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The Queen Is Dead, Long Live the Queen?
The automatic stay of 11 U.S.C. § 362 is one of the most important principles of bankruptcy law. It provides crucial breathing space for the debtor to reorganize or liquidate, and avoids the piecemeal dismemberment of the estate's assets. Among other things, it stays “the commencement or continuation … of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title.” While the scope of the automatic stay's protection is broad, it is generally limited to a debtor.
However, in rare instances, courts have extended stay protection to non-debtors through 11 USC § 105. This is considered extraordinary relief reserved for unusual circumstances, and may be analogized to the inherent power of federal courts under their general equity powers. The high burden to grant this extraordinary equitable relief includes: 1) “danger of imminent, irreparable harm”; 2) “reasonable likelihood of a successful reorganization”; 3) “balancing the relative harm as between the debtor and the creditor”; and 4) “balancing of the public interest in successful bankruptcy reorganizations with competing societal interests.” In re SDNY 19 Mad Park, LLC, 2014 WL 4473873, at *3 (Bankr. S.D.N.Y. 2014).
In the seminal case of Queenie, Ltd. v. Nygard Intern., 321 F.3d 282, 288 (2d Cir. 2003), the U.S. Court of Appeals for the Second Circuit broadly expanded the automatic stay to include a debtor's wholly owned subsidiary where the adjudication against the non-debtor would have an immediate adverse economic impact on the debtor: “The automatic stay can apply to non-debtors, but normally does so only when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor's estate.” Id.
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