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Sometimes a business deal doesn't work out, and the parties decide to see each other in court. What happens if during the lawsuit one of the parties files for bankruptcy protection? Will the court halt the entire case and mothball it during the (often years-long) bankruptcy process?
A recent decision from the North Carolina Business Court explains that in some instances, the show must go on.
The Disputed Consulting Deal
The case involved Meridian Renewable Energy, a consulting company that signed agreements with both Pine Gate Renewables and Birch Creek Development to provide services on renewable energy projects. The contracts said that Pine Gate and Birch Creek were "jointly and severally" liable for payments to Meridian, meaning Meridian could collect from both.
When Meridian didn't get paid what it believed it was owed, it sued Birch Creek for breach of contract. Birch Creek counter-claimed against Meridian and also brought Pine Gate into the lawsuit as a third party. Then, in November 2025, Pine Gate filed a Chapter 11 bankruptcy in Texas.
Birch Creek saw an opportunity to stop Meridian from coming after it. It argued that because Pine Gate was a party to the same contracts at issue in the lawsuit, the bankruptcy's automatic stay should freeze the entire case — including all claims between Birch Creek and Meridian that had nothing to do with Pine Gate.
The Automatic Stay is Automatic but Not Absolute
When a company files bankruptcy, the Bankruptcy Code imposes an "automatic stay" that stops all collection actions against the debtor. Creditors violate it at their peril because they can face sanctions and attorneys' fees. The stay is powerful – it's the shark cage that protects the debtor's attempt to reorganize from the creditor feeding frenzy.
But the automatic stay is not absolute – it only protects the debtor. It doesn't extend to co-defendants or other parties to a lawsuit unless there are "unusual" or "extraordinary" circumstances. The Bankruptcy Code was not meant to halt unnecessarily and indefinitely proceedings unrelated to the debtor's bankruptcy case. Extending the automatic stay typically requires a showing of such identity between the debtor and the third party that a judgment against one is effectively a judgment against the other.
Birch Creek couldn't show any unusual circumstances. That Pine Gate happened to be a party to the same contracts wasn't enough – not when the contracts imposed "joint and several liability."
Putting the "Sever" in Joint and Several Liability
The Business Court's ruling turned on a fundamental principle of contract law: when you have joint and several liability, each obligor is independently responsible for the full amount owed. Meridian had sued only Birch Creek on contracts where both Birch Creek and Pine Gate were jointly and severally liable. Under North Carolina law, you can sue all the joint obligors, or you can sue just one and collect the full amount from that party. Even though Pine Gate also owed the money didn't make it a necessary party to Meridian's lawsuit against Birch Creek. Similarly, Birch Creek's counterclaims against Meridian could be resolved without Pine Gate's involvement because they were disputes between Meridian and Birch Creek about their own conduct and obligations. The Business Court ruled that the claims between Meridian and Birch Creek would proceed. The automatic stay only applied to claims against Pine Gate – those were put on ice.
The Declaratory Judgment Issue
The case had one peculiar issue. Both Meridian and Birch Creek had asked the court for "declaratory judgments" about the parties' rights and obligations under the contracts. These requests specifically sought declarations about Pine Gate's rights and duties under the agreements.
The court recognized that it couldn't declare someone's rights and obligations when it's not participating in the case because of bankruptcy protection. Moreover, the declaratory judgment claims were duplicative of the breach of contract claims that would already resolve the parties' obligations to each other. The court dismissed the declaratory judgment claims without prejudice, meaning the parties could potentially bring them back later if circumstances changed. But the core contract and tort disputes between Meridian and Birch Creek would move forward on schedule.
The Upshot
The automatic stay in bankruptcy is powerful but only a debtor can harness its protections. Just because one party to a multi-party dispute files bankruptcy doesn't mean the entire case stops. The key question is whether your claims can be resolved without the bankrupt party's participation. If you've structured your contracts with multiple parties who are jointly and severally liable, you can typically pursue any one of them for the full amount owed, even if another obligor files bankruptcy. For example, if a corporate borrower files bankruptcy, the lender can still pursue the guarantors of the obligation. You don't have to wait for the bankruptcy to conclude to pursue your other remedies.
But the more your lawsuit depends on determining the debtor's rights and obligations, the more likely it is to be stayed. If you are not 100% sure, you should err on the side of respecting the automatic stay and seek a ruling from the bankruptcy court. The bankruptcy court can rule on whether the automatic stay applies and, if it does, whether you are entitled to relief from the automatic stay to proceed with your lawsuit.
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.
