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Welcome to the first issue of Huddleston Bolen’s new business law newsletter, Main and Court. As the name implies, this newsletter will provide practical tips and regular updates on legal issues that impact your business. We invite your comments and ideas for articles.
To launch the newsletter, and as an unfortunate sign of the economic times, we are opening with a four issue series on bankruptcy law and how specific rules impact you as a provider of credit to your customers. In this series, we will provide information on how you, as a creditor, can take full advantage of your rights and tips on how you can avoid the many pitfalls that could prolong the bankruptcy process or constrain your ability to collect on the debt.
In this issue, we focus on automatic stay, which resembles an injunction, barring the creditor from taking any actions against the debtor or the property of the debtor’s bankruptcy estate.
The next issue will feature a detailed overview of preferences and the various defenses a creditor can use to reduce or avoid exposure to preference claims. The bankruptcy trustee can bring an action to recover transfers made by a debtor prior to filing bankruptcy even if the transfers were in the debtor’s ordinary course of business, in an effort to recover funds that can be distributed to creditors.
In the third issue, we will discuss reclamation. The law allows certain creditors that have delivered goods to the debtor before bankruptcy to take back, or reclaim, the goods from the debtor. The seller’s exact reclamation rights depend on how soon prior to the petition date the goods were delivered.
The fourth and final issue of this series will address proof of claims. The law requires, with a few limited exceptions, creditors to submit a proof of claim by a specified date. The court will typically not allow the claim to be paid by the bankruptcy estate if the proof of claim is not submitted by the required date.
I hope you find this information useful and informative. Please feel free to contact me if it raises any questions or if there is anything we, at Huddleston Bolen, can do to assist you.
Tom Gilpin |
Tom Murray |
Bruce Stout |
Chris Plybon |
Dan Earl |
Dan Konrad |
Jan Holbrook |
Audy Perry |
Eddie Cunningham |
Karen Poulton |
Cindy McCarty |
Justin Gilfert |
Casey Baker |
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Every business needs its customers to pay. But that can become especially difficult in tough economic times. Bankruptcy law adds additional complications that you should be aware of when attempting to collect from customers. One matter that frequently gets bill collectors into trouble is the automatic stay.
What It Is
The automatic stay is very broad and far-reaching, applying to almost any type of formal or informal action taken against the debtor or the property of the bankruptcy estate. As soon as a bankruptcy case begins, which is the very moment the bankruptcy petition is filed, the law divides all of the bankrupt’s debts into two categories: pre-petition and post-petition. The law automatically stays, or stops, any effort by a creditor to collect a pre-petition debt.
The automatic stay resembles an injunction, barring the commencement or continuance of any actions against the debtor or the property of the debtor’s bankruptcy estate. The automatic stay does not, by itself, mean you cannot ever collect your debt. Instead, its purpose is to prevent a chaotic and uncontrolled scramble for a debtor’s assets in a variety of uncoordinated proceedings in different courts, and to shield the debtor from financial pressures during the attempt to reorganize or repay the debts.
The Perils of the Stay
The automatic stay arises as soon as the bankruptcy case is filed. The debtor does not have to give creditors any notice of the bankruptcy case in order for the stay to go into effect. Because of this, it is extremely easy to trip over the automatic stay without even knowing that you have done so.  Something as simple as a phone call to your customer asking for payment could be considered a stay violation. While unintentional stay violations may not result in sanctions, creditors should be aware that sanctions for violating the automatic stay can be severe. The debtor may be awarded damages, costs, attorney’s fees and, in some cases, punitive damages.
Exemptions and Relief
The automatic stay will remain in effect and protect the debtor’s property from the collection efforts of creditors until the bankruptcy case is closed or dismissed; or the debtor is granted a discharge and the property is abandoned. Additionally, the stay can terminate as to personal property of the estate if the individual debtor fails to perform his or her intent as stated in the bankruptcy papers. In order to prevent abuse of the bankruptcy system, there are special provisions that apply to certain “serial filers” – debtors that have filed multiple bankruptcy petitions – and other bad-faith filers.
A creditor or party in interest can seek modification of the stay by motion for various reasons, including:
- Lack of adequate protection is the most common basis for finding cause to grant relief. There are various forms of adequate protection that may be lacking. One such form is the making of a cash payment or periodic cash payments to the extent necessary to compensate for any decrease in value of the creditor’s interest. Other forms of adequate protection include the provision of an additional or replacement lien as compensation for the decrease in value of the creditor’s interest, or the realization of an indubitable equivalent of the creditor’s interest.
- The stay can also be modified if there is no equity in the property, and the property is not necessary for an effective reorganization. A debtor is deemed to have no equity in the property when the debtor owes more on the property than what the property is worth. Property is considered to be unnecessary for effective reorganization if the court is convinced that a reorganization is not feasible, or if the plan is unlikely to succeed because it lacks credible assumptions and projections.
Additionally, there are certain exceptions that allow a creditor to ignore the automatic stay, including:
- Commencement or continuation of a civil action or proceeding involving certain familial rights and obligations, such as paternity suits, establishing domestic support obligations, child custody proceedings, domestic violence actions, and certain marriage dissolution proceedings;
- Actions by a landlord to obtain nonresidential real property when a lease has terminated prior to the filing of the bankruptcy petition. However, this exception is limited to situations which the stated lease term expires. It does not apply to leases terminated for other reasons;
- Certain withholdings from a debtor’s wages and collections of amounts withheld under the debtor’s agreement authorizing such withholding and collection for the benefit of a pension, profit-sharing, stock bonus, or other plan;
- Continuation of an eviction action, where the landlord evicted the debtor from residential property so long as the landlord obtained a judgment for the repossession of such property before the debtor filed the bankruptcy petition;
- Commencement or continuation of a criminal action or proceeding against the debtor, including most bad check prosecutions.
Be careful, though, before you rely on one of the above-mentioned exceptions. The law is very specific as to who qualifies for the exceptions, and in what situations they apply. If your facts do not match, you will not qualify for the exception, and any action you take may be in violation of the stay! Note that even if a creditor does not qualify for an exception, relief from the stay can be requested.
Conclusion
The automatic say resembles an injunction, barring the creditor from taking actions against the debtor or the property of the debtor’s bankruptcy estate. Moreover, an automatic stay applies to most types of formal or informal action taken against the debtor or the property of the bankruptcy estate. To avoid violating an automatic stay, creditors should immediately stop any attempts to collect payment once they learn that a debtor is in bankruptcy and contact an experienced bankruptcy lawyer. Bankruptcy law provides relief options for creditors but they are highly technical.
Huddleston Bolen LLP has a number of experienced bankruptcy attorneys that are ready to handle any bankruptcy-related question you may have. For information or assistance, contact Jan Holbrook at 304-691-8330 or jholbrook@huddlestonbolen.com.
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