An order approving a bankruptcy sale barred anyone from suing the purchaser for any claim “related to the Transaction.” With concerns for due process and other practical considerations, a district judge in New York permitted a potential bidder to sue the successful purchaser.

The debtor was selling its business through a chapter 11 case in New Jersey. The plaintiff’s business involved purchasing troubled assets.

For financing to buy the debtor’s business, the plaintiff approached the defendant with the idea of bidding jointly. They signed a nondisclosure agreement that barred the defendant from bidding for the business without the participation of the plaintiff.

The defendant won the auction on its own, not in partnership with the plaintiff. The sale-approval order barred anyone from commencing an action against the defendant-purchaser based on a claim “in connection with or related to the Transaction.”

The Suit Defying the Injunction

The plaintiff nonetheless sued the defendant-purchaser in federal district court in New York, asserting claims for breach of contract, among others. Alluding to the injunction in the sale order, the defendant-purchaser filed a motion to dismiss based on res judicata.

District Judge Arun Subramanian denied the dismissal motion in a four-page, single-spaced opinion on April 26. Quoting the Second Circuit, he defined res judicata, or claim preclusion, as holding “‘that a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.’ Brown Media Corp. v. K&L Gates, LLP, 854 F.3d 150, 157 (2d Cir. 2017) (cleaned up).”

The Suit Didn’t Offend the Injunction

In the case at hand, the plaintiff surely could have appeared in bankruptcy court to object to the defendant’s bidding. In bankruptcy cases, though, Judge Subramanian said “there are a few nuances” attached to res judicata.

Elucidating, Judge Subramanian again quoted the Second Circuit’s Brown decision:

“In the bankruptcy context, . . . instead of examining whether a subsequent lawsuit asserts claims that could have been included as part of a previous lawsuit, courts have assessed whether a new action seeks to bring claims that could have been raised and litigated within the scope of the bankruptcy proceeding.” Id. at 158.

The Second Circuit, he said, asks whether a lawsuit “‘would impair, destroy, challenge, or invalidate the enforceability or effectiveness of the reorganization plan.” Id. at 157 (citation omitted).”

In the case before him, Judge Subramanian quoted the Second Circuit once again as having said in Brown that “‘the complaint is fairly read to allege misconduct only on the part of the defendants. Thus, … it was not incumbent on the plaintiffs to challenge in the bankruptcy court the “good faith purchaser” status of [the defendant].’” Id. at 159.

Paraphrasing the Second Circuit, Judge Subramanian said that a judgment against the defendant would have “no effect” on the validity of the sale or the confirmation order.

For its most powerful grounds for dismissal, the defendant quoted the sale approval order’s prohibition of claims by anyone against the defendant “in connection with or related to the Transaction.” Reading the provision broadly “would lead to potentially unlawful and absurd results,” Judge Subramanian said.

Judge Subramanian said that the defendant was misreading the word “Transaction.” He said that the word was “clearly geared toward the core bankruptcy concepts of selling the assets free and clear of prior claims and ensuring the finality of the sale order.”

In addition, Judge Subramanian said that a broad reading “might be unlawful.” Citing the continuing controversy about nondebtor releases in In re Purdue Pharma L.P., 69 F.4th 45, 69–84 (2d Cir.), cert. granted sub nom. Harrington v. Purdue Pharma L.P., 144 S. Ct. 44 (2023), he said that releasing all claims against the defendant-purchaser “requires substantial due process.”

Finally, Judge Subramanian said that the defendant’s reading was “absurd.” He gave examples:

If someone stole money to purchase bankruptcy assets, [the defendant’s] reading would bar a claim against the thief. If a purchaser stopped paying a mortgage on a property bought in foreclosure, even years after the purchase, [the defendant’s] reading would bar any claim there too.

Finding the defendant’s interpretation of the sale order to be “untenable,” Judge Subramanian denied the motion to dismiss, because “the facts to support res judicata don’t appear on the face of the complaint and sale order.”

Note

Before ascension to the bench one year ago, Judge Subramanian clerked in the district court and the Second Circuit, followed by a clerkship with Justice Ruth Bader Ginsburg. A biograph says that while in private practice, he focused on commercial and bankruptcy law.