On September 13, 2005, the U.S. Court of Appeals for the Sixth Circuit decided that the Automatic Stay halted a state court lawsuit where the debtor was not a named party but, since the suit involved property of the estate, the ruling was necessary to protect estate assets. Amedisys, Inc. v. National Century Financial Enterprises, Inc. ("NCFE"), 2005 U.S. App. LEXIS 19665 (6th Cir. 2005). The Sixth Circuit affirmed rulings by the bankruptcy court and district court when it held that a bankruptcy court has jurisdiction to enforce the automatic stay in a suit against a non-debtor defendant where the suit seeks to obtain possession or exercise control over property of the estate.

On November 8, 2002, Amedisys sued several parties, to include the debtor NCFE, in the U.S. District Court for the Southern District of Ohio (the "District Court"). On November 18, 2002, NCFE filed for bankruptcy protection in Ohio. The District Court action was transferred to the Bankruptcy Court.

On February 21, 2003, Amedisys brought a state court action in Louisiana against JP Morgan, certain JP Morgan employees and NCFE's insurer. The debtor, NCFE, was not named as a defendant.

On June 23, 2003, NCFE moved the Bankruptcy Court for an order enforcing the automatic stay against the Louisiana action. The Bankruptcy Court held that the automatic stay applied to the Louisiana action based on two factors. First, the claims in the Louisiana action required a determination of ownership of funds alleged to be the debtor's funds and second, the involvement in the Louisiana action will act to diminish the bankruptcy estate by causing a duplication of efforts and a waste of judicial time and resources. Amedisys appealed to the District Court. The District Court affirmed and concluded that the Louisiana action "amounted to no more than an attempt to prove that Amedisys owned the accounts at the time of NCFE's bankruptcy" and said that the automatic stay applied because NCFE was the real party in interest in the Louisiana action.

The Appeals Court affirmed the lower courts on an appeal by Amedisys. The Court said that the bankruptcy court had jurisdiction under 362(a)(3) which says that the stay applies to "any act to obtain possession of property of the estate or of property from the estate or to exercise control over the property of the estate." Further, they found that because the Louisiana action sought to obtain accounts receivable held by defendant JP Morgan in the name of a debtor entity and because the accounts receivable were likely property of the estate, the Bankruptcy Court properly enforced the automatic stay.

The Court explains further that it is within the power of the Bankruptcy Court to identify property of the bankruptcy estate. Further, the fact that the debtor was not a named defendant in the state court action did not render enforcement of the stay improper. The automatic stay applies not only to actions against the debtor but also to actions seeking to obtain property of the estate.

Also, in this matter, the Court explained its earlier decision in Patton v. Bearden, 8 F.3d 343 (6th Cir. 2001) in which the Court stated that in order to apply the ?362 automatic stay against non-debtor defendants, a debtor must demonstrate unusual circumstances. The Court explains that the unusual circumstances analysis must be made if a bankruptcy court seeks to extend the automatic stay under ?362(a)(1), but this analysis is not necessary when seeking to protect only estate assets under ?362(a)(3).

Mike