A decision by a magistrate judge in Michigan counsels attorneys for chapter 11 debtors to take care in drafting orders intended to expand the automatic stay to halt lawsuits against nondebtors.

Not to keep you in suspense, the Michigan magistrate judge declined to enforce an order entered by the bankruptcy court in Houston purporting to stay all lawsuits against nondebtors “in their entirety . . . on an interim basis pursuant to section 362 of the Bankruptcy Code.”

The plaintiff was a prisoner who filed a lawsuit pro se in federal district court in Michigan claiming that the defendants committed “deliberate indifference to his serious medical needs in violation of the Eighth Amendment.”

One of the defendants was an individual employed by Wellpath Holdings Inc., which filed a chapter 11 petition in Houston on November 11. The prisoner did not name Wellpath as a defendant.

In the chapter 11 case, Wellpath obtained as series of orders from the bankruptcy court that purported to stay lawsuits against nondebtors, like the employee, “on an interim basis pursuant to section 362 of the Bankruptcy Code.” Wellpath filed a suggestion of bankruptcy with the court in Michigan and attached a copy of the bankruptcy court’s orders purporting to halt the prisoner’s lawsuit, among all others.

In an opinion and order on December 4, Magistrate Judge Kimberly G. Altman of Detroit declined Wellpath’s invitation to put the prisoner’s suit on ice.

Citing a 1993 decision by the Sixth Circuit, Judge Altman said that a bankruptcy court cannot “stay proceedings against non-debtor defendants under 11 U.S.C. § 362.” See Patton v. Beardon, 8 F.3d 343 (6th Cir. 1993). She quoted a bankruptcy court in Ohio that said, “[T]he only entity to which the § 362 stay applies is the debtor. As such, it may not be extended to third parties such as the [d]ebtor’s co guarantors. In re Nat’l Staffing Servs. LLC, 338 B.R. 35, 36-37 (Bankr. N.D. Ohio 2005).”

On the other side of the fence, Judge Altman quoted the Sixth Circuit for having said, “Some courts have held that the debtor’s stay may be extended to non-bankrupt parties in unusual circumstances.” Patton v. Beardon, 8 F.3d 343, 349 (6th Cir. 1993). However, she went on to quote the Sixth Circuit for having also said that extensions of the automatic stay “were in fact injunctions issued by the bankruptcy court after hearing and the establishment of unusual need to take this action to protect the administration of the bankruptcy estate.” Id.

Even if there were “unusual circumstances,” the circuit court in Patton said that “the bankruptcy court would first need to extend the automatic stay under its equity jurisdiction pursuant to 11 U.S.C. § 105.” Id.

“The order from Wellpath’s bankruptcy proceeding,” Judge Altman said, “does not cite 11 U.S.C. § 105(a) and does not set forth the preliminary-injunction factors or contain any analysis on the subject.” Indeed, she said, “The phrase ‘preliminary injunction’ is in fact nowhere to be found.”

Given that “no preliminary injunction has been issued,” Judge Altman held that “neither this Court nor the bankruptcy court can otherwise ‘extend’ the automatic stay to non-debtor defendants.”

Judge Altman ruled that “the case [brought by the prisoner] will not be stayed and will proceed against [the Wellpath employee] and all the other defendants,” because “Wellpath is not a party to this case, and its bankruptcy stay has not properly been extended to non-debtor parties, like [the employee].”

Observations

The federal district court in Michigan was not sitting as an appellate court in review of the order entered by the bankruptcy court in Houston.

This writer invites readers to explain the basis on which the Michigan court could decline to enforce the order of the bankruptcy court in another district.