Publications + Presentations

Smart Summary

• The Ninth Circuit Bankruptcy Appellate Panel held that continuing to prosecute a fraudulent transfer suit against a non-debtor spouse after the debtor’s bankruptcy filing violated the automatic stay because the suit was, in fact, an effort to collect a debt owed by the debtor.
• The court found a second, independent stay violation: fraudulent transfer claims become property of the bankruptcy estate upon filing, so continuing to pursue them was an improper exercise of control over estate property.
• The panel’s broader message: creditors shouldn’t self-adjudicate whether the stay applies. When in doubt, stop and ask an experienced bankruptcy attorney, and perhaps the bankruptcy court. A creditor who guesses wrong does so at its own risk.

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Every experienced collections attorney knows the drill. The debtor files bankruptcy, and the automatic stay slams the brakes on collection efforts. Litigation stops. Calls stop. Even friendly reminder letters stop. It’s one of the most fundamental bankruptcy rules.

But what happens when the lawsuit you’re pursuing isn’t against only the debtor? What if one of the named defendants is the debtor’s spouse, the debtor’s business, the debtor’s business partner, an affiliated business entity, or some other third party?

A recent decision from the Ninth Circuit Bankruptcy Appellate Panel (BAP) says: not so fast.

Kleidman v. Pearlman 

The creditor had already done the hard part. It obtained a court judgment against the debtor before he filed bankruptcy. Looking to collect, the creditor commenced a fraudulent transfer action against the soon-to-be debtor and his wife, alleging that the debtor had shuffled assets to his wife to keep them beyond creditors’ reach.

Then the debtor filed Chapter 7 bankruptcy. Rather than pump the brakes, the creditor kept moving forward with collection efforts. The creditor’s theory was that post-bankruptcy collection actions aimed only at the spouse, not the debtor, didn’t run afoul of the stay.

The bankruptcy court didn’t buy it. Neither did the Ninth Circuit BAP.

Why the Court Found a Stay Violation 

Notably, when the creditor filed its motion in state court, he failed to specify that he intended to pursue the action only against the spouse¹—and having only raised the argument after having filed the state court motion, the Ninth Circuit BAP was skeptical of his true intention. This skepticism was further compounded by the creditor wholly omitting any mention of the debtor’s petition to the state court. 

When pressed by the Ninth Circuit BAP, the creditor framed his post-bankruptcy maneuvering as fraudulent transfer claims to collect on a debt owed by the debtor, not the spouse. However, 11 U.S.C. § 362(a)(1) doesn’t stop only actions against the debtor. It also reaches actions “to recover a claim against the debtor.” Suing the spouse, in other words, was still an effort to collect the debtor’s obligation, which put it within the realm of the automatic stay.

The court found a second problem, as well. Once the bankruptcy case was filed, the fraudulent transfer claims became property of the estate. Continuing to prosecute them wasn’t just a workaround of the stay’s collection bar under Section 362(a)(1). It was also an exercise of control over estate property, barred separately under Section 362(a)(3).

The Court’s Bigger Message 

The opinion’s real significance reaches well beyond fraudulent-transfer litigation. 

Throughout the decision, the panel drove home a point every creditor should file away: Don’t self-adjudicate the automatic bankruptcy stay. Once a creditor learns of a bankruptcy filing, the safe move is to stop and, if there’s any uncertainty, ask the bankruptcy court rather than guess. A creditor that presses forward without relief from the stay, the court cautioned, "proceed[s] at [its] own risk."

That’s not a throwaway line. It reflects one of the Bankruptcy Code’s foundational principles. The burden falls on creditors to seek relief from the stay. Policing violations is not the debtor’s job.

Practical Considerations for Creditors 

• Pause pending litigation immediately, or sever litigation between debtors and non-debtors, after learning of a bankruptcy filing, even if you’re confident your claims are directed only at a non-debtor third party.

• Look past the named defendants. If the lawsuit is ultimately intended to recover a debt that the debtor owes, the automatic stay may still apply as to non-debtors.

• Handle fraudulent transfer claims with care. Once a bankruptcy case is filed, those claims may become property of the estate, which changes who has authority to pursue them.

• When in doubt, go to the bankruptcy court first. A motion for relief from stay is almost always cheaper than defending a stay violation and covering the other side’s attorneys’ fees.

Why It Matters 

Pearlman is a Ninth Circuit B.A.P. decision, so it isn’t binding outside that circuit (e.g., in Ohio). But the principle behind it travels well beyond California. Bankruptcy courts tend to interpret the automatic stay broadly, particularly when the real focus of collection efforts, however styled, is a debtor’s obligation.

For creditors, lenders, and collection professionals, the lesson is straightforward. Before taking your next step in litigation involving a debtor’s spouse, an alleged fraudulent transferee, or any other non-debtor party, stop and ask whether the automatic stay might apply. When there’s any doubt, a quick check with the bankruptcy court is almost always the safer, cheaper path forward.

Questions about how the automatic stay affects your collection efforts? Contact Kegler Brown’s Creditors’ Rights & Bankruptcy team.

^{¹ The Sixth Circuit BAP has opined that generally, the automatic stay protects the bankruptcy debtor and does not bar suits against third parties, such as non-debtor entities, even when wholly owned by the debtor, or the debtor’s insurers, guarantors, and sureties. Collett v. Lee Oil Co. (In re Collett), Nos. 13-8033, 12-61190, 2014 WL 211309, *6 (6th Cir. BAP May 21, 2014).}