| The filing of bankruptcy creates an automatic injunction in favor of the debtor. Section 362 of the Bankruptcy Code contains a long list of actions that are stayed upon the filing of a bankruptcy petition.
What Is Stayed?
Among other things, a creditor cannot file or continue a lawsuit against the debtor to recover on claims that arose before the petition date, that is, before the filing of bankruptcy (known as “pre-petition period”). Nor can a creditor (a) seek judgment against the debtor; (b) perfect or enforce liens granted pre-petition; foreclose on collateral, terminate contracts on account of pre-petition defaults, (c) pursue collection on a judgment, (d) seek to evict the debtor, as tenant, for not paying rent, or (e) take other actions against the debtor or its property. The stay halts rights of setoff as well. Thus, if a creditor and the debtor owe each other mutual debts arising from different transactions, the creditor cannot, without relief from the stay, apply the debt owing to it against the debt it owes.
Is Stay Relief Necessary?
Attorneys are often called upon to advise on whether a proposed action would constitute a violation of the automatic stay and require filing a motion seeking “relief from the stay” before proceeding.
The following are examples of situations that are not so obvious in which we have been involved: (1) The landlord wants to evict the debtor, a tenant, who has not paid rent in months and has rejected the lease in bankruptcy with no intention of paying rent; (2) the debtor has a lawsuit against the creditor that the debtor continues to pursue despite bankruptcy and the creditor has a counterclaim and defenses against the debtor; (3) the creditor is a contractor who performed valuable work for the debtor and seeks to file a mechanics’ lien before the deadline under law to protect itself against further non-payment; or (4) the creditor has a supply contract obligating the creditor to continue to provide products and services to the debtor, and seeks to modify credit terms post-petition to minimize its risk, but the debtor argues that any contract modification violates the stay. Situations like these are bothersome because creditors often want to act quickly, but the consequences for violating the automatic stay can be harsh, and include fines and contempt of bankruptcy court.
In each of these cases, we have successfully gotten relief from the automatic stay that allowed our client to pursue its rights without fear of violating the automatic stay. For years, we have represented creditors in bankruptcy, and even gotten payment when our client thought the filing of bankruptcy meant everything was lost. |
