Can a Non-Party’s Bankruptcy Put the Brakes On Your Personal Injury Lawsuit?

A U.S. District Court judge in Georgia has ruled that Wal-Mart can not stop individuals from bringing personal injury lawsuits against the retail giant for allegedly defective gas cans sold to consumers.  Wal-Mart attempted to halt the lawsuits because the supplier of the gas cans, Blitz U.S.A., was currently under bankruptcy protection.  The company’s lawyers argued that Blitz’s indemnification of Wal-Mart created enough of a connection between the two companies to bring Wal-Mart under the protection of Blitz’s bankruptcy.  The court, however, disagreed, reasoning that there was no such close connection and that allowing the suits to go forward would not cause irreparable harm to the bankrupt party.  For more information on this case, you can read the full article at the San Francisco Chronicle’s web page.

The reason this story caught our eye is because we had a nearly identical question of law arise in one of our personal injury cases where the court also ruled in our favor after extensive motion work.  Our facts were slightly different:  Our client was injured after being rear-ended by an employee of a large corporation (to protect the identities of the parties involved, let’s call it “LC”), who was driving a company vehicle at the time.  Shortly before we filed suit, LC filed for a Chapter 11 business bankruptcy.  At that point, we knew that if we sued LC as well as the driver our case would be put on indefinite hold (possibly for years) while LC’s reorganization dragged along in the system.  We also knew after all that time our client’s claim against LC 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 LC’s bankruptcy case.  Our contention was that the defendant, as an agent of LC, 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 LC’s bankruptcy played out.  We knew that if we lost this motion, our 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 we 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, we saw this as a simple issue:  Defendant, as LC’s agent, was independently liable for the rear-end collision and our client’s injuries.  As a result, we were free to bring a personal injury action against only the agent and not LC.  Because LC was not a party to this lawsuit, its bankruptcy should not have any effect on our litigation unless LC could show some irreparable harm to its reorganization efforts as a result.  But LC 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 LC’s bankruptcy.  After being allowed to continue the case was ultimately settled resulting in a very happy and grateful client.