Stop me if you’ve heard this one before: A personal injury client is injured in a car accident. The at-fault driver was in the course and scope of employment in a corporate car (yay, deep pockets!). Settlement negotiations have gone nowhere and you decide to file suit against the driver and their employer. In the meantime, the employer’s entire business model has been destroyed by a recent technology that makes the company practically obsolete. So the corporation files for bankruptcy. What happens to your case?
I had a nearly identical issue come up in one of my personal injury cases. My client was injured after being rear-ended by an employee of a large corporation. The employee was driving a company vehicle at the time. Shortly before we filed suit, the corporation filed for a Chapter 11 business bankruptcy (mostly because it failed to adapt to the revolutionary business model of the insurgent new - at the time - company, Netflix.). I won’t name names but let’s just call this corporation “Cropduster.”
So Cropduster filed for bankruptcy and at that point, I knew that if I sued Cropduster as well as the driver our case would be put on indefinite hold (possibly for years) while Cropduster’s reorganization dragged along in the system. I also knew after all that time my client’s claim against Cropduster would most likely be discharged in the bankruptcy anyway.
Armed with this knowledge, we made a strategic decision and filed suit only against the driver. Our adversaries, adeptly understanding the ramifications of our choice, tried to halt our lawsuit by claiming that the defendant was protected by the automatic stay in Cropduster’s bankruptcy case. Our contention was that the defendant, as an agent of Cropduster, was separately liable for her own torts and therefore was independently liable for the car accident.
After much back-and-forth, a motion was filed by the defendant to stay our case while Cropduster’s bankruptcy played out. We knew that if we lost this motion, the case was ostensibly finished. Luckily, the law in this area was fairly developed and there was a lot of good precedent for us.
In the Ninth Circuit, two cases specifically discuss these issues in some detail: In re Chugach Forest Products, Inc. and Matter of Lockard. But I had to convince the court that these cases applied to our situation even though, factually, they were not 100% on point. Fortunately, the court in Chugach and Lockard outlined the law substantially enough, allowing us to assert our position with confidence.
The law spelled out in the cases is more or less straightforward: The automatic stay in bankruptcy protects only the debtor and not third-parties who are independently liable to plaintiff. The courts have created a very narrow exception to this rule in “unusual circumstances” where there is a very close connection in the financial interests of the debtor and the third-party, where it would cause irreparable harm to the bankruptcy debtor to allow the third-party to be sued. The third-party’s mere right to indemnification from the debtor, however, is not an unusual circumstance that warrants applying the automatic stay.
As a result, I saw this as a simple issue: Defendant, as Cropduster’s agent, was independently liable for the rear-end collision and my client’s injuries. As a result, we were free to bring a personal injury action against only the agent and not Cropduster. Because Cropduster was not a party to this lawsuit, its bankruptcy should not have any effect on our litigation unless Cropduster could show some irreparable harm to its reorganization efforts as a result. But Cropduster couldn’t do this because a mere employer-employee connection didn’t put the parties in an interlaced financial relationship where transactions affecting one automatically affected the other. Furthermore, the employee’s right to indemnification simply wasn’t enough of an “unusual circumstance” under the law to justify putting a stop to our lawsuit.
In the end, the court agreed with our reasoning and declined to suspend our lawsuit because of Cropduster’s bankruptcy. After being allowed to continue the case was ultimately settled resulting in a very happy and grateful client. The lesson, as always, is if you’re hurt in a car accident (or know someone who is) hire (or refer them to) a personal injury attorney that’s knowledgeable in all the different nuances of law because that can be the difference between recovering money for your injuries or walking away with nothing.