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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: June 10, 2016

State Court Has Power to Extend Bankruptcy Stay to Non-Bankrupt Party

On May 25, 2016, Justice Singh of the New York County Commercial Division issued a decision in Deutsch v. Liquid Holdings Group, Inc., 2016 NY Slip Op. 30966(U), extending the automatic bankruptcy stay to non-bankrupt parties, explaining:

Bankruptcy law automatically stays all actions or proceedings against the debtor and all actions to obtain possession or to exercise control over property of the estate. . . .

Contrary to plaintiffs contention, this court does have authority to extend a stay to a non-bankrupt party. The law is clear that the non-bankruptcy court has the
jurisdiction to determine the applicability of the automatic stay to litigation before it. The court in which the litigation claimed to be stayed is pending has jurisdiction to determine whether the proceeding before it is subject to the automatic stay. An extension of the automatic stay protection to non-debtors is reserved for cases where the court finds special or unusual circumstances. Special or unusual circumstances always involve an immediate adverse consequence for the debtor’s estate.

Courts have extended the automatic stay to actions against non-debtors where there is such an identity of interests that the action against the non-debtor would have
an adverse impact on the debtor’s estate. On the other hand, a bankruptcy stay does not prevent a plaintiff from proceeding on causes of action against non-bankrupt defendants, which do not involve the bankrupt’s property.

(Internal quotations and citations omitted) (emphasis added).

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