Abstention Under Bankruptcy Code

The rules governing the bankruptcy court are mighty complex and at times can seem unfair. For example, in some instances the court can suddenly call a stop to a bankruptcy proceeding if they do not want to listen to the entire case. That may seem a bit strange and even counterproductive. But the thing to know is that the court cannot—and does not-- make these decisions randomly. Even if it seems unlikely, they adhere to strict guidelines at all times.

When Can Bankruptcy Court Abstain From Hearing a Complete Case?

A court can abstain (or dismiss) a case if it believes that by doing so it will be acting in the best interest of the debtor (the party who owes the money) or the creditor (the party who is owed the money). For example, there was an instance where a dealership was ordered to pay back its creditors over a five year period. When the five years were almost up and the debtor still had not repaid all the money, he made a motion to file Chapter 11 so he wouldn’t be obligated to come up with the sum of money that was still due. Therefore, in order to quash this motion because it was not made in good faith, the court abstained to hear the rest of the case.

Foreign Insolvency

Another example would be if there was any type of foreign insolvency issue which meets with Bankruptcy Code. What this means is that if a foreign party is involved the court may have to take a time out in order to interact properly with both the U.S. court and the court in the other country. In every instance, the overarching idea is for the court to protect the debtor and creditor in a fair and efficient matter. Sometimes petitions must be filed (such as a petition for recognition of a foreign proceeding) and additional documents must be gathered to present to the court. And obviously, this calls for extra time.

Dissatisfied Creditors

In some situations the court will abstain due to the behavior of several dissatisfied creditors. This happened with Sun World Broadcasters and the Bankruptcy Court of Rhode Island. For over four years with the help of a court appointed trustee, Sun World had been trying to avoid liquidation (selling off their assets). Eventually, the Rhode Island court realized that the creditors were holding out as long as they could in the hopes of garnering a more favorable response from the federal bankruptcy court.

Of course, there are many other examples of the court appropriately dismissing a case. Among them was the time the court abstained because a Chapter 11 proceeding was filed in an effort to resolve a shareholder’s dispute. In another instance, a Chapter 11 case was viewed as an opportunity to put an end to an argument between two Lutherans who were fighting over control of the congregation’s church.