Bankruptcies are on the Rise Do Not Violate the Automatic Stay or Discharge Injunction
Bankruptcies are on the Rise
Do Not Violate the Automatic Stay or Discharge Injunction
The American Bankruptcy Institute issued a report on October 29th that indicated that as stimulus checks and other forms of temporary relief run out, experts are projecting an increase in personal bankruptcy filings, which have so far been muted during the coronavirus pandemic. And the Economic Studies of Brookings reported on October 26th that between the months of April 2020 and July 2020, personal bankruptcy filings increased by about 40,000 and total businesses seeking chapter 11 protection in July 2020 rose by 52% compared to July 2019.
The BANKRUPTCY waive is here and building. Most relevant to businesses, they are Chapter 7 (dissolutions), Chapter 13 (lower value individual reorganizations), Chapter 11 (reorganizations) and the new Chapter 11/subchapter 5 (a quick reorganization with limited rights for creditors).
There are things that businesses can do before customers and others who owe them money file bankruptcy, but immediately when a company or individual files for bankruptcy protection (the “Debtor”), even without notice to the creditor, there is an Automatic Stay injunction to keep all creditors from enforcing any rights, taking any collection efforts or bettering their position as compared to other creditors of the Debtor. The Automatic Stay applies not just to collection efforts, it includes continuing any litigation, taking setoff efforts, creating or enforcing liens, and holding onto the Debtor’s assets after the bankruptcy filing instead of turning them over to the bankruptcy estate. There are exceptions, but not many. And while a creditor can ask the court for relief from the Automatic Stay, doing anything before being granted that relief can be sanctionable conduct.
Be aware that in addition to the Automatic Stay, there are often Stay injunctions included in plans of reorganization at the end of the bankruptcy case. Creditors should heed the Stay injunction, as for any violation, the bankruptcy court can take action and issue contempt, damages and/or sanctions against the creditor.
The U.S. Supreme Court recently issued a ruling regarding violation of a Stay injunction after a plan of reorganization was confirmed in the case of Kimball Hill, a bankruptcy case originally arising out of the Northern District of Illinois and appealed to the U.S. Supreme Court. The end result was that due to releases (Stay injunctions) in the confirmed plan releasing Debtors, their administrators, successors or assigns, affiliates, representatives, etc., when a creditor continued to seek payment for its claims, the Court held the creditor in contempt, and the creditor lost its claim against the Debtor and was ordered to pay significant monetary sanctions in the millions, consisting of actual damages, Debtor’s legal and expert fees, property damages, etc.
Creditors should remain mindful that seemingly permissible conduct may become the subject of considerable scrutiny if it is challenged. So, before acting, consider whether there is a Stay.
For more information feel free to contact Dawn: dcoulson@eppscoulson.com.
Epps & Coulson, LLP does both Debtor and Creditor work.
EPPS & COULSON, LLP
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Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney. While intended as informational and educational, it is considered advertising in some states. Epps & Coulson encourages you to call us to discuss how these matters apply to you or your business.