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 cneff@foxrothschild.com.

In the bankruptcy case of ADI Liquidation, Inc. (f/k/a AWI Delaware, Inc.), Bankr. No. 14-12092 (KJC), the Court considered a motion by creditor Western Family Foods, Inc. (“WFFI”) for relief from the automatic stay to exercise its setoff rights against its general unsecured claim against ADI Liquidation, Inc., et al. (the “Debtors”).  Meanwhile, the Debtors asserted that they also hold certain setoff rights, and have asked for Court approval of the exercise of their setoff rights against claimants who, like WFFI, have asserted administrative priority claims under Bankruptcy Code § 503(b)(9).

In the opinion, the Court found that WFFI requested that its setoff rights trump those of the Debtors.  In denying this request, Judge Carey provided that “there is no basis in the Bankruptcy Code or applicable case law to conclude that a claimant’s setoff rights should trump a debtor’s setoff rights.” Citing In re Circuit City Stores, Inc., 2009 WL 4755253, *4 (Bankr. E.D. Va. Dec. 3, 2009), the Court provided:

The Court, in evaluating setoff, should favor an application that is most likely to result in equal distributions to the Debtors’ creditors as a whole. See In re Colonial Realty Co., 229 B.R. 567, 575 (Bankr. D.Conn. 1999) (holding that the right to setoff is not absolute and must be balanced against the debtor’s duty to maximize assets of the bankruptcy estate and equitable treatment of other creditors.)

At bottom, the Court reiterated that the Bankruptcy Code does not treat a debtor’s and creditor’s right to setoff equally.

Carl D. Neff is a bankruptcy attorney 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 cneff@foxrothschild.com.

The automatic stay is one of the most powerful protections provided to debtors in a bankruptcy proceeding.  The stay acts as an injunction that prohibits creditors (including landlords) from commencing or continuing any proceeding against the debtor which could have been commenced prior to the bankruptcy.  Applied to landlords, the automatic stay prohibits efforts to collect unpaid rent, or seek eviction, setoff, lease termination or foreclosure, among others.

It is important for landlords to realize that the automatic stay becomes effective without notice or a hearing.  Were a landlord (or any creditor) to be found in violation of the automatic stay, the debtor-tenant may be able to recover actual damages from the landlord, including attorneys’ fees.  If the violation is found to be intentional, the debtor-tenant may recover punitive damages.

In order to avoid the consequences resulting from violating the automatic stay,  landlords should seek relief from the stay by filing a motion with the bankruptcy court.  Under Section 362 of the Bankruptcy Code, creditors can seek relief from the automatic stay “for cause.” An example of “cause” includes the tenant’s failure to pay rent.

Carl D. Neff is a bankruptcy attorney 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 cneff@foxrothschild.com.