Stay Away: Some Exceptions And Bases For Relief From The Bankruptcy Code’s Automatic Stay

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BankruptcyThe automatic stay provided for by section 362 of the Bankruptcy Code is triggered immediately upon the filing of a debtor’s petition with the Bankruptcy Court. Unfortunately, many business owners and managers have a basic understanding of the automatic stay by virtue of the fact that they have been on the receiving end of its pervasive and broad-ranging effects. The automatic stay bars the commencement of new lawsuits and the continuation of existing ones, lien and judgment enforcement, collection of pre-bankruptcy debts, and other actions against the debtor and/or its assets. A violation of the automatic stay is punishable as contempt of court. There are, however, a number of exceptions to the applicability of the automatic stay and circumstances that support granting a motion for stay relief. Some (but not all) of these exceptions and bases for stay relief are discussed below.

Although there are a number of exceptions to the automatic stay, it should be emphasized that in certain cases the Bankruptcy Court may nevertheless prevent action by a creditor even where an exception to the automatic stay exists. As a best practice, a motion should always be made with the Bankruptcy Court before proceeding as to avoid potentially being held in contempt and sanctioned by the Bankruptcy Court.

One exception to the stay is granted to commercial landlords where a lease for nonresidential real property has been terminated before the bankruptcy filing. Under New Jersey law, a lease is deemed terminated when judgment has been entered in favor of the landlord and a warrant for eviction/removal has been entered. Thus, if, before the bankruptcy filing, the landlord obtains a favorable state court judgment and a warrant for eviction/removal, then the automatic stay is most likely inapplicable and will not prevent the landlord from reclaiming possession of the leased premises.

Furthermore, criminal proceedings against the debtor are not barred by the automatic stay. In general, bad check prosecutions are likewise permitted to proceed even though the defendant is in bankruptcy. Actions and proceedings brought by the government to enforce its regulatory or police powers are also generally excepted from the stay. In certain instances where the proceeds of a debtor’s insurance policy are not estate property, the automatic stay would be inapplicable.

In addition, there are a number of bases for obtaining relief from the automatic stay. A bankruptcy that was filed in bad faith may serve as a basis for stay relief. Banks and other secured lenders may be able to obtain relief from the automatic stay if they can show that their interest in a property is not adequately protected. A lack of adequate protection can, among other things, be demonstrated by the debtor’s failure to make post-bankruptcy payments to the secured creditor or the debtor’s failure to pay property taxes.

In Chapter 11 cases, the secured creditor may be able to obtain stay relief if it can show that the debtor’s property that is encumbered by its mortgage or other security interest is not necessary to an effective reorganization and the debtor has no equity in the property. The secured creditor may also be able to obtain stay relief against a parcel of real property if the court finds the bankruptcy petition was part of a scheme to hinder, delay or defraud creditors that involved either (1) the transfer of all or part ownership of or interest in the property with court approval or the consent of the secured creditor, or (2) more than one bankruptcy filing affecting the real property. This type of stay relief is very effective against “frequent filers” because it is prospective and insulates the secured creditor from the restrictions of the automatic stay as a result of future bankruptcy filings for a period of two years after entry of the court order. An affected party may also seek stay relief “for cause,” which involves a broad, fact-specific inquiry by the Bankruptcy Court to determine whether the automatic stay should continue to apply to a specific creditor in a specific case.

Upon a bankruptcy filing, a business impacted by the automatic stay would be well-advised to consult with qualified bankruptcy counsel so that exceptions to the automatic stay and potential bases for stay relief are carefully and thoroughly explored to ensure that appropriate action is taken on the business’s behalf.

Topics:  Automatic Stay, Bad Faith, Bankruptcy Code, Chapter 11, Commercial Bankruptcy, Landlords, Tenants

Published In: Bankruptcy Updates, Civil Remedies Updates, General Business Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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