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How to Get a Civil Action Out of a Bankruptcy Stay

October 6, 2010

By Barbara Haubrich-Hass, ACP/CAS

Litigation is like working out on an elliptical machine.  There are various speeds, built-in workout features, and adjustable resistance and incline ramps.  In comparison, litigation has built-in rules and timelines, adjustable discovery devices, and the urgency between tasks can ebb and flow.  As a paralegal, you learn what is commonly referred to as, "hurry up and wait" where there is a rush to complete a deadline, and then there may be a lull between tasks.  When a defendant files for bankruptcy in the course of litigation, it shifts from "hurry up and wait" to "put on your brakes and STOP!"  A bankruptcy automatically stays the litigation (11 U.S.C. § 362).  What this equates to for a plaintiff is the further delay to an already long process to recovery in a damaging event.

However, if the value of your client's claim is within the policy limits of the defendant's liability insurance coverage, there is good news.  Under certain circumstances, the stay in a civil action can be lifted if the plaintiff can show good cause for the relief (11 U.S.C. § 362(d)(1)).  There are 12 factors for the court to consider in granting relief from an automatic stay (Packerland Packing Co. v. Griffith Beverage Co. (In re Kimble) (9th Cir. 1985) 776 F.2d 802, 807).  However, lifting a stay to pursue the insurance proceeds, only, generally is allowed where the plaintiff can show six of the 12 factors that: 

1. The relief will result in a complete resolution of the issues;
2. There will be no interference with the bankruptcy case;
3. The defendant's insurance carrier has assumed full financial responsibility for defending the litigation;
4. There will be no prejudice to other creditors;
5. The interests of judicial economy will be best served; and,
6. The impact of the stay on the parties, and the "balance of hurt."

This is good information.  But, what is the application for a paralegal?  Discussed here are the steps to take in requesting relief from an automatic stay when the parties have stipulated to pursue the defendant's insurance proceeds only.

Step One:  Prepare a Stipulation for Relief From Automatic Stay for your supervising attorney's review and approval.  The attorneys who will need to sign the Stipulation include the plaintiff's attorney, the attorney for the defendant/debtor in the civil action, and the debtor's attorney in the bankruptcy action.  Once the Stipulation has been circulated and signed by all of the attorneys, move to Step Two. 

Step Two:  Call the bankruptcy court and ask the clerk if a motion and hearing is required.  Some courts do not require a hearing if the parties have stipulated to the relief.

If the court does require a motion and hearing, ask the clerk:

• If additional documents are required to be filed with the motion.  Some courts require a cover sheet.
• How the hearing date is selected.  The hearing date is obtained in a variety of ways depending on that court's rules.  Some courts will provide a list of hearing dates to choose from.   In other courts, the motion is filed with the court first and then the court sends back notice of the hearing date.  While in other courts, the motion is filed and the debtor selects the date.  Once the court advises you of how a hearing date is selected, follow the court rules and file the motion with the supporting documents.  The hearing date must be held within 30-days of the date that the motion is filed (11 U.S.C. § 362(e)).
• Confirm with the clerk the required filing fee.

If a motion is required, go to Step Three. 

Step Three:  Prepare a Motion for Relief From Automatic Stay, Memorandum of Points and Authorities, and Declaration of Attorney, along with a Proposed Order for your supervising attorney's review and approval.

Step Four:  Serve the Motion and supporting documents.  The Bankruptcy Code allows for service by first class mail.  Service is complete upon mailing.  The motion and supporting documents must be served on the parties involved, including the Debtor, Debtor's attorney, Trustee (if appointed), and any other party known to claim an interest in the bankruptcy. 

Step Five:  File with the court a Certificate of Service of the Motion and supporting documents.

Step Six:  Calendar the hearing and ensure that the attorney appears for the Motion.

Step Seven:  Once the Order is signed, serve a copy of the Order on the Respondent, Respondent's attorney, and all counsel involved in the civil litigation.  In addition, file the Order with the court in the civil matter advising the civil court that the stay has been lifted.