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6 | Monday, august 11, 2014 | Commercial Litigation
| nylj.com

The Bankruptcy

Automatic Stay:

A Guide for

Commercial Litigators

OCK
ST
BIG

include commencement or continuation of from defending themselves.9 A bankruptcy bankruptcy courts broad powers to issue any
By DanieL a. FLiman any action against the debtor that was or debtor-plaintiff can sue a non-debtor in any order that is appropriate to carry out the
anD miCheLe L. angeLL
could have been commenced before the bank- court.10
Bankruptcy Code.16 To impose sanctions in
T ruptcy case.2 Broadly speaking, this provision this regard, a court must find either “mali-
he bankruptcy automatic stay has an freezes lawsuits pending at the time of the Consequences of Violating the Stay
ciousness or lack of a good faith argument
immediate and widespread impact on bankruptcy filing that name the debtor as and belief that the party’s actions were not
litigation activity involving a bankrupt
defendant.
“In the Second Circuit, actions taken in 17
in violation of a bankruptcy stay.” Again,
debtor or its properties. The stay is bind- The bankruptcy filing and automatic stay violation of the automatic stay are generally though, the litigant will fall into this category
ing in all courts, in all proceedings, in every stop the litigation against the debtor “in its void ab initio,”11 but more than that, commer- if it has notice of the bankruptcy filing and

jurisdiction. It is automatically triggered by tracks.”3 The debtor-defendant will usually cial litigators should tread carefully because violates the automatic stay, or even fails to
the filing of a two-page bankruptcy petition, file a “Suggestion of Bankruptcy”4 (or “Notice consequences for violations can be harsh.
remedy an inadvertent violation after learning
with no further action required. The stakes of Bankruptcy”5 or “Notice of Bankruptcy and Section 362(k) of the Bankruptcy Code, as of the bankruptcy.18
for violating the automatic stay are very effect of Automatic Stay”)6 to inform the interpreted by the Second Circuit, provides In sum, if you receive notice that a defen-
high. Courts may award costs, damages and plaintiff and non-bankruptcy court of the that an individual debtor (not a corporate dant in your litigation filed for bankruptcy,
sometimes punitive damages against parties automatic stay’s application. with respect debtor)12 injured by any willful violation of and you nonetheless continue litigating
that violate the automatic stay. For all these to litigation commenced prior to the debtor- the automatic stay shall recover actual dam- against it (even if you have no intention to
reasons, the automatic stay poses extensive defendant’s bankruptcy, the automatic stay ages, including costs and attorney fees, and, harm the debtor), you face serious risk of
obstacles and challenges for commercial liti- stays continuation of the action against, but in appropriate circumstances, may even be being sanctioned to pay fees, compensatory

gators. we discuss below the scope and limits does not dismiss, the debtor; thus, the non- granted punitive damages and compensation damages and, if the debtor is an individual,
of the automatic stay, from the perspective bankruptcy court should place the action for emotional distress.13 Once a litigant or also punitive damages.
of a commercial litigator, and provide sug- against the debtor on the court’s suspense other creditor becomes aware that a debtor
gestions for navigating the stay to minimize docket until the bankruptcy court resolves has filed for bankruptcy, any intentional act Options and Alternatives
disruption on pending litigation.
the claim, rather than dismiss the action.7 The that results in a violation of the stay is “will-
automatic stay does not enjoin continuation ful” for purposes of actual damages under the If you represent a plaintiff and a defendant
of the litigation against a debtor’s non-debtor provision regardless of the violator’s subjec- files for bankruptcy, you should immediately
Stayed Acts
co-defendants.8 Often, due to confusion about tive belief or intent.14 Maliciousness or bad stop any further litigation activity and ensure

Section 362(a) of the Bankruptcy Code, the this issue, non-bankruptcy judges will mistak- faith warrants the additional imposition of
“automatic stay,” provides that a petition for enly stay the entire proceeding, preventing punitive damages.15
bankruptcy “operates as a stay, applicable litigation against non-debtors.
Sanctions for violating the automatic stay DanieL a. FLiman is a partner and miCheLe L. angeLL
to all entities, of” various activities to col- where the bankruptcy debtor is the plain- as to a corporate debtor are granted by way is an associate at Kasowitz, Benson, Torres & Fried-
lect debts of the debtor.1 Most critical in the tiff in pending litigation, the stay does not stop of the court’s contempt power combined man, where they practice in the creditors’ rights and
commercial litigation context, those activities
the action, nor does it enjoin the defendants
with Bankruptcy Code §105(a), which grants
bankruptcy group.