How Can Debtors Defend Against a Motion for Relief from an Automatic Stay?
For businesses in financial distress, one of the most immediate benefits of filing for bankruptcy under Chapter 11 is triggering the automatic stay. The automatic stay prevents creditors from seeking to enforce their claims, and it provides debtors the opportunity to work through the bankruptcy process without the risk of being declared in default. However, creditors can seek relief from the automatic stay in various circumstances, and when facing creditors’ motions for relief, debtors must work with an experienced Miami Chapter 11 bankruptcy lawyer to protect themselves to the fullest extent possible.
7 Potential Defenses to a Motion for Relief from an Automatic Stay in a Business Bankruptcy
While creditors can file motions for relief on various grounds, debtors also have several potential defenses available. Determining which defenses a Chapter 11 debtor can assert requires a careful assessment of the creditor’s claims as well as all pertinent facts and circumstances. With this in mind, some examples of potential defenses to a motion for relief from an automatic stay include:
1. Insufficient Grounds Under Section 362(d) of the U.S. Bankruptcy Code
When seeking relief from an automatic stay, a creditor must assert specific grounds under Section 362(d) of the U.S. Bankruptcy Code. In most cases, this involves asserting that either:
- The creditor will suffer a “lack of adequate protection” or has other “cause” to seek relief from the automatic stay; or,
- The debtor does not have equity in the property the creditor is seeking to obtain and this property is not necessary to effective reorganization of the debtor’s liabilities.
If a creditor fails to assert sufficient grounds for relief under Section 362(d), then no relief is warranted. As a result, attacking the creditor’s claimed grounds for relief will prove to be an effective defense strategy in many cases.
2. Failure to Comply with the Rules for Seeking Relief from an Automatic Stay
In addition to asserting sufficient grounds under Section 362(d), creditors seeking relief from an automatic stay must also comply with the rules for seeking relief under the Federal Rules of Bankruptcy Procedures. Rule 4001 establishes extensive procedural and substantive requirements—and, if a creditor’s motion is deficient in any respect, exposing this can be enough to prevent the motion from being granted.
3. Inadequate Notice
When seeking relief from an automatic stay, a creditor must provide adequate notice to the debtor and other interested parties, except in very limited circumstances. Similar to other procedural deficiencies, if a creditor seeking relief fails to provide adequate notice, this can also sustain efforts to fight a motion for relief from an automatic stay.
4. Lack of Standing to File
Fighting a motion for relief from an automatic stay may also involve challenging the creditor’s standing in some cases. An experienced Miami Chapter 11 bankruptcy lawyer will be able to help you assess whether this is a viable defense in your company’s case.
5. Preserving the Stay is Necessary to Enable the Debtor’s Reorganization
Debtors pursuing reorganization under Chapter 11 can also fight creditors’ motions for relief by arguing that preserving the stay is necessary to enable their reorganization. During the early stages of the bankruptcy process, bankruptcy judges will often (though not always) err on the side of facilitating reorganization rather than protecting the interests of individual creditors.
6. Harm to the Debtor Would Outweigh the Benefits to the Creditor Seeking Relief
Similarly, Chapter 11 debtors can often challenge creditors’ motions for relief on grounds of equity and fairness. If granting a creditor’s motion would result in undue prejudice, or if any valid interest in granting relief is outweighed by the potential harm to the debtor or other interested parties, then the motion generally should not be granted.
7. Defenses to the Underlying Debt
Another option for defending against a motion for relief from an automatic stay is to challenge the underlying debt. If the creditor’s underlying claim is invalid, then no relief is warranted. When justified, asserting this type of defense in response to a motion for relief can help to protect the debtor’s interests in subsequent stages of the bankruptcy process as well.
Again, these are just examples. An experienced Miami Chapter 11 bankruptcy lawyer will be able to evaluate all potential defenses to a motion for relief from an automatic stay and execute a comprehensive and cohesive defense strategy. Since a creditor’s successful motion for relief can have serious implications not only with respect to that creditor’s claim, but for the entire bankruptcy process, it is critical that debtors work with experienced counsel to fight these motions by all means available.
Dealing with Creditors’ Other Efforts to Collect Prior to Reorganization
Along with motions for relief from the automatic stay, creditors can seek to protect their interests through various other pre-reorganization efforts. As a Chapter 11 debtor, being prepared for these efforts is also critical to maximizing the benefits of the reorganization process. Some examples of other ways that creditors may seek to protect their interests during the early stages of a business bankruptcy include:
- Asserting the creditor’s reclamation rights
- Seeking designation as a “critical vendor”
- Asserting leverage to seek assumption of an executory contract
- Filing a proof of claim
- Initiating an adversary proceeding
Similar to motions for relief from automatic stays, Chapter 11 debtors can defend against these efforts in various ways as well. Here, too, the key is to evaluate all potential options and execute a strategy focused on securing the best possible end result.
Schedule an Appointment with a Miami Chapter 11 Bankruptcy Lawyer at Edelboim Lieberman
If you need to know more about how your company’s creditors may seek to protect their interests during the Chapter 11 bankruptcy process, we invite you to get in touch. We represent companies of all sizes in business bankruptcy proceedings across Florida. To schedule an appointment with a Miami Chapter 11 bankruptcy lawyer at Edelboim Lieberman, please call 305-768-9909 or tell us how we can contact you online today.
