How to Lift the Automatic Stay to Allow State Court Litigation to Proceed in the event of a Bankruptcy Filing

“How to Lift the Automatic Stay to Allow State Court Litigation to Proceed in the event of a Bankruptcy Filing” —
I’ve seen variants of this question on a number of legal question sites recently. There’s a few points the firm thinks should be made.[one_half]

What is the Automatic Stay?

When you file for bankruptcy, something called the automatic stay (which is a federal court injunction) immediately stops any lawsuit filed against you and most actions against your property by a creditor, collection agency, or government entity. Because of its far-reaching effect and the fact that it is automatic upon filing and not after a hearing, the automatic stay may provide a powerful reason to file for bankruptcy.

Liquidating Claims in State Court

First, whether in bankruptcy or not, automatic stay or not, there are always two components to collection. One is have a court determine that you are owed money (this is often referred to as “liquidating” the claim). The second is collection on the legal amount owing. One of the things that the firm likes about defendants in bankruptcy is that oftentimes, large amounts of money are spent on the first phase, only to find out that the judgment is not collectible. It is typically not appropriate to try to find out how collectible your claim is before you actually liquidate it. One of the things that benefit you here with a defendant in bankruptcy is that you can actually find out in advance how much you will get, presuming you win your underlying claim. Find out that answer from the bankruptcy filings before you spend more time and effort on trying to win your lawsuit. Good bankruptcy lawyers can give you a good idea of this by reviewing the Debtor’s Schedules/Statement of Financial Affairs and some other documents filed in the bankruptcy case.

Motion to Lift Automatic Stay

Presuming that claims like yours will receive distributions under the bankruptcy case, the second benefit of the company being in bankruptcy is that sometimes the debtor is less inclined to fight claims. This is because, when a defendant does not agree to pay a claim, it is either because they really don’t think they owe the money or, as is often the case, they couldn’t afford to pay the claim. Once the company has shifted from trying defend the claims on the merits because they couldn’t pay it to figuring out how to pay claims, often they no longer are that interested in actually defending the claim.

Filing a Proof of Claim

Filing a proof of claim in bankruptcy is essentially the same as filing a lawsuit in federal court to collect the claim. If the debtor does not object to the claim, it is deemed allowed. That’s a lot easier than the state court method.–isn’t it. Now, of course, if the claim is still fundamentally opposed, and the debtor is inclined to actually litigate it, either the bankruptcy court or the state court is required to liquidate the claim. Usually, the bankruptcy court is not that interested in doing so and will send it back to state court.

Fastest Way to Collect and Liquidate your Claim

This gets to the answer to the question. Presuming you are filing a proof of claim (and subject to some complex issues regarding Stern v. Marshall and consenting to jurisdiction, which are way beyond the scope here), given that you are doing all this on the cheap, you might be better off not trying to run back to state court to get your day in court now. However, if that is what you rally want (because witness may die/testimony stale, etc.) then you need to file a motion to lift stay to allow the litigation to proceed because of those very reasons. However, even if you get to trial and win, you still have to come back to bankruptcy court to collect.
So you are really not saving any time on getting money in your pocket. However, as is often the case, you really need to run this by a Chapter 11 lawyer to get an answer specifically applicable to your situation.