California Court Discusses Cause for Lifting Automatic Bankruptcy Stay

Generally, when a person files a petition for bankruptcy, an automatic stay will be entered that bars anyone from filing claims seeking damages from the party in state or federal court. In some instances, however, a bankruptcy court can lift the automatic stay, allowing litigation to proceed. Recently, a California bankruptcy court discussed what constitutes just cause for lifting a stay, in a case in which the debtor appealed a retroactive annulling of an automatic stay. If you are a California resident seeking a reprieve from your debts, it is prudent to confer with a capable California bankruptcy attorney to assess whether bankruptcy may be an option for you.

Facts of the Case

It is reported that the debtor filed a petition for Chapter 13 bankruptcy, after which the bankruptcy court issued an automatic stay. Subsequently, the defendants, who were unaware of the claimant’s bankruptcy proceedings, filed a wrongful death lawsuit against the claimant in state court. After the defendants were advised of the debtor’s bankruptcy, they moved to annul the stay in order to validate the filing of their complaint in state court and to liquidate their claims against the debtor. The bankruptcy court granted the motion and retroactively lifted the stay, after which the debtor appealed.

Grounds for Lifting an Automatic Stay in a Bankruptcy Case

Pursuant to the bankruptcy code, when a party in interest moves to lift an automatic stay and a hearing is held, a bankruptcy court must grant relief from an automatic stay upon showing of cause. Cause is not specifically defined by the bankruptcy code; rather, whether cause exists must be determined on a case by case basis. In determining whether a stay should be lifted to allow a case filed in state court to proceed, the court should assess the judicial economy, potential for prejudice, the expertise of the state court, and whether only bankruptcy issues are involved.

Further, in assessing whether to retroactively annul a stay, bankruptcy courts have focused on whether the creditor was aware of the bankruptcy petition, and whether the debtor engaged in behavior that was inequitable or unreasonable, or whether allowing the stay to remain intact would be prejudicial to the creditor.

In the subject case, the appellate court found that the defendant’s action solely asserted state law claims, and no prejudice would result to the debtor by allowing the matter to continue. The appellate court noted that while the defendant argued he lacked insurance, he would face the same issue if the case was litigated in bankruptcy court. Further, the appellate court found that the defendants did not have notice of the bankruptcy claim, and if the stay was not lifted, their wrongful death claim would be time-barred. As such, the appellate court found that lifting the stay was appropriate and affirmed the lower court ruling.

Meet with an Experienced California Bankruptcy Attorney

While a stay of other claims is automatically entered in bankruptcy cases, that does not mean the stay cannot be lifted. If you wish to file a petition for bankruptcy, it is important to meet with an attorney so that you fully understand the impact the petition may have on your debts and your rights. Matthew D. Roy is an experienced California bankruptcy attorney who can assist you in seeking relief from your debts. You can reach him via the form online or at (916) 361-6028 to schedule a consultation.