Strategies, Challenges, and Answers

What Happens When One Of Multiple Defendants Files For Bankruptcy?

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?

Bankruptcy court 2 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.

About Michael Mills

Mr. Mills practices in the area of civil litigation and appeals, with particular experience in matters involving trucking liability, insurance defense, insurance coverage, premises liability, products liability and defense of personal injury. Mr. Mills is a member of the Trucking Insurance Defense Association, the Defense Research Institute Trucking Committee and the Nevada Motor Transport Association. Mr. Mills is licensed to practice before the Nevada Supreme Court and the Utah Supreme Court. He is also licensed to appear before the United States Supreme Court, the U.S. District Courts for the Districts of Nevada and Utah, as well as the U.S. Court of Appeals for the Ninth Circuit. Mr. Mills has created 3 Blogs for the benefit of the insurance industry. He serves as editor and publisher of the Nevada Insurance Law Blog, the Nevada Coverage and Bad Faith Blog and the Nevada Trucking Law Blog.

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