On April 30, 2009, Chrysler and its affiliates filed a chapter 11 case in the U.S. Bankruptcy Court for the Southern District of New York. On June 1, 2009, GM and its affiliates also filed a chapter 11 case in the U.S. Bankruptcy Court for the Southern District of New York.
People and companies who are owed money from these companies have questions about what are their rights now that these companies have filed for bankruptcy. In a prior posting ( Help I am Owed Money By a Company that Has Recently Filed for Bankruptcy in New York) we have discussed the different types of claims in bankruptcy cases. In this post we will focus more specifically on the rights of creditors of Chrysler and GM.
1. Automatic Stay Prevents Collection, Litigation & Judgment Enforcement
Upon the commencement of a bankruptcy case the automatic stay goes into effect. The automatic stay is a mandatory injunction of the Bankruptcy Court that arises automatically by operation of law upon the filing of a bankruptcy case. The territorial reach of the stay is nationwide (and in theory at least — worldwide — although creditors in foreign jurisdictions will not always honor U.S. Bankruptcy Court orders). The stay is automatic because no prior notice or hearing is required before the stay goes into effect.
The stay prevents dunning and collection activity by suppliers and vendors to collect unpaid pre-bankruptcy invoices. The automatic stay prevents filing of lawsuits against the debtor relating to bankruptcy claims. If a creditor has a judgment against the debtor the automatic stay prevents efforts by the creditor to perfect (such as by filing judgment liens) or enforce a judgment (such as by execution through a sheriff).
The stay only applies to debtors in bankruptcy (i.e., the companies that have actually filed for bankruptcy). However, in some large chapter 11 cases the Bankruptcy Courts have extended the stay to certain key personnel in upper management of the debtors on the theory that they need to be able to focus their time on the debtor’s chapter 11 case and reorganization and can’t have their time occupied with other matters, such as having their depositions taken in litigation relating to pre-bankruptcy claims.
If you are a creditor with a claim against an affiliate of a company that filed for chapter 11 it is important to verify that the affiliate has actually filed for bankruptcy. For example, even though Chrysler and GM have each filed for chapter 11 bankruptcy, not all of their domestic and overseas affiliates have filed for chapter 11. Accordingly, there is not automatic stay in place regarding for those entities that have not filed for bankruptcy.
2. Relief from Automatic Stay
A creditor may bring a motion in the Bankruptcy Court to lift the automatic stay. A creditor may obtain relief from the automatic stay for cause. While cause for lifting the automatic stay is not defined in the Bankruptcy Code, the case law has developed various standards to permit the stay to be lifted in certain circumstances.
3. Personal Injury Claimants and the Automatic Stay
The Bankruptcy Court is a court of limited jurisdiction. The Bankruptcy Court does not have jurisdiction to enter final orders determining personal injury or wrongful death actions against a debtor. Jurisdiction for such matters is vested with the U.S. District Court. There is also concurrent jurisdiction for such matters in state court.
A plaintiff in a personal injury or wrongful death claim against a debtor may want to have a jury trial in state court. If the claim is a pre-bankruptcy claim against a debtor in bankruptcy, such as, for example, a personal injury or wrongful death claim based on a design defect claim against Chrysler or GM, that claim is stayed as a result of the automatic stay in bankruptcy. However, the creditor may bring a motion in the Bankruptcy Court to lift the automatic stay to permit a case to proceed through discovery and trial.
An order lifting the automatic stay involving a pre-bankruptcy personal injury or wrongful death claim will typically permit the creditor to proceed only through entry of judgment, but not enforcement. The stay is lifted to permit the claim to be fixed and liquidated, but not for other purposes.
3. Claims Covered by Insurance and the Automatic Stay
However, if the claim is covered by insurance the stay may also be lifted to permit the claimant to recover any resulting judgment from insurance in excess of the debtor’s insurance deductable. If the debtor is self-insured, however, such enforcement typically will not be permitted.
In addition, many debtors in bankruptcy chapter 11 cases will seek to establish a procedure or mechanism to seek to resolve personal injury claims on a comprehensive basis that avoids jury trial. Often a debtor will seek bankruptcy court approval for mediation protocol orders that govern mediation procedures governing personal injury claims.
4. The Claims Process and Claims Bar Date
Deadlines for filing proofs of claims — known as the claims bar date — are set by Bankruptcy Court order in chapter 11 cases. Although not required, depending on the size of the claim it may be advisable to have the claim prepared by an attorney. Since debtors will often object to claims on various grounds it may be advisable to have the claim prepared by a local bankruptcy attorney in the U.S. Bankruptcy Court for the Southern District of New York so that if an objection to the claim is filed there is already someone in place to respond to the objection.
At Starr & Starr, PLLC we are active in representing creditors in bankruptcy cases, including in motions for relief from stay, preparation of proof of claims, and defense of objections to claim.. Please feel free to contact us at 888-867-8165 or by e-mail at email@example.com to schedule a consultation.