With rare exceptions, when a bankruptcy petition is filed, an “automatic stay” comes into effect which prevents the commencement or continuation of any litigation or proceeding against the debtor or the estate of the bankruptcy estate. Bankruptcy courts may grant an “exemption” from the automatic stay to allow a creditor to pursue litigation against the debtor in a forum other than bankruptcy before filing the bankruptcy case. In some situations, courts have also set aside the stay retroactively to validate otherwise voidable actions as violations of the automatic stay, such as when a creditor sues or enforces a lien after filing for bankruptcy but is not aware of the deposit. A recent United States Supreme Court ruling called into question the ability of bankruptcy courts to retroactively reverse the stay in such circumstances. However, the Ninth Circuit Bankruptcy Appellate Panel (BAP) ruled that this Supreme Court precedent did not prevent the bankruptcy court from retroactively lifting the automatic stay.
In Merriman v. Fattorini (In re Merriman), the plaintiffs filed a wrongful death lawsuit against former NFL star Shawn Merriman in state court after Merriman filed for bankruptcy. After learning of Merriman’s bankruptcy, the plaintiffs asked the bankruptcy court to retroactively reverse the automatic stay to validate the litigation they filed before hearing the bankruptcy case and allowing them to liquidate their bankruptcy. damages in state court. The court concluded that there was “cause” to retroactively lift the automatic stay.
On appeal, the BAP concluded that the bankruptcy court had sufficient evidence to grant the plaintiffs’ request. The BAP also acknowledged that during the appeal, the Supreme Court rendered a ruling that retroactive orders cannot create jurisdiction where there is none. After careful consideration of the scope and scope of the Supreme Court’s decision, however, the BAP concluded that the decision does not preclude a bankruptcy court’s power to retroactively set aside the automatic stay because “it is absolutely clear that Congress expressly gave such power, including the power retroactively to grant bankruptcy remedy.
What will be the impact of this decision on creditors? Many creditors seek relief from the automatic stay of bankruptcy to initiate lawsuits or other remedies brought in a forum other than bankruptcy after the debtor has filed for bankruptcy. The decision of the BAP specifies that the effective use by the bankruptcy court of the recourse in receivership must sometimes include the possibility of granting a retroactive reorganization. As such, creditors may invoke this decision in support of a retroactive suspension request, notwithstanding the prior decision of the Supreme Court.