Upon the filing of a bankruptcy petition, the automatic stay takes effect. “The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from its creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him [or her] into bankruptcy.”
Section 362(a) enumerates eight (8) actions and activities from which the debtor is protected—“it does not protect separate legal entities, such as corporate directors, officers or affiliates, partners in a debtor partnership or codefendants in pending litigation.” Courts, relying on the explicit construction of section 362(a), have reasoned that the protection is afforded to the debtor alone.
In A.H. Robins Co. v. Piccinin, the Fourth Circuit stated that the automatic stay may be extended to non-bankrupt parties when “unusual circumstances” are present. The Fourth Circuit has identified two instances rising to the level of “unusual circumstances” warranting an exception to the general rule and application of the automatic stay to non-debtors: (1) where there is such identity between the debtor and third-party defendant that a judgment against the third-party defendant will in effect be a judgment against the debtor; and (2) where the pending litigation, though not brought against the debtor, would cause the debtor irreparable harm.
This article explores the two exceptions to the general rule that the automatic stay does not apply to non-debtors. Part I analyzes the exception recognized when there is both a sufficient and insufficient identity relationship that exists between the debtor and third-party to extend the automatic stay to a non-debtor. Part II analyzes the exception recognized when there is pending litigation brought against a non-debtor which would cause the debtor irreparable harm. Part III analyzes the distinction between extending the automatic stay under section 362 and the often-cited notion of an injunction under section 105 of the Bankruptcy Code prohibiting actions against a non-debtor party.