Addressing what he called the “immense and immensely complicated” reorganization of casino giant Caesars Entertainment Operating Co. Inc., Seventh Circuit Judge Richard A. Posner penned an important opinion on Dec. 23 reversing the lower courts and establishing an easily satisfied test allowing the bankruptcy court to enjoin lawsuits in other courts against nondebtor third parties, including nonbankrupt affiliates.
Junior bondholders had filed four lawsuits in Delaware state court and a Manhattan federal district court seeking to reinstate the nonbankrupt parent’s guarantees of the noteholders’ bonds. The guarantees had been extinguished in two transactions in 2014 before the casino operating company filed for reorganization.
Upheld in district court in October, the bankruptcy judge had concluded in July that he lacked the power to enjoin the junior bondholders’ suits against the nonbankrupt parent. The bankruptcy judge believed that Seventh Circuit precedent permitted injunctions halting suits by creditors against nonbankrupts only when the creditors were suing on claims also available to the debtors.
In reporting the district court opinion, we noted that Judge Posner was on the panel that heard the appeal on Dec. 10. We said it was “a safe bet that Judge Posner will write the circuit’s opinion, because he seldom misses a chance to make a significant pronouncement on bankruptcy.”
That is exactly what happened. Judge Posner said the lower courts misinterpreted the circuit’s precedents in 1998 and 2009, called Fisher and Teknek, respectively. To justify an injunction halting suit against a nonbankrupt third party, he established a two-part test.
First, the bankruptcy judge must decide whether an injunction “is likely to enhance the prospects for a successful resolution of the disputes attending its bankruptcy.” Second, the court has power to enjoin under Section 105(a) if denial would “endanger the success of the bankruptcy proceedings.”
Although Judge Posner said he was not compelling the bankruptcy judge to issue an injunction on remand, he all but told the lower court how to rule. He said the interests of the operating company’s creditors would be “furthered” by an injunction if the bondholders’ suits outside of bankruptcy court would drain the nonbankrupt parent of capital, leaving “much less money” for other creditors to recover in bankruptcy.
In that regard, Judge Posner seems to have bought into the debtor’s argument that the suits, if not enjoined, might enable the bondholders to “jump the line in front of other creditors, including more senior ones.”
Defeating the injunction on remand is not an impossible dream for the bondholders, however.
Since the suits in New York are near conclusion, the bondholders can argue that the Manhattan district judge should be permitted to rule on the legality of cancelling the guarantees, with the understanding that an injunction would then kick in, preventing the bondholders from exercising remedies against the nonbankrupt parent.
Even in the absence of an injunction, a judgment in New York reinstating the guarantees would not by itself enable the bondholders to “jump the line” because the parent could then file under chapter 11, putting the bondholders on the same footing as other unsecured creditors.
Judge Posner said that Fisher and Teknek had more “clear-cut” facts permitting injunctions. Those cases, he said, did not mean that a “less clear-cut case is necessarily beyond the reach of section 105(a).”