United States: Personal Injury Or Wrongful Death Claims Against Chapter 11 Debtors: How To Proceed

Summary

When a company files for bankruptcy, they gain a number of protections under federal law.  One of these protections is the "automatic stay" provided by 11 U.S.C. § 362. The automatic stay makes it illegal to continue prosecuting, or to initiate, an action against the debtor who is in bankruptcy.  Even if that debtor has injured you, it means that you cannot try to recover from them without getting the automatic stay lifted.  As more large bankruptcy cases are filed in Delaware, it becomes increasingly important that persons injured by debtors understand the legal hoops that they have to jump through in order to recover for their injuries.

To aid in discussing this matter, imagine a situation in which a person (the "Injured") is injured when hit by a truck belonging to the company (the "Debtor").  The Injured files a lawsuit in state court to recover and the Debtor files for bankruptcy protection in Bankruptcy Court for the District of Delaware ("DE Bankruptcy Court").  The last important assumption is that the Debtor, like most large companies, has insurance that can compensate the Injured.  While many of the principles of this post will apply in other courts, it will be discussed specifically in the context of this purely hypothetical situation.

The Automatic Stay

11 U.S.C. § 362 ("Section 362") provides that, with limited exceptions, when the Debtor files for bankruptcy, a stay is placed on actions that could otherwise be brought against it.  Section 362 includes prohibitions against nearly any legal action that could be brought against the Debtor in any court other than the DE Bankruptcy Court.  While there are exceptions, they are very specific and beyond the scope of this post.  Rather, this post will focus on what a person who was injured by a Debtor should do in order to obtain a recovery.

The specific provisions of Section 362(a) which relate to our example are as follows:
 "[A] petition filed under ... this title ... operates as a stay ... of –
(1) the commencement or continuation  ... of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

Thus, the Injured will find it very difficult to recover, since they are prohibited from bringing a new lawsuit against the Debtor or continuing to prosecute the lawsuit that has already begun.  In some instances, a Debtor will declare bankruptcy days before a trial is scheduled to begin, freezing any litigation against it.  While this is certainly frustrating for the Injured, there is a path to obtain recovery.

Relief from the Automatic Stay

In order to resume an existing lawsuit against the Debtor, or start a new lawsuit against the Debtor, the Injured must obtain relief from the automatic stay.  This requires the Injured to file a motion for relief from stay and the judge presiding over the bankruptcy to grant the motion.

The relevant language from the Bankruptcy Code is found in Section 362(d), which provides in pertinent part as follows:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay -
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest.

Thus, the DE Bankruptcy Court is required to determine if there is "cause" to lift the stay.  In making that determination, the DE Bankruptcy Court follows the analysis of the case Izzarelli v. Rexene Prods. Co. (In re Rexene Prods. Co.), 141 B.R. 574, 577 (Bankr. D. Del. 1992).  The DE Bankruptcy Court places the initial burden on the Injured to establish that cause exists, and allows the Debtor an opportunity to rebut the Injured's argument.

In the Rexene opinion, the DE Bankruptcy Court cites to the legislative history of Section 362 in its holding that 'It will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from any duties that may be handled elsewhere.'  Rexene Prods., 141 B.R. at 576 (quoting H.R. Rep. No. 95-595, 95th Cong., 1st Sess., 343-344 (1977)).

The DE Bankruptcy Court has adopted a three-prong analysis to determine whether there is cause to grant relief from the automatic stay.  The court determines whether (i) any great prejudice to either the bankruptcy estate or the Debtor will result from continuation of the civil suit; (ii) the hardship to the Injured by maintenance of the stay considerably outweighs the hardship to the Debtor; and (iii) the Injured has a probability of prevailing on the merits.

A bankruptcy estate generally is not considered to have an interest in proceeds of liability insurance policies.  Consequently, the DE Bankruptcy Court typically holds that a Debtor does not suffer prejudice or hardship if the Injured obtains stay relief to liquidate claims that are covered by such proceeds. 

With respect to the third prong of the analysis regarding cause, the DE Bankruptcy Court held in Rexene that the required showing is very slight.  The threshold for this third prong is even easier to meet where a movant's claim would be covered by non-debtor sources. In cases following Rexene, the DE Bankruptcy Court has stated that under such circumstances, a bankruptcy court should not examine the merits of the movant's claims. Rather, "all that is required is that the movant make more than a 'vague initial showing' that he can establish a prima facie case. In a case, [sic] such as this one where the claimant seeks only to liquidate its claims as a predicate to recovering against insurance and other non-debtor sources, to require a merits analysis would defeat the objective of economizing judicial resources and would frustrate the effort to resolve relief from stay motions expeditiously." Santa Fe Minerals v. BEPCO. L.P. (In re 15375 Memorial Corp.), 382 B.R. 652, 691 (Bankr. D. Del. 2008).

In deciding whether to lift the automatic stay, the Delaware Bankruptcy Court has also considered general policies, including: 1) whether relief would result in a partial or complete resolution of the issues; 2) lack of any connection with or interference with the bankruptcy case; 3) whether the debtor's insurer has assumed full responsibility for defending it; 4) whether the parties are ready for trial in the other proceeding; and 5) impact of the stay on the parties and the balance of the harms.  While these issues may provide additional support for the motion for relief from stay that the Injured will need to file, the DE Bankruptcy Court will typically consider them within the context of the Rexene analysis, so attorneys for the Injured should always consider the Rexene factors first.

Finally, 28 U.S.C. § 157(b)(5) provides that Personal Injury and Wrongful Death claims shall be tried in the district court.  Thus, even if a bankruptcy court wanted to decide a personal injury matter, such a case cannot be tried in the bankruptcy court.  I have had the opportunity to observe, on multiple occasions, the judges of the Delaware Bankruptcy Court tell debtors' counsel that they will not decide personal injury matters.  And while past performance is no guarantee of future results, it does provide a level of predictability here in Delaware.

www.foxrothschild.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions