In Brief: Delaware Bankruptcy Court Clarifies Burden of Proof for Automatic Stay Relief

In Brief: Delaware Bankruptcy Court Clarifies Burden of Proof for Automatic Stay Relief

In In re Abeinsa Holding, Inc., 2016 BL 335099 (Bankr. D. Del. Oct. 6, 2016), the U.S. Bankruptcy Court for the District of Delaware addressed what it perceived to be a flaw in the approach that many courts apply to motions for relief from the automatic stay. Specifically, the court noted that, although the Bankruptcy Code expressly places the burden of proof on the party opposing such relief (generally, the debtor or the bankruptcy trustee), except as to whether the debtor has equity in property, the three-factor test applied by many bankruptcy courts (principally in Delaware) "is sometimes inadequate to the task of determining whether stay relief should be granted" because it does not adequately reflect the statutory burden.

Subsections (d)(1) and (d)(2) of section 362 of the Bankruptcy Code provide that, on the request of a party in interest and after notice and a hearing, the court shall grant relief from the automatic stay: (i) "for cause, including the lack of adequate protection of an interest in property of such party in interest"; or (ii) regarding the stay with respect to an act against property, if "the debtor does not have an equity in such property; and . . . such property is not necessary to an effective reorganization."

Except for the "lack of adequate protection" language quoted above, the term "cause" is not defined in the Bankruptcy Code. Courts have devised various balancing tests to determine whether this flexible standard has been met in any given case. For example, in Izzarelli v. Rexene Prods. Co. (In re Rexene Prods. Co.), 141 B.R. 574, 576 (Bankr. D. Del. 1992), the court applied a three-factor test examining whether:

(i) the estate or the debtor will be greatly prejudiced by continuation of litigation in another court;
(ii) the hardship arising from denial of stay relief to the party seeking it considerably outweighs the hardship to the debtor; and
(iii) the movant has a probability of prevailing on the merits.

Section 362(g) of the Bankruptcy Code allocates the burden of proof in connection with a motion for relief from the automatic stay as follows:

In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a) of this section—

(1) the party requesting such relief has the burden of proof on the issue of the debtor's equity in property; and 
(2) the party opposing such relief has the burden of proof on all other issues.

In Abeinsa Holding, the debtors entered into a contract to construct an energy generating facility for Portland General Electric ("PGE"). The contract designated the U.S. District Court for the District of Oregon as the exclusive forum to resolve disputes. The debtors' parent corporation—Spanish energy, telecom, transport, and environmental conglomerate Abengoa, S.A. ("Abengoa")—guaranteed the debtors' obligations under the construction contract, which were also secured by a performance bond issued by two sureties.

Prior to the petition date, PGE terminated the construction contract, claiming the debtors were in default, and, upon denial of its claim under the performance bond, sued the sureties in the Oregon district court. In accordance with the terms of the guaranty, Abengoa commenced an arbitration proceeding to resolve PGE's claims. After the debtors filed for chapter 11 protection in the District of Delaware, PGE sought relief from the automatic stay to commence litigation in the district court against the debtor for breach of the contract.    

The bankruptcy court granted the motion.

At the outset of its opinion, bankruptcy judge Kevin J. Carey explained that, because the debtors' equity in property was not at issue, "the burden to resist lifting of the stay rests entirely" with the debtors. However, he noted, "[c]uriously, the cases considering such requests for relief tend toward asking the question: 'Why should the court lift the stay?' . . . [while] [t]he statute, by its burden shifting, seems almost instead to ask, 'why shouldn't the stay be lifted?' " According to Judge Carey, the Rexene factors appear to limit the significance of putting the burden squarely upon the party opposing stay relief. Thus, he found that "use of the Rexene test in situations like this one is sometimes inadequate to the task of determining whether stay relief should be granted."

Instead, Judge Carey looked for guidance to the Second Circuit's ruling in Sonnax Indus., Inc. v. Tri Component Products Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280 (2d Cir. 1990), where the court listed the following factors—only one of which is the balancing of harms—to consider in connection with a request for stay relief to continue pending litigation:

(1) whether relief would result in a partial or complete resolution of the issues; 2) lack of any connection with or interference with the bankruptcy case; (3) whether the other proceeding involves the debtor as a fiduciary; (4) whether a specialized tribunal with the necessary expertise has been established to hear the cause of action; (5) whether the debtor's insurer has assumed full responsibility for defending it; (6) whether the action primarily involves third parties; (7) whether litigation in another forum would prejudice the interests of other creditors; (8) whether the judgment claim arising from the other action is subject to equitable subordination; (9) whether movant's success in the other proceeding would result in a judicial lien avoidable by the debtor; (10) the interests of judicial economy and the expeditious and economical resolution of litigation; (11) whether the parties are ready for trial in the other proceeding; and (12) impact of the stay on the parties and the balance of harms.

Id. at 1286 (citing In re Curtis, 40 B.R. 795, 799–800 (Bankr. D. Utah 1984)).

Applying these factors, Judge Carey found in Abeinsa Holdings that "no great prejudice" would result to the debtors from commencement of litigation in the Oregon district court and, further, that the debtors "failed to carry their burden to demonstrate harm." The judge found, among other things, that the debtors had failed to prove that litigation in the district court would prejudice the interests of the rest of the creditor body. He also concluded that the potential hardship to PGE "considerably outweighs" any prejudice to the debtors because the Oregon district court was in the best position to manage the jurisdictional disputes presented by the parallel court and arbitration proceedings. In addition, Judge Carey determined that PGE had a "sufficient likelihood of success" on the issue of forum selection under the construction contract.

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