The automatic stay provision of the Bankruptcy Code is regarded as one of the most essential protections the Code offers to debtors. Section 362(a) provides that the filing of a bankruptcy petition “operates as a stay [of] action[s] or proceeding[s] against the debtor.” Thus, when an entity files for bankruptcy, an automatic stay is created that prevents creditors from taking any action to collect or enforce a debt, including among other things, continuing ongoing litigation.
Practically, the automatic stay enables all claims against a debtor to be brought in a single forum. Simultaneously, it also preserves “what remains of the debtor’s solvent estate and [provides] for a systematic and equitable liquidation procedure for all creditors.” Aside from its benefit to debtors, the automatic stay also incidentally benefits creditors by fostering an orderly and organized resolution of all pending claims against the debtor’s estate.
Traditionally, courts have limited the application of the automatic stay to debtors and property of the estate, adhering to a strict interpretation of the language of section 362. Some courts, however, have expanded the application of the automatic stay to non-debtor entities under certain circumstances. This expansion is significant because it affords the protections of a bankruptcy to entities that have not filed and thus are not within the bankruptcy court’s jurisdiction.
This Article will survey the different standards applied by circuit courts when determining whether the automatic stay should be expanded to cover non-debtor entities. Part I will analyze the “strict interpretation” of section 362, Part II will consider the “unusual circumstances” standard, Part III will evaluate the “immediate adverse economic consequence” standard, and Part IV will examine the nuances between the standards. Although two different models may justify expanding the application of the automatic stay provision to non-debtor entities, their nuances are important to note, especially when considering the implications that expansion will have on the debtor, its creditors, and the bankruptcy system as a whole. This is especially evident when compared to the strict interpretation of section 362. Moreover, while the expansion of section 362 may broaden its reach, non-debtor parties still must meet the stringent requirements of those standards in order to be afforded the protections of the automatic stay.