In short order, two courts have now held that the Supreme Court’s Purdue decision does not preclude bankruptcy courts from issuing preliminary injunctions stopping lawsuits against nondebtors.

In an opinion on July 17, Chief Bankruptcy Judge Jacqueline P. Cox of Chicago followed an opinion handed down two days before by Delaware’s Bankruptcy Judge Craig T. Goldblatt in Parlement Technologies Inc., 24-10755, 2024 BL 240417, 2024 WL 3417084 (Bankr. D. Del. July 15, 2024). To read ABI’s report on Parlement, click here.

In Parlement, Judge Goldblatt described Purdue as holding “that non-debtors may not receive permanent injunctive relief in the form of a third-party release, under a plan of reorganization, even when a bankruptcy court finds that the release is necessary to facilitate the debtor’s reorganization.” See Harrington v. Purdue Pharma L.P., 219 L. Ed. 2d 721 (Sup. Ct. June 27, 2024). To read ABI’s report, click here. To watch ABI’s webinar on Purdue, click here.

In her opinion on July 17, Judge Cox said that Purdue “rejected the argument that 11 U.S.C. § 1123(b) permits a bankruptcy court to release and enjoin claims against a nondebtor without the claimants’ consent.” [Emphasis in original.]

Enjoining Lawsuits on Guarantees

The case in Chicago gave Judge Cox better grounds for enjoining lawsuits against nondebtors than the facts presented to Judge Goldblatt.

Several creditors were suing the corporate debtor’s three principals and two of the debtor’s corporate affiliates on their guarantees of debts owing by the chapter 11 debtor. The debtor filed an adversary proceeding looking for a temporary restraining order and a preliminary injunction to stop the lawsuits on the guarantees.

Judge Cox said that the injunction sought by the debtor “is distinguishable from the much broader relief sought in Purdue Pharma” because “the guarantors are not seeking a release of claims against them.” She cited Parlement to mean “that Purdue Pharma does not preclude bankruptcy courts from granting third parties the protection of a preliminary injunction.”

Judge Cox read Parlement to say that a preliminary injunction is available if the court concludes that management needs a breathing spell from other litigation or believes that the parties may be able to negotiate a plan with a consensual resolution of the claims against nondebtors. Either of those outcomes, she said, could be seen as success on the merits.

In the case before her, Judge Cox said that the debtor had satisfied both requirements. First, because the principals intend to fund the chapter 11 plan, she said that the suits could impair the bankruptcy court’s jurisdiction since the source of funds for a plan “could be jeopardized.”

Second, Judge Cox said that there was a reasonable likelihood of a successful reorganization since an injunction would permit the principals to continue contributing their time and money to the reorganization effort.

Without requiring a bond, Judge Cox granted a two-week temporary restraining order and scheduled a hearing at the end of July to consider extension of the injunction.