Seeking Relief From The Automatic Stay In Delaware

Introduction

As more companies file for bankruptcy, creditors and other interested parties of a debtor must quickly familiarize themselves with the automatic stay. Section 362(a)(1) of the Bankruptcy Code stays "the commencement or continuation … of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement" of a bankruptcy proceeding. Generally speaking, the automatic stay is intended to give the debtor a "breathing spell" from its creditors. To do so, the stay stops various forms of collection efforts against the debtor.

The automatic stay is not without limitations, however. In drafting the Bankruptcy Code, Congress carved out exceptions where the automatic stay does not apply. Further, the Federal Rules of Bankruptcy Procedure provide procedural safeguards for a party seeking relief from the automatic stay. Given the frequency with which automatic stay issues arise in bankruptcy proceedings, this post is intended to provide a brief summary of the scope of the automatic stay. Further, the latter part of this post looks at cases frequently cited by parties seeking relief from the automatic stay in the Delaware Bankruptcy Court.

Scope of the Automatic Stay

Section 362(a)(3) of the Bankruptcy Code defines the scope of the automatic stay. Under this section, the automatic stay bars any "act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." In order to have the stay "lifted," section 362(d) authorizes a bankruptcy court to "grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay …(1.) for cause, including the lack of adequate protection of an interest in property of such party in interest."

In order to trigger the automatic stay, there must be an act against either the debtor or against property of the debtor or of the estate. The automatic stay does not stay actions taken against non-debtor third parties. The Third Circuit has recognized that although the automatic stay has a broad scope, the clear language under 362(a) applies only against a debtor. See McCartney v. Integra Nat'l Bank North, 106 F.3d 506, 509 (3d Cir. 1997). As a consequenceit is universally acknowledged that an automatic stay of proceedings accorded by § 362 may not be invoked by entities such as sureties, guarantors...