Bankruptcy Judge Shows Reach of Automatic Stay

One of the prominent features of federal bankruptcy procedure is the automatic stay of all lawsuits or civil actions against the debtor. When a person or company files for bankruptcy protection, whether it be a Chapter 7 liquidation, a Chapter 13 individual bankruptcy or a Chapter 11 corporate reorganization, the bankruptcy court automatically issues the stay immediately against most civil cases although the law does provide for certain enumerated exceptions for policy reasons (such as a case for child support by a former spouse). In a case pending in the state of Delaware – the home of many national corporations which operate primarily in other states- a federal bankruptcy judge just ruled that the bar applies to a state court case in California involving the disposition of some insurance proceeds where the debtor itself is not even a party.

In the bankruptcy case of In Re Longview Power, LLC, the judge halted a California state lawsuit by First American Title Insurance Co. that allegedly threatened its plan to exit bankruptcy. First American Title Insurance Co. serves as the insurance company for a group of secured creditors with claims against Longview for construction work in which they have mechanic liens. Because Longview contends that the companies who contracted to build their power plant defectively designed the plant, Longview negotiated with the lienholders for them to pay a reduced portion of the $335 million in mechanic’s liens that they claim should be paid. They agreed to pay the negotiated amount from an $825 million insurance policy provided by American Title Insurance. That insurance company sued the secured creditors’ collateral agent on the grounds that the policy they issued applies only to defects in title resulting from the mechanics’ liens. Before the California court could resolve that dispute, the Delaware federal judge decided that the California case imperils the ability of Longview to get through bankruptcy.

The court relies on 11 USC Section 362(a)(3) relating to the automatic stay. This provision applies the stay to “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”. The bankruptcy court views the proceeds from this insurance policy as property of the estate and any future disposition of these funds, the court suggests, should be made in the bankruptcy case not within the context of the California state action.  This decision underscores the reach of the automatic stay to cases in which the debtor itself is not even an actual party. It should be noted that the bankruptcy court will entertain the arguments advanced by American Title Insurance within the context of the Chapter 11 reorganization.

In Albuquerque, Giddens & Gatton Law, PC has attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, PC at (505) 633-6298 to set up an appointment or visit the firm’s website at Giddens & Gatton Law, PC is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.