For many Valley businesses, being served with even one major lawsuit can cripple business operations. Even a successful defense can be expensive, and losing could end the business.
One business recently in the news, Luna Innovations, filed for bankruptcy protection under Chapter 11 precisely because it appeared it might lose a lawsuit (losing is described as a “potential negative outcome”). Within six months, the company was able to settle the claim and secure approval of a reorganization plan.
Filing a Chapter 11 bankruptcy triggers the “automatic stay,” halting pending litigation. While the creditor still has an opportunity to prove its claim, the Bankruptcy Court has control over the timing and controls where the claim will be decided. In addition, a successful Chapter 11 case prevents a single creditor from securing immediate payment of a crippling judgment at the expense of operating expenses, other creditors, and the survival of the business.