Doing the Splits: Does the Automatic Stay Prevent Suits Against a Debtor Filed in the Debtor’ s Home Bankruptcy Court?
Doing the Splits
Doing the Splits: Does the Automatic Stay Prevent Suits Against a Debtor Filed in the Debtor’ s Home Bankruptcy Court?
Annette W. Jarvis, Greenberg Traurig, LLP
Once a debtor files bankruptcy, can a debtor be sued in the debtor’ s home bankruptcy court based on pre-petition actions without seeking relief from the automatic stay? The answer to that question depends on the Circuit in which the debtor has filed bankruptcy.
The Second Circuit began the debate in In re Ionosphere Clubs, Inc., 922 F. 2d 984( 2d Cir. 1990), which concluded relief from the stay was required with respect to a suit based on a pre-petition claim, but for reasons relating to Section 1113, found the automatic stay is not applicable to an arbitration under a collective bargaining agreement. The following year, the D. C. Circuit in U. S. v. Inslaw, Inc., 932 F. 2d 1467( D. C. Cir. 1991) weighed in to create the split in determining that an adversary proceeding over contested property of the estate did not violate the automatic stay. In 1992, based on the“ absurd results” that would otherwise occur, the Ninth Circuit B. A. P. in In re N. Coast Vill., Ltd. 135 B. R. 641, 643( B. A. P. 9th Cir. 1992), agreed with the D. C. Circuit in determining creditors may sue the debtor in its home bankruptcy court without violating the automatic stay.
Although the Third and Tenth Circuits have not yet addressed this issue, bankruptcy courts within these circuits have taken differing approaches. In In re Uni-Marts, LLC,
404 B. R. 767( Bankr. D. Del. 2009), the Bankruptcy Court for the District of Delaware adopted the majority view, holding that filing an adversary proceeding against a debtor in its home bankruptcy court does not violate the automatic stay. Conversely, in In re Roman Catholic Church of the Archdiocese of Santa Fe, 627 B. R. 916( Bankr. D. N. M. 2021), the Bankruptcy Court for the District of New Mexico followed the minority view, requiring a claimant to obtain relief from the automatic stay before initiating an action against the debtor in its home bankruptcy court.
Interestingly, while these cases address the language of Section 362 and consider its interaction with other provisions of the Bankruptcy Code, their outcomes are primarily driven by procedural aspects of bankruptcy practice. The courts focus on the claims process, the underlying purpose of the automatic stay, and the need to harmonize Section 362 with the practicalities and efficient administration of bankruptcy cases.
In Ionosphere Clubs, the litigation at issue was overlayed by the fact that it arose out of a collective bargaining agreement and involved the application of Section 1113. As a result, while the Second Circuit adopted the view that even a suit on a pre-petition claim in the home bankruptcy court of the debtor generally required relief from the stay, the Second Circuit made different rulings involving whether an arbitration rather than a suit violated the automatic stay. The arbitration was mandated by the collective
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