The bankruptcy court has both the jurisdiction and statutory power to impose an anti-suit injunction protecting a non-settling defendant from claims by third-party nondebtors, even if the injunction was not part of the parties’ settlement, according to the Eleventh Circuit. Evidently, however, the question was not raised concerning the bankruptcy court’s constitutional power to enter a final order imposing an injunction having the effect of a third-party release.
One Defendant Dismissed, Others Settle
The maddeningly complex procedural history resulted from several lawsuits fought in multiple courts over 10 years. The litigation ended up in bankruptcy court, years after the families of six deceased patients won $1 billion in default judgments against nursing homes based on wrongful death claims.
In an attempt at frustrating the collection of the impending judgments, the owners transferred the nursing homes’ assets to other entities before the plaintiffs obtained their awards. The plaintiffs did not discover the transfers until years after obtaining their judgments. When they finally learned about the allegedly fraudulent transfers, the plaintiffs filed an involuntary chapter 7 petition against the nursing home entities that were an empty shell.
Together with the trustee, the plaintiffs filed suit in bankruptcy court against the nursing homes’ insiders and their non-bankrupt companies. The suit raised a multitude of claims, including substantive consolidation with the non-filed entities, breach of fiduciary duty, successor liability, veil piercing, and fraudulent transfer.
At the pleading stage, the bankruptcy court dismissed the suit against one of the peripheral defendants, who was a wealthy real estate investor.
During trial, the remaining defendants agreed to settle by paying $23.7 million. However, the judgment creditors vowed to file new lawsuits in state court against the dismissed defendant by alleging different theories.
The dismissed defendant opposed approval of the settlement unless it were modified to include an injunction barring the judgment creditors from suing him anywhere on new or old theories.
The bankruptcy judge said he would find the settlement to be “fair and equitable” only if there were a permanent injunction barring suits of any sort against the dismissed defendant. Approving the settlement, the bankruptcy judge therefore imposed an injunction prohibiting further litigation against the dismissed defendant, saying it was necessary to protect the bankruptcy court’s prior judgment in favor of the dismissed defendant.
The district court upheld the settlement and the injunction, leading to an appeal to the Eleventh Circuit.
The Circuit’s Opinion
In a 45-page opinion on Oct. 19, Circuit Judge Julie Carnes upheld the settlement and the injunction, first confronting the question of whether the bankruptcy court had subject matter jurisdiction.
Under the Pacor “conceivable effect” test adopted by the Eleventh Circuit, Judge Carnes laid out several abstruse hypotheticals where further litigation might affect the estate. Even potential litigation entirely between non-debtors on claims not belonging to the estate, Judge Carnes said, could affect the “size and administration of the bankruptcy estate,” perhaps from operation of collateral estoppel.
Next, Judge Carnes analyzed whether the bankruptcy court had statutory power to impose the injunction under the All Writs Act, 28 U.S.C. § 1651. The judgment creditors argued that the injunction was barred by the Anti-Injunction Act, 28 U.S.C. § 2283, which prohibits federal courts from enjoining proceedings in state courts unless one of three conditions are met.
Judge Carnes found that the injunction was proper under the exception to the Anti-Injunction Act allowing courts to stay proceedings “where necessary in aid of its jurisdiction.”
To protect the integrity of the judgment of dismissal on claims already litigated, Judge Carnes said that the injunction fell within the “where necessary” exception.
With regard to claims the plaintiffs had not already brought against the dismissed defendant, Judge Carnes agreed with the bankruptcy court and said that the case fell “squarely” within Eleventh Circuit precedent invoking the exception in the context of class action and multidistrict litigation.
With regard to claims not already asserted, Judge Carnes also relied on the bankruptcy court’s decision that the settlement would not be “fair and equitable” unless the dismissed defendant were protected by an injunction precluding new lawsuits.
“And because the [judgment creditors] have been unequivocal about their intent to pursue state action against the [dismissed defendant],” Judge Carnes said, “the necessity of the Injunction in aid of the bankruptcy court’s jurisdiction is clear.”
The Millennium Issues
At its foundation, the case involves non-consensual third-party releases of non-bankruptcy claims. It therefore brings to mind Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), 16-110, 2017 BL 84332 (D. Del. March 17, 2017), where a district judge in Delaware insinuated that a bankruptcy court may not have constitutional power to enter a final order granting non-consensual third-party releases of non-bankruptcy claims, even as part of a chapter 11 confirmation order.
Under Wellness International Network Ltd. v. Sharif, 135 S. Ct. 1932, 191 L. Ed. 2d 911, 83 U.S.L.W. 4337 (2015), an objection to the power of the bankruptcy court to enter a final order can be waived. Evidently, the issue was not raised in the bankruptcy court and therefore was waived.
Furthermore, Bankruptcy Judge Laurie Selber Silverstein ruled on remand from the district court in Millennium that she had constitutional power to enter a third-party injunction alongside confirmation of a chapter 11 plan. In re Millennium Lab Holdings II LLC, 15-12284, 2017 BL 354864 (Bankr. D. Del. Oct. 3, 2017).
Assuming that Judge Silverstein is correct, the two cases are nevertheless distinguishable because Millennium entailed a third-party injunction as part of a chapter 11 plan confirmation, while the case at bar only involved a settlement.
If, however, the district court’s approach in Millennium is correct, Judge Silverstein listed several often-arising circumstances where bankruptcy courts could not issue final orders. The case in the Eleventh Circuit would be another where an anti-suit injunction could only be entered on a final basis by the district court.
To read ABI’s discussion of the district and bankruptcy court decisions in Millennium, click here and here.
The bankruptcy court has both the jurisdiction and statutory power to impose an anti-suit injunction protecting a non-settling defendant from claims by third-party nondebtors, even if the injunction was not part of the parties’ settlement, according to the Eleventh Circuit. Evidently, however, the question was not raised concerning the bankruptcy court’s constitutional power to enter a final order imposing an injunction having the effect of a third-party release.