A bankruptcy petition results in an immediate order staying all actions against the debtor and the debtor’s property. The purpose of the stay is to allow the debtor relief from collection efforts and to permit the orderly disposition of the debtor’s estate.
In Shaoxing County Huayue Import & Export v. Bhaumik, the California Court of Appeal held that a corporation’s bankruptcy petition does not stay a creditor’s alter-ego claim against individuals. An alter-ego claim is one that seeks to hold someone liable for corporate debts under the theory that the corporation is a sham. In Shaoxing County, the debtor corporation admitted that it owed over $291,000 and filed a bankruptcy petition. The creditor alleged that an individual was an alter-ego of the corporation who should be held equally liable for the corporation’s debt. The individual controlled the corporation, but could produce no evidence of separate bank accounts, tax returns, or any attempt to issue shares or keep corporate records. The trial court concluded that the individual was an alter-ego of the corporation and was therefore liable for the corporation’s debt.
On appeal, the individual argued that the corporation’s bankruptcy should have stayed the lawsuit against him. He further argued that the claims against him were an asset of the bankrupt estate. The court of appeal rejected these arguments. Since the corporation did not have any claim against the individual, the claims were not assets of the bankrupt estate. Instead, the corporation’s creditors had claims against the individual and, since the individual had not personally filed bankruptcy, the stay did not prevent the creditors from pursuing those claims.