Bankruptcy Judge Craig T. Goldblatt of Delaware wrote an opinion in July explaining how a chapter 11 debtor, after Purdue, can obtain a preliminary injunction halting lawsuits against nondebtors. Parlement Technologies Inc., 661 B.R. 722 (Bankr. D. Del. July 15, 2024). To read ABI’s report, click here.

Chief Bankruptcy Judge Carl L. Bucki of Buffalo, N.Y., wrote an opinion that might be read to mean that preliminary injunctions protecting nondebtors are no longer available after Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024). To read ABI’s report on Purdue, click here.

This writer understands Judge Bucki’s September 30 opinion more properly to mean that the bankruptcy court will not issue a preliminary injunction protecting nondebtors when the chapter 11 case is almost five years old; there is no plan, and the creditors’ committee and the debtor are at an impasse, despite years of mediation.

Seven Prior Injunctions

The Diocese of Buffalo, N.Y., filed a chapter 11 petition in February 2020, looking to resolve some 800 lawsuits asserting sexual abuse claims against the diocese and nondebtor affiliates like schools and parishes.

Promptly after the chapter 11 filing, the debtor commenced an adversary proceeding to halt lawsuits against nondebtor, affiliated entities. Seven times, Judge Bucki granted preliminary injunctions stopping lawsuits against affiliates that were not covered by the automatic stay.

Most recently, Judge Bucki granted a preliminary injunction in January 2024. At the time, the Second Circuit’s decision in Purdue meant that the diocese might be able to confirm a plan with nonconsensual releases for nondebtors. However, argument in Purdue had been held in the Supreme Court one month before.

Recognizing that the Supreme Court might ban nonconsensual releases, Judge Bucki structured the injunction he issued in January to expire after the decision in Purdue. When the Supreme Court reversed the Second Circuit in Purdue and barred nonconsensual releases of nondebtors, the diocese filed a new motion seeking a preliminary injunction covering all of the diocese’s affiliates.

Grounds for Preliminary Injunctions

Judge Bucki recited Second Circuit standards in nonbankruptcy cases for preliminary injunctions. Basically, there must be a likelihood of success on the merits, or serious questions with the balance of hardship tipping “decidedly” in favor of the plaintiff. In addition, the plaintiff must show the likelihood of irreparable harm.

In the case before him, Judge Bucki found “neither a likelihood of success nor serious questions for litigation.” However, the debtor argued that Section 105(a) provides the basis for an injunction covering affiliates not protected by the Section 362 automatic stay.

Judge Bucki responded by pointing to language in Section 105(a), which provides that the “court may issue any order . . . that is necessary or appropriate to carry out the provisions of” the Bankruptcy Code. Among the applicable provisions of the Code, he identified Section 1106(a)(5), which says that a debtor “shall” file a plan “as soon as practicable.”

“Recognizing this need to develop a plan,” Judge Bucki said that he had “relied on section 105(a) in [his] four most recent decisions granting a temporary stay of all litigation against parishes and affiliates.” After Purdue, though, he said that the debtor could no longer propose a plan with nonconsensual releases.

Judge Bucki recognized that nothing in Purdue “expressly prohibits a temporary stay of litigation against parishes and affiliates.” However, he went on to say that “the outcome in Purdue Pharma strikes the rationale for any further such injunction.”

According to Judge Bucki, three years of mediation failed to produce a plan, and the debtor reported a “breakdown in negotiations” with the official creditors’ committee. Although the debtor might succeed with a plan having consensual releases, the judge said he could not “foresee the likely development of a fully consensual plan.”

Judge Bucki denied the motion for a preliminary injunction, finding “insufficient justification to use section 105 for the purpose of granting a stay of all lawsuits against parishes and affiliates.”

Observations

Out of context, some language in Judge Bucki’s opinion could be taken to mean that preliminary injunctions stopping lawsuits against nondebtors are no longer available after Purdue.

After almost five years in chapter 11, Judge Bucki could not see the likelihood of a consensual plan conferring releases on nondebtors. This writer therefore interprets the opinion to mean that injunctions might issue earlier in cases where the possibility of a plan is alive and well. In Parlement, Judge Goldblatt saw no per se bar to preliminary injunctions stopping suits against nondebtors.

Presumably, a debtor at the outset of a chapter 11 case could demonstrate the four factors required by Judge Goldblatt for issuance of a preliminary injunction stopping lawsuits against nondebtors. Judge Goldblatt did not interpret “success on the merits” to require the likelihood of confirming a plan with nonconsensual releases.