Shant A. Karnikian (left) Brian Kabateck. (Courtesy photos)

Pacific Gas & Electric Co. recently sought bankruptcy protection in the face of more than $30 billion in potential liability from the wildfires that have ravaged California.

One immediate effect the company's Chapter 11 filing had was the halting of thousands of lawsuits and other claims for compensation pending against PG&E lodged by a wide array of victims. In bankruptcy parlance, the pause is known as an “automatic stay,” and it also extends to pending and future litigation filed against a debtor while the bankruptcy process is ongoing. But for lawyers dismayed by the utility's bankruptcy filing or facing their own instances where a defendant has become a debtor amid litigation, there are ways to prevent an automatic stay from derailing your clients' civil cases for years.

A plaintiff with a pending lawsuit against a defendant going through bankruptcy can move to have the automatic stay lifted if they have cause. (11 U.S.C. §362(d)(1).)

The decision concerning whether relief from a stay is granted is “within the broad discretion of the bankruptcy court.” (Truebro, Inc. v. Plumberex Specialty Prods., Inc. (In re Plumberex Specialty Prods., Inc.) (C.D. Cal. 2004) 311 B.R. 551, 558).

And the Ninth Circuit has ruled that stay relief may be ordered to allow litigation pending in another forum to proceed to its conclusion. (See, e.g., Packerland Packing Co. v. Griffith Beverage Co. (In re Kimble) (9th Cir. 1985) 776 F.2d 802, 807.)

The purpose of this allowance—and one of the purposes of bankruptcy in general—is to permit the court and the trustee for the debtor to determine the value of all claims by creditors against the debtor.

As for what constitutes cause for lifting a stay, the Ninth Circuit has decreed that “discretionary relief from the stay must be determined on a case by case basis.” (MacDonald v. MacDonald (In re MacDonald) (9th Cir. 1985) 755 F.2d 715, 717; see also Baldino v. Wilson (In re Wilson) (3d Cir. 1997) 116 F.3d 87, 90.)

To help make such a determination, courts typically consider a set of 12 factors, known as the Curtis factors, derived from In re Curtis, 40 B.R. 795, 799-800 (Bankr. D. Utah 1984) (See also In re Plumberex Specialty Products, Inc., 311 B.R. 551, 560 (Bankr. C.D. Cal. 2004)).

The 12 factors are:

1. Whether relief would result in partial or complete issue resolution;
2. The lack of any connection with or interference with the bankruptcy case;
3. Whether the other proceeding involves the debtor as a fiduciary;
4. Whether a specialized tribunal with necessary expertise has been established to hear cause of action;
5. Whether the debtor's insurer has assumed full defense responsibility;
6. Whether the action primarily involves third parties;
7. Whether the litigation in another forum would prejudice the interests of other creditors;
8. Whether the judgment claim arising from the other action is subject to equitable subordination;
9. Whether movant's success in the other proceeding would result in a judicial lien avoidable by debtor;
10. The interests of judicial economy and expeditious and economical resolution of litigation;
11. Whether parties are ready for trial in the other proceeding; and
12. The impact of the stay on parties and balance of harms.

The factors are non-exclusive, and a court is not required to give each factor equal weight. Plumberex, 311 B.R. at 560.

The court in Curtis said, “[t]he most important factor in determining whether to grant relief from the automatic stay to permit litigation against the debtor in another forum is the effect of such litigation on the administration of the estate.”

Lawyers seeking to have a motion for a lifting of an automatic stay granted are most likely to be successful when they can demonstrate more of the applicable Curtis factors weigh in their favor than those that do not.

If a bankruptcy court denies your motion, you have the option of appealing to a district court and the potential for an order determining the bankruptcy court abused its discretion. In re Roger, No. 5:14-cv-02515, (C.D. Cal. 2015)

Additionally, plaintiffs' lawyers should be aware that an automatic stay does not protect non-bankrupt third parties even when they are closely related to the debtor. (U.S. v. Dos Cabezas Corp. (9th Cir. 1993) 995 F.2d 1486, 1491) The nonbankrupt third parties would include co-defendants that your client may have a claim against. California courts have also held that bankruptcy of one defendant in a case with multiple defendants does not stay the proceeding as to the other defendants. Queenie, Ltd. v. Nygard Int'l (2nd Cir. 2003) 321 F3d 282, 287; In re Miller (9th Cir. BAP 2001) 262 BR 499, 503-504 & fn. 6; Fortier v. Dona Anna Plaza Partners (10th Cir. 1984) 747 F2d 1324, 1329-1330.

While there are many obstacles created when a defendant files for bankruptcy, plaintiffs should not be discouraged. By following the proper procedure and brushing up on relevant case law, relief from an automatic stay can be obtained. This would give the plaintiff the opportunity to proceed against the debtor defendant in civil court and ultimately obtain a well-deserved judgment.

Brian S. Kabateck is a consumer rights attorney and founder of Kabateck LLP in Los Angeles. He represents plaintiffs in personal injury lawsuits, mass torts litigation, class actions, insurance bad faith lawsuits, insurance litigation and commercial contingency litigation.

Shant A. Karnikian is a senior associate at Kabateck LLP. His practice focuses on consumer class actions, insurance bad faith, and personal injury.