Debtor efforts in the bankruptcy

Civil litigants, who have filed a claim against a number of defendants, only one of whom has filed for bankruptcy, are theoretically permitted to proceed with the litigation against the non bankrupt parties. If the non debtor parties are officers or principals of the debtor, however, the debtor may seek to enjoin the litigation regarding these non debtor parties. The bankruptcy court may issue an injunction to enjoin the civil lawsuit if there is evidence demonstrating that proceeding with the civil action will impede the debtor’s efforts in the bankruptcy court pursuant to Section 105(a) of the Bankruptcy Code. Similarly, if the bankrupt debtor is a principal party to the civil action, a civil court may decide that the furtherance of justice mandates a stay of the entire proceeding. Injunctions generally are issued only in unusual circumstances in which the failure to issue an injunction will have a “substantial and adverse impact” upon the debtor’s continuing existence. To obtain an injunction, a debtor must demonstrate that it has a reasonable likelihood of reorganizing, the debtor will suffer irreparable injury if the relief is not granted, the relative hardships of the parties favor granting such extraordinary relief and, if applicable, public interest favors the injunction.44 This high standard helps to ensure that extending the automatic stay to non debtors will not be granted lightly. Alternatively, the bankrupt debtor may seek to have the civil action “removed” from the non bankruptcy court, other than a U.S. tax court, to the bankruptcy court. Procedural, the debtor must file a notice of removal with the district court and with the state court in which the litigation is pending. Once removed, the district court will then refer the case to the bankruptcy court. In most district courts, however, an order automatically refers the matter to the bankruptcy court, and the notice of removal can be filed directly in the bankruptcy court rather than the district court. If a litigant opposes removal to bankruptcy court, it cans file a motion to remand or abstain in the district court. In deciding whether to oppose the removal, civil litigants should consider its consequences.

 Once a civil lawsuit is removed to the bankruptcy court, it becomes an adversarial action subject to the Federal Rules of Evidence and the Federal Rules of Civil Procedure to the extent that they are incorporated by the Bankruptcy.