How Does Bankruptcy Affect Civil Cases?

How Does Bankruptcy Affect Civil Cases?

Finance companies, mortgage companies, and other creditors will do almost anything to collect the money owed to them. Bankruptcy stops these lawsuits and gives distressed debtors an opportunity to restructure debts and/or work out payment plans. However, courts are very clear that bankruptcy is a shield, not a sword. Courts typically use this phrase in consumer bankruptcy abusive filing matters. But it applies in other areas as well, such as preemptive Chapter 11 corporate filings. 

Proactive and prepackaged Chapter 11s are a little more common today. The Los Angeles Dodgers filed for bankruptcy in 2011. The Dallas Stars and other professional sports teams have done similar things in recent years. Therefore, many organizations believe they can get away with preemptive bankruptcy. But there is a big difference between prepackaged and preemptive. Prepackaged bankruptcies are completely pre-arranged. Preemptive bankruptcies leave many things up in the air.

Debtors have rights. They file bankruptcy to protect those rights. Creditors have rights as well, especially if these creditors also happen to be injury victims. A sex abuse lawyer protects these rights, in both bankruptcy court and civil court. Organizational sex abuse survivors have already been victimized twice, by the individual abuser and by the organization that protected that abuser. We work hard to ensure survivors aren’t victimized a third time by the judicial system.

The Automatic Stay

Usually, Section 362 of the Bankruptcy Code takes effect before a judge even considers the merits of the bankruptcy, an issue that’s outlined below. The Automatic Stay blocks most creditor adverse actions. Adverse actions in consumer bankruptcies occasionally include lawsuits. Direct actions are more common, such as repossession and foreclosure.

Creditor lawsuits are much more common in Chapter 11 organizational restructuring bankruptcies. Indeed, most organizations file Chapter 11 because they face liability or other lawsuits.

In most jurisdictions, the bankruptcy judge could limit or cancel Section 362 relief for a number of reasons, such as:

  • Misuse: We touched on this area above. We can accurately predict what will happen tomorrow, but we don’t know what will happen tomorrow. The Automatic Stay protects debtors under financial duress. It arguably doesn’t apply to debtors who are afraid of financial duress in the future.
  • Multiple Filing: This point comes up frequently in consumer bankruptcy cases. Some debtors repeatedly file and voluntarily dismiss bankruptcy cases, using the Automatic Stay to frustrate creditors. Others use different names, such as Mike and Mike, LLC.
  • Fraud: As outlined below, only honest debtors are entitled to bankruptcy relief. Including inaccurate or misleading information in bankruptcy forms is fraudulent. The unclean hands doctrine often applies as well. If Mike cheated customers who are now filing lawsuits, Mike is probably on his own.

The Automatic Stay expires when the bankruptcy judge closes the case. However, in Chapter 11, lawsuit immunity may continue. The company that emerges from bankruptcy is a legally different entity from the one that filed.

Some people may remember the uproar over GM’s defective ignition switches in 2014. The controversy, along with some other factors, forced the automaker into Chapter 11 bankruptcy. After the judge closed that bankruptcy, GM’s lawyers argued that the “new GM” wasn’t legally responsible for injuries the “old GM” caused.

The “new GM” and defective ignition switch accident survivors eventually worked out a compromise. The company agreed to accept responsibility for some accidents.

Bankruptcy Eligibility

Since bankruptcy could wreak havoc on an injury claim, a sex abuse lawyer often attacks the organization’s eligibility to file. 

According to the Supreme Court, debtors who are honest, yet unfortunate, are entitled to bankruptcy protection. Arguably, Catholic Church dioceses fail all three parts of this test.

The simple definition of a “debtor” is a person or entity with more liabilities than assets. Many organizations have deficits, so they meet this basic definition. However, a bankruptcy debtor is usually a person or entity under financial duress. Most Catholic Church dioceses don’t meet that standard.

Furthermore, the Catholic Church has been far from honest in this area. According to an exhaustive Maryland Attorney General’s report, Catholic Churches in the mid-Atlantic region tolerated sexual abuse for decades, going back as far as the 1950s. Usually, officials quietly transferred abusers to other positions or allowed them to reign without penalty. Either way, sexual abuse victims were denied the compensation and justice they need and deserve.

Honest people and organizations own up to their mistakes. Dishonest people and organizations sweep these matters under the rug and hope they do not get caught.

In this context, “unfortunate” typically means an involuntary misfortune. Economic downturns either directly or indirectly cause organizational economic misfortune, at least in most cases. In this instance, the Catholic Church’s misfortune was entirely self-inflicted. Bankruptcy protects people from self-inflicted wounds, but not to this extent.

Options for Survivors

In the unlikely event that the judge allows the bankruptcy to move forward, organizational sex abuse survivors still have viable legal options.

The Automatic Stay only affects the lawsuit process. It does not affect the underlying claim. It certainly does not affect a survivor’s legal and financial rights. Therefore, all potential creditors, including organizational sex abuse survivors, may file a proof of claim in a bankruptcy case.

Basically, a proof of claim is a form that sets out the nature of the matter. Claimants should also attach supporting documents, like medical bills. 

Strict time deadlines apply in these situations, and the deadline varies. Usually, claimants have about sixty days to file a proof of claim. If they miss the deadline, and the judge does not dismiss the bankruptcy, they may lose their right to obtain compensation.

Compensation in a sex abuse case usually includes money for economic losses, such as medical bills, and noneconomic losses, such as pain and suffering.

Normally, the bankrupt party objects to a proof of claim. Like most other civil claims, these disputes normally settle out of court.

Personal injury proof of claim resolutions normally include victim compensation funds. Judges order companies to set up these funds as a condition of bankruptcy, rather than dealing with many individual claims that assert the same basic legal arguments.

A sex abuse lawyer needs excellent negotiating skills to successfully resolve a VCF claim. These matters are not court supervised. Therefore, the Fund Administrator does not have a duty to negotiate in good faith. As a result, unless the survivor is willing to take a low-ball offer, these settlement talks are often lengthy.

Work With a Hard-Hitting Personal Injury Lawyer

Bankruptcy complicates sex abuse claims, but it does not derail them. For a free consultation with an experienced sexual abuse survivor attorney, contact The Yost Legal Group today. We are available via e-mail, phone (1-800-YOST-LAW), and text (410-659-6800).