One of the most significant features of the 1978 Bankruptcy Reform Act was markedly broadened versions of the automatic and postdischarge stays. If bankruptcy is the refuge for the honest but unfortunate debtor,' then the stay is the specific tool that makes the refuge meaningful. Indeed, more than one court has characterized the stay as a shield that gives the corporate debtor an opportunity to reorganize and affords the individual debtor a chance for the proverbial fresh start. Even courts mindful of the debtor-protection function of the stay, however, are careful to note that the debtor should use the stay only as a shield, and not as a sword. Virtually every judge would agree in principle that offensive uses of the stay are impermissible. Unfortunately, the judicial consensus against debtors wielding the stay as a weapon has not been matched by a similar consensus on where to draw the line between offensive and defensive uses of the well-known bankruptcy device. In a number of important and recurring cases courts regularly are allowing both individual and corporate debtors to use the stay offensively as a means of extracting a future benefit from a nondebtor party to whom the debtor owes a prepetition debt. The dangers of this trend are subtle but significant. With an increase in use of the stay as a weapon will come a decrease in the willingness of nondebtor parties to extend credit to financially troubled corporations and individuals. Furthermore, offensive uses of the stay will compromise the equality of treatment and value-preservation goals of corporate bankruptcy, while exacerbating the moral hazard problem inherent in an individual debtor's discharge right.
Offensive Uses of the Bankruptcy Stay,
45 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol45/iss1/2