Bankruptcy stay issues in insured D&O (Directors and Officers Liability Insurance) claims

Litigation practitioners are often introduced to the US Bankruptcy Code when they face the automatic stay of Title 11 of the United States Code Section 362 (11 U.S.C. § 362) in a case they are pursuing on behalf of plaintiffs trying to prove up and quantify damages caused by the debtor.

Most lawyers facing the filing of a bankruptcy case know that pre-bankruptcy creditors may not enforce claims against a bankruptcy debtor, or against property of the estate of a bankruptcy debtor, without first obtaining relief from the automatic stay from the Bankruptcy Court (11 U.S.C. § 362(d)). Although some few matters are excepted from the stay's reach, most plaintiffs find themselves seeking relief from the automatic stay under Section 362(d) for "cause," if they wish to continue litigation against the debtor in state or federal courts.

This principle is easy to apply in two-party litigation when a plaintiff is adverse to a defendant who files bankruptcy between the filing of the complaint and the conduct of the trial or entry of judgment. Only rarely in a simple two-party dispute is relief from stay granted to continue litigation outside of the bankruptcy case to determine the merits of the claims and quantify damages - in re Caves, 309 B.R. 76 (Bkrtcy. M.D.Ga. 2004) (relief denied). This is especially true if the claims asserted against the debtor do not require special expertise or involve substantial application of local law. The question normally comes down to how close to resolution the action is at the time the bankruptcy case is filed and the balance of harms that would flow from continuing litigation in the selected forum or proceeding in bankruptcy. If it is early in the non-bankruptcy litigation, relief from stay will be denied. If it is late in the litigation, and the trial court has invested significant time and effort in learning the facts and legal theories, relief from stay may be granted to wrap the case up and liquidate the creditor's claim. In SCO Group, Inc., 395 B.R. 852 (Bkrtcy. D.Del. 2007) (relief granted where state court action was pending for four years and bankruptcy was filed on eve of trial). The reason this is true is that bankruptcy courts are expert at liquidating creditor claims against bankruptcy estates in summary proceedings or "mini trials". Disputes that consume significant time and attorney's fees if liquidated in state or federal court litigation will be more efficiently resolved in an objection to claims...