Suing a company in bankruptcy isn’t much different from any other suit, other than the bankruptcy adds a layer of court supervision at the beginning and the end of the case. However, you’ll need to be aware of rules that will affect how you litigate the matter. If you don’t follow the requirements, you could lose your right to prosecute the action, or worse yet, the court could hold you in contempt of court.
If your civil lawsuit is in progress when the defendant files a bankruptcy case, the case will come to a stop. The automatic stay—a court order (injunction) that prohibits a creditor from collecting its debt—gets put in place immediately after a bankruptcy filing.
To continue the lawsuit, you’ll have to file a motion asking the bankruptcy court to lift the automatic stay (and you’ll need a good reason to do so). Pursuing the litigation without court permission could lead to a loss of your right to a recovery, being held in contempt of court, being charged a hefty fine, and possibly being ordered to pay damages (compensatory money) to the debtor.
Just because you initially filed your case against the company in state court, doesn’t mean that it will stay there. After the bankruptcy case gets filed, the bankruptcy court can order the state case moved to federal bankruptcy court (if you or someone else requests doing so by filing a motion).
Whether the court orders the case moved will depend on the type of case and how far the lawsuit has progressed. For instance, if the case involves money owed or property ownership—and the outcome will affect the amount of money that bankruptcy creditors will receive—then there’s a good likelihood the court will order the lawsuit moved or refiled in bankruptcy court.
However, that isn’t always the case. If the matter is close to trial, or actually in the process of being tried, the bankruptcy court will likely allow the litigation to continue in the state court—primarily because it would be too costly to require the litigants to start over.
There are other scenarios that you’ll want to be aware of, too. If the dispute involves money but the outcome won’t affect the bankruptcy estate, the bankruptcy court will probably leave the stay in place. If the matter seeks to change behavior only—for instance, suppose the attorney general wants to stop a factory owner from polluting a stream—the chances are that the court will allow the case to continue.
Some matters, such as criminal cases and certain family law issues, can continue forward without permission from the court.
You’ll file most lawsuits—called adversary proceedings—in the bankruptcy court itself. In most respects, they’re conducted like cases filed elsewhere; however, you should be aware that there are significant procedural differences (for instance, the way you’ll file and serve the initial complaint) so you’ll likely want to consult with an experienced attorney.
If the debtor is already in bankruptcy and you want to file a civil case outside the bankruptcy court, you’ll need to get court permission.
A company that files Chapter 7 bankruptcy is shutting down and using bankruptcy as an orderly way to dispose of assets and wrap up its affairs. As with any Chapter 7 case, a bankruptcy trustee will administer the case by gathering the assets, liquidating them, and using the proceeds to pay creditor claims.
The trustee will be a party to any lawsuit you file and will make all the decisions about the litigation on behalf of the bankruptcy estate. The debtor, its officers, and stockholders will no longer have any say in the affairs of the company, including the litigation (although the officers still have a duty to cooperate with the trustee).
A company that wants to remain open will file for Chapter 11 bankruptcy. In this chapter, the business will create a plan to reorganize its debt; however, if you file a lawsuit, the court will have to approve of any settlement.
Because of the complicated nature of any adversary proceeding, you’d be well advised to discuss the specifics with a knowledgeable attorney.