The Defendant in My Lawsuit Filed for Bankruptcy: What Next?

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Litigation is challenging on its own. So, what do you do when the defendant in your lawsuit files for bankruptcy? Before throwing in the towel or settling claims for pennies on the dollar, there are strategies to effectively manage a defendant’s insolvency and pursue a meaningful recovery.

In this blog, the creditors’ rights attorneys at Hendershot Cowart P.C. breaks down a few basics about dealing with a defendant’s bankruptcy amid litigation.

Bankruptcy and Litigation: Your Options to Collect on a Claim

When a defendant files bankruptcy, their petition will trigger an automatic stay on “the commencement or continuation” of most legal actions, including collections and civil claims (11 U.S. Code § 362).

As a plaintiff with a pending claim or outstanding debt, you become a creditor of the debtors’ estate, and must therefore comply with rules established by the bankruptcy code to cease further action. Creditors who violate these rules can face consequences, including liability for debtor’s damages.

Your options following the automatic stay depend on the circumstances of the matter and the status of your claim.

  • If the lawsuit is still being litigated, plaintiffs can file a motion in bankruptcy court seeking relief from the stay (these motions are typically opposed by defendants). The judge may allow plaintiffs to continue prosecuting the case in its original forum, deny the motion, or remove the case as an adversary proceeding to bankruptcy court. Plaintiffs who wish to challenge removal may ask the bankruptcy court to abstain and remand the case.
  • If the lawsuit has been resolved and damages were awarded for fraud or fraudulent conveyance, plaintiffs must ask the bankruptcy court to determine that these debts satisfy an exception to discharge in bankruptcy (11 U.S. Code § 523). If approved by the court, your claim will become a non-dischargeable debt and prioritized for payment during the defendant’s bankruptcy proceedings.

Our business law attorneys have proven experience with both litigation and creditors' rights. Call (713) 909-7323 or contact us online to discuss your case.

As a plaintiff who has been awarded damages in a civil lawsuit, you are now effectively a creditor. While plaintiffs will often choose to file a proof of claim to preserve their rights as a creditor, a proof of claim does not ensure payment of any certain sum and may actually be deemed as consent to remove the claim to bankruptcy court.

Plaintiffs and counsel should carefully consider the implications of filing a proof of claim and fully explore their options regarding jurisdiction given the prevailing circumstances.

Screenshot of a LinkedIn post by creditors' rights attorney Carolyn Carollo. She writes, "Johnson & Johnson is making headlines for a secret strategy to shift liability for baby powder lawsuits to a subsidiary, which would then immediately declare #bankruptcy. J&J’s intention was to limit the compensation available to #plaintiffs. If this happens to you, there are strategies to recover meaningful money damages."

A Defendant’s Bankruptcy May Have a Silver Lining

Though many plaintiffs are put off by the prospects of dealing with a defendant in bankruptcy because they dread burdensome barriers or some dubious expansion of their litigation timeline, the truth of the matter is that bankruptcy court can offer some attractive benefits.

  • Efficiency. Disputes relegated to bankruptcy court, where dockets are fast-tracked, can be resolved in a timelier manner than those in trial courts, especially with today’s bloated post-pandemic dockets. Because bankruptcy judges work to facilitate resolutions when outstanding litigation involving a debtor drags on, settlements are also more common.
  • Security. Depending on the facts of a case, plaintiffs dealing with defendants in bankruptcy may need to accept a discounted payout on their claims. In exchange, however, they can benefit from a sense of security that comes with having a better understanding of the defendant’s financial picture and their ability to satisfy a claim.
  • Collection. Debtors in bankruptcy are obligated under the bankruptcy code to pay once a judgment is issued, thereby relieving plaintiffs from the challenges of dealing with collections.

Rule 9019: Settlements in Bankruptcy

Any settlement between a plaintiff and insolvent defendant must receive approval from the bankruptcy court. This typically requires parties to file a motion with the bankruptcy court that asks for approval, outlines the terms of the settlement, and explains why it is in the debtor’s best interest. Other creditors of the debtor’s estate have the right to object to the motion.

Because bankruptcy rules require only 21 days’ notice for the court to approve a settlement (Rule 9019), uncontested settlements can be quickly approved. However, if other creditors of the debtor’s estate object to the settlement, the process will involve trial-like proceedings, discovery, and evidentiary hearings before the judge.

Debtors in large bankruptcy cases may file motions to establish settlement procedures to streamline this process.

Questions About Your Rights as a Creditor? We Can Help.

A defendant’s bankruptcy filing creates complexities, but there are solutions that can help businesses with viable, high-value claims preserve their right to collect a meaningful recovery.

The creditors’ rights attorneys at Hendershot Cowart P.C. routinely work with business clients and general counsel to protect creditors’ rights in bankruptcy and help them navigate the most appropriate course of action. Our Houston-based firm has a history of helping business creditors resolve disputes, devise effective solutions to legal problems, and recover debts.

Call (713) 909-7323 or contact us online to speak with a lawyer.

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