Delaware Bankruptcy Court Provides Guidance on the Scope of The Automatic Stay
On December 3, 2020, the United States Bankruptcy Court for the District of Delaware entered an opinion in In re Extraction Oil & Gas, Inc., Case No. 20-11548 (CSS), holding that two entities (the “State Court Plaintiffs”) violated the automatic stay of 11 U.S.C. § 362(a) when those entities commenced and prosecuted litigation against non-debtor entities in Colorado state court and entered into a settlement agreement with the non-debtor entities. The Court’s opinion provides useful guidance regarding the scope of the automatic stay of 11 U.S.C. § 362(a).
Prior to the commencement of the bankruptcy case, the Debtors — who were in the business of extracting hydrocarbons from land in Colorado — entered into a Transportation Services Agreement (“TSA”) with the State Court Plaintiffs. The Debtors’ TSA with the State Court Plaintiffs required, among other things, that the Debtors ship a minimum volume of oil using the State Court Plaintiffs’ pipelines or make cash payments to the State Court Plaintiffs if the Debtors failed to do so.
Post-petition, the Debtors moved to reject the TSA and engaged alternative service providers (the “Alternative Service Providers”) to transport the Debtors’ oil. Asserting that the Debtors’ actions would cause irreparable harm, the State Court Plaintiffs commenced the Colorado state court action against the Alternative Service Providers, but not the Debtors, and sought a temporary restraining order against those entities. The Court in the Colorado state court action granted the State Court Plaintiffs’ request for a temporary restraining order, requiring the Alternative Service Providers to “cease all diversion and transport of crude oil from the Extraction wells….” Thereafter, the State Court Plaintiffs and the Alternative Service Providers entered into a settlement agreement (the “Settlement Agreement”) in which the Alternative Service Providers agreed to, among other things, not receive oil from certain locations identified in the Colorado state court litigation.
In the bankruptcy case, the Debtors moved the Court for an order finding that the State Court Plaintiffs’ commencement of the Colorado state court action and entry into the Settlement Agreement violated the automatic stay of 11 U.S.C. § 362(a). In response, the State Court Plaintiffs argued that the Debtors were impermissibly seeking to extend the automatic stay of 11 U.S.C. § 362(a) to non-debtors as they commenced the Colorado state court action against the Alternative Service Providers, not the Debtors.
The Court disagreed with the State Court Plaintiffs. The Court explained that 11 U.S.C. § 362(a)(3) prohibits “any act to obtain possession of property of the estate or to exercise control over property of the estate.” The Court further explained that the Debtors’ contractual and business relationships with the Alternative Service Providers are property of the Debtors’ bankruptcy estates. The Court then found that the State Court Plaintiffs attempted to exercise control over of the Debtors’ contractual and business relationships with the Alternative Service Providers through their prosecution of the Colorado state court action and entry into the Settlement Agreement. As such, the State Court Plaintiffs violated the automatic stay of 11 U.S.C. § 362(a) despite the fact that they had commenced the Colorado state court action against the Alternative Service Providers and not the Debtors.
The key takeaway from the Court’s decision is that a creditor may violate the automatic stay of 11 U.S.C. § 362(a) even where it commences an action against an entity other than a debtor in bankruptcy. Indeed, the relevant inquiry for the Court was not whether the State Court Plaintiffs had taken action against the Debtors, but rather whether the State Court Plaintiffs sought to exercise control over property of the Debtors’ bankruptcy estates.