Factors Bankruptcy Courts Consider in Deciding Whether to Grant Relief from the Automatic Stay
The automatic stay is one of the most immediate and powerful benefits of filing for Chapter 7, 11 or 13 bankruptcy. While the automatic stay doesn’t erase debt, it puts a stop to creditors’ attempts to collect, giving the debtor some much-needed breathing room. Creditors can, however, petition the court for relief from the stay. If successful, that creditor can proceed with its legal actions against the debtor.
The Bankruptcy Code’s automatic stay provisions stop creditors from bringing or continuing lawsuits, enforcing judgments, placing liens or foreclosing on the debtor’s property and taking any other action that would negatively affect the debtor’s bankruptcy estate.
Creditors can request termination or modification of the stay in certain circumstances, based on three grounds provided in the statute:
- For cause
- When the debtor does not have enough equity in property that is not necessary for an effective reorganization of debt
- When the property is “single asset real estate”
“For cause” is not defined in the Bankruptcy Code, so courts decide that ground on a case by case basis. They apply the Curtis test, named after a 1984 Utah case. The Curtis factors are:
- Whether the relief requested will result in a partial or complete resolution of the bankruptcy issues
- Whether the outside litigation has any connection to or will interfere with the bankruptcy case
- Whether the litigation involves the debtor as a fiduciary
- Whether a specialized tribunal has been established with expertise to hear the particular cause of action
- Whether the debtor’s insurance carrier has assumed financial responsibility for defending the litigation
- Whether the litigation essentially involves third parties and the debtor functions only as a bailee or conduit for the property in question
- Whether the litigation would prejudice the interests of other creditors, the creditors’ committee and other interested parties
- Whether the judgment claim arising from the litigation is subject to equitable subordination
- Whether the movant’s success in the litigation would result in a judicial lien avoidable by the debtor
- Whether the litigation has progressed to the point where the parties are prepared for trial
- How lifting the stay might serve the interests of judicial economy and the expeditious and economical determination of litigation for the parties
- The impact of the stay on the parties and the “balance of hurt”
The burden is on the creditor to prove that there is cause to lift or modify the stay. If the creditor succeeds, then the burden shifts to the debtor to establish that the stay should remain fully in effect.
At The Law Offices of Michael Jay Berger in Beverly Hills, I have successfully handled motions for relief from the automatic stay on behalf of both debtors and creditors. Whichever side of the case you are on, please call my office at 310-271-6223 or contact us online for a free consultation.