Seeking Relief from the Automatic Stay: Protecting Creditors’ Rights During the Bankruptcy Process

Customer and client bankruptcies can present significant risks for creditors. Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code both provide opportunities for filers to significantly reduce (if not eliminate) their debt obligations, and Subchapter 5 of Chapter 11 allows small business filers to do so with limited creditor involvement. As a result, creditors must work with an experienced Miami bankruptcy litigation attorney to protect their financial interests—and, in many cases, this involves seeking relief from the automatic stay.

What Is the “Automatic Stay?”

Initiating a commercial bankruptcy proceeding under Chapter 7 or Chapter 11 triggers what is known as an “automatic stay.” While the automatic stay is in effect, creditors are generally prohibited from seeking to collect the amounts they are owed. Instead, they must participate in the bankruptcy process to protect their claims (to the extent that they can)—whether through involvement with the creditors’ committee or initiation of an adversary proceeding—potentially while pursuing other options as well.

When Creditors Can Seek Relief from the Automatic Stay in a Commercial Bankruptcy

But, while the automatic stay provides strong protections for commercial debtors, these protections are not absolute. The U.S. Bankruptcy Code allows creditors to seek relief from the automatic stay in various circumstances. Specifically, Section 362(d) of the Bankruptcy Code allows creditors to seek relief from the automatic stay in four circumstances:

• Section 362(d)(1) –Section 362(d)(1) entitles creditors to relief from the automatic stay “for cause, including the lack of adequate protection of an interest in property of such party in interest.”
• Section 362(d)(2) – Section 362(d)(2) entitles creditors to relief from the automatic stay, “with respect to a stay of an act against [eligible] property . . . if—(A) the debtor does not have an[y] equity in such property; and, (B) such property is not necessary to an effective reorganization.”
• Section 362(d)(3) – Section 362(d)(3) entitles creditors to relief from the automatic stay “with respect to a stay of an act against [eligible] single asset real estate . . . by a creditor whose claim is secured by an interest in such real estate,” subject to various conditions.
• Section 362(d)(4) – Section 362(d)(4) entitles creditors to relief from the automatic stay “with respect to a stay of an act against [eligible] real property . . . by a creditor whose claim is secured by an interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors . . . .”

Since Sections 362(d)(3) and 362(d)(4) are specific to real estate, most motions for relief from automatic stays in commercial bankruptcy proceedings involve claims under Sections 362(d)(1) and 362(d)(2).

Under Section 362(d)(1), secured creditors can demonstrate a “lack of adequate protection” by showing that the collateral securing their debts is diminishing in value. Other potential grounds to seek relief under this section include the debtor’s failure to maintain or preserve collateral, waste or mismanagement, or undue delay in proposing a reorganization plan, among others. Under Section 362(d)(2), creditors can seek relief by showing that both (i) the value of collateral is less than the combined total of all secured debts encumbering the property and (ii) the collateral is unnecessary to the resolution of the debtor’s other outstanding obligations.

Filing a Motion for Relief from an Automatic Stay

Seeking relief from the automatic stay during a Chapter 7 or Chapter 11 commercial bankruptcy involves filing a motion under Section 362(d). There are several strategic considerations involved, and creditors seeking relief should work with an experienced Miami bankruptcy litigation attorney to decide when to file. There are both benefits and drawbacks to filing quickly once a Chapter 7 or Chapter 11 proceeding has been initiated, and creditors should work with their counsel to time their motions as strategically as possible:

Benefits to Quickly Filing a Motion for Relief from an Automatic Stay

• Protecting the value of secured collateral before it begins to diminish
• Determining the extent to which the creditor will need to be involved in the remainder of the bankruptcy process
• Securing “adequate protection” payments under Section 362(d)(1)

Drawbacks to Quickly Filing a Motion for Relief from an Automatic Stay

• The bankruptcy judge may be reluctant to grant relief early in the process, where much of the focus is on protecting the debtor
• The creditor may lack sufficient evidence to clearly establish the grounds for its motion, and taking the time to gather this evidence may increase the chances of success
• Pursuing a motion for relief takes time and resources that could potentially be devoted to other aspects of protecting the creditor’s rights

Making a strategic decision about when (and whether) to file a motion for relief from an automatic stay requires a careful assessment of all relevant factors. This is not limited to the factors listed above. By working with an experienced Miami bankruptcy litigation attorney, creditors can ensure that they are making informed decisions with their companies’ best interests in mind.

Next Steps for Creditors Facing Customer and Client Bankruptcies

Due to the various considerations and implications involved with filing a motion for relief from an automatic stay, creditors that are facing customer and client bankruptcies must work closely with their counsel to chart their next steps. While filing a motion under Section 362(d) will be warranted—and necessary—in some cases, in others it won’t be the best approach. Once again, informed decision-making is key; and, while creditors must make their decisions quickly, they must also ensure that they are doing so with a long-term perspective.

Speak with a Miami Bankruptcy Litigation Attorney at Edelboim Lieberman in Confidence

If you need to know more about the benefits and drawbacks of filing a motion for relief from the automatic stay in a commercial bankruptcy under Chapter 7 or Chapter 11, we invite you to get in touch. Please call 305-768-9909 or contact us online to schedule an appointment at Edelboim Liberman.