Bankruptcy Court’s Stay of Litigations Against Non-Debtors: An Unusual Circumstance?

As a general rule, the automatic stay in a debtor’s bankruptcy case bars creditors from taking action to collect their claims against the debtor. However, in very limited circumstances, courts have extended the stay to enjoin non-debtor third-party collection efforts, such as lawsuits against guarantors of a debtor’s obligations. In a recent decision, the United States Bankruptcy Court for the Northern District of Iowa (the “Bankruptcy Court”), in In re Bailey Ridge Partners, LLC, took the unusual step of staying two litigations against non-debtors, one to enforce claims against guarantors of a debtor’s obligations and the other to enforce a claim against a nondebtor co-obligor. The Bankruptcy Court concluded that: (a) the debtor was likely to successfully reorganize and emerge from bankruptcy; (b) the guarantors and co-obligor were critical to the success of the reorganization based on the financial and other support they had provided and committed to provide to the debtor; and (c) the creditor suing the non-debtor guarantors was fully secured by the debtor’s assets.