A bankruptcy filing often puts a quick halt to efforts to collect a debt from a bankrupt debtor. Under 11 U.S. Code § 362, the filing of a bankruptcy petition puts in place an automatic stay of collection efforts against a debtor. The stay does not, however, automatically stay proceedings against a guarantor of a debtor’s debts.
So, what happens when a plaintiff has sued both a primary obligor on a debt and the guarantor in one action and, during the pendency of that case, the primary obligor files for bankruptcy? A plaintiff seeking to pursue the guarantor can move to sever the claims against the bankrupt defendant and continue the claims against the non-bankrupt defendants.
In United Catalyst Corporation v. NCR Auto Cores & Security Inc., Index No. 69008/2018, Westchester Commercial Division Justice Gretchen Walsh explained: “In ruling on a CPLR § 603 motion to sever claims against a bankrupt defendant from those against the non-bankrupt defendants, New York courts engage in a ‘balanc[ing] of the equities’ to assess whether requiring a plaintiff ‘to await the conclusion of the bankruptcy proceeding before obtaining any remedy outweighs any potential inconvenience to the defendants’” (citation and quotation omitted).
In that case, Justice Walsh found that the prejudice to the plaintiff in having to await the conclusion of a potentially lengthy bankruptcy case far outweighed the inconvenience to the defendants. The Court, therefore, ordered severance of the case into two separate cases, with different captions and different index numbers, and stayed the case against the debtor.
Takeaway: When one defendant files for bankruptcy, the entire case need not grind to a halt. If the bankruptcy is likely to be a lengthy one, the case may be severed and proceed against the non-bankrupt defendants.