What Happens When One Of Multiple Defendants Files For Bankruptcy?

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A previous M&A blog post HERE discussed the ramifications of a bankruptcy filing on civil litigation by a Plaintiff or Defendant.  In that post we learned that where a sole Defendant files bankruptcy, the entire case comes to a stop due to the automatic stay imposed by bankruptcy law.  See 11 U.S.C. 362(a)(1). However, what happens when the insured defendant files bankruptcy, but is only one of several defendants?

In the case of multiple Defendants, the underlying litigation is not brought to a halt because the automatic stay does not apply to non-debtors.  See 11 U.S.C. 362(a) (1).  A “debtor” is defined in 11 U.S.C. 101(13).  This stay forces the Plaintiff to file a claim against the bankruptcy estate in bankruptcy court and to continue to litigate the case in the original court.  This simultaneous litigation of the same case in two different courts can be time consuming and confusing.

The foregoing general rule about the automatic stay is applicable to the more common chapter 7 and 11 bankruptcies.  The stay may be extended to codebtors with regard to certain consumer claims in cases under bankruptcy chapters 12 and 13.

In order to avoid litigating in two places, most Plaintiff’s attorneys try to get the bankruptcy stay lifted and get the case sent (to the extent that there is insurance coverage only), back to the initial court.

Just like before, if the Plaintiff files a Motion to Lift the Automatic Stay the court will decide the issue by considering several factors.  The Bankruptcy Court will balance the hardship of requiring the debtor to appear and employ counsel in a non-bankruptcy forum against the hardship caused to other parties if they are required to conduct both bankruptcy and non-bankruptcy litigation.  As stated in our previous bankruptcy blog, one of the most common factors for granting relief from the automatic stay is that the claim against the debtor is covered by insurance and that the insurer will pay for the defense of the claim and also for any amount awarded.

A bankruptcy filing of an insured defendant should be brought to the attention of defense counsel immediately, as the automatic stay, as the name implies, is immediately applicable upon the filing of a bankruptcy case.