the debtor;
(b.) whether hardship to the movant from continuing the stay outweighs any hardship to the debtor; and (c.) whether the movant has a reasonable probability of prevailing on the merits of the suit. Id.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at


In a 28 page decision dated March 9, 2012, Judge Carey of the Delaware Bankruptcy Court denied confirmation of a debtor’s plan and granted the motion to lift the automatic stay filed by a creditor with a lien against a majority of the debtor’s assets.  Judge Carey’s opinion is available here (the “Opinion”).  A Dirt-for-Debt exchange is one where a debtor conveys to a secured creditor the collateral securing its loan in full satisfaction of the creditor’s claim. A more important aspect of this term, however, is that it is very catchy (it got your attention – didn’t it?) and was used by Judge Carey in the Opinion.


All Lands Investments, LLC, (the “Debtor”) had borrowed over $16,000,000 from RBS Citizens (“Citizens”) in order to purchase and develop a parcel of property here in Delaware (the “Subdivision”). Opinion at *3-4. While the Subdivision was the Debtor’s primary asset, it was also collateral for the loans from Citizens. Prior to declaring bankruptcy, the Debtor defaulted on its obligations to Citizens under the loan agreement, and the Delaware State Court had entered a final judgment in favor of Citizens for over $14,000,000. Opinion at *5. Three months later, the Debtor declared bankruptcy.

The Debtor recently filed a plan of reorganization (the “Plan”) that would provide Citizens with a secured claim for the value of the Subdivision with any debt beyond that value being a general unsecured claim. Opinion at *6. This naturally resulted in an appraisal argument between the Debtor and Citizens, as Citizens argued it would have a residual unsecured claim, and the Debtor argued that Citizens’ claim would be completely satisfied by the collateral. Opinion at *9. Regardless of which appraisal was selected by the court, this treatment would allow the Debtor to consider all of Citizens’ secured claims to be paid in full for purposes of voting on the Plan. Thus, for purposes of having the Plan confirmed, Citizens’ only possible ‘no’ vote would be that of an unsecured creditor, simplifying the cram-down process for the Debtor. – A cram-down is the process under 11 U.S.C. § 1129(a)(10) to confirm a plan despite a class of creditors voting ‘no’. It has a number of requirements, but the only one important to understanding this Opinion is that a class of creditors with higher priority than the one voting ‘no’ must be impaired and vote yes to the plan.

With that intent, the Debtor held out as impaired two classes of claimants apart from the general unsecured creditors, arguing that their acceptance of the Plan allowed the Debtor to cram-down the Plan over an objection by Citizens. Opinion at *18. Citizens argued the opposite, that the collateral was worth far less than its claim, and its resulting unsecured claim controlled the vote of the general unsecured creditors because of its size. Citizens also argued that the classes which the Debtor claimed were impaired were “artificially impaired” and therefore their votes do not satisfy the cram-down requirements. Opinion at *22-23.

Citizens also filed a motion for relief from the automatic stay to exercise its remedies against its collateral, arguing that it was not adequately protected because the Debtor had no equity cushion and was not making payments. Citizens also argued that the because the property was completely encumbered and the Debtor could not confirm a plan, the Subdivision was not necessary for the Debtor’s reorganization. Opinion at *27.

Judge Carey’s Opinion

The Opinion is lengthy, but can be summarized quickly. Judge Carey found the testimony of the expert presented by Citizens to be more persuasive, and assigned a value to the collateral well below the debt owed to Citizens. Opinion at *26. This meant that Citizens’ unsecured claim would control the vote of the unsecured creditors. Id. Judge Carey also ruled that the classes of creditor claimed by the Debtor to be impaired were artificially impaired, meaning that they would not be considered impaired for purposes of a cram-down analysis. Opinion at *24.

Judge Carey then moved to Citizens’ motion for relief from the stay. He referred to the record made at the confirmation hearing in holding that “Citizens met is burden of proof” and thus would be granted relief from the automatic stay. Opinion at *27. While the Opinion addressed additional items, they were not core to Judge Carey’s decision and in the interest of minimizing the length of an already too-long post, they have been omitted. In this case, the Debtor tried to trade dirt for debt, but with no other assets to speak of and an unconfirmable plan, the Court allowed proceedings to continue against the dirt without impacting the debt. A worst-case scenario for a debtor, but a nominal win for a lender (which is still likely to be out-of-the-money on this deal).