Following a masterful synthesis of Ninth Circuit precedent, Bankruptcy Judge William J. Lafferty, III, of Oakland, Calif., declined (for now) to enjoin lawsuits against individuals and nondebtor affiliates of chapter 11 debtors.
In his January 12 opinion, Judge Lafferty said that requested “injunctive relief request is, at least to some extent, part of the exercise of leverage shifting that frequently occurs in the distressed circumstances that pertain in chapter 11 cases.” He continued by saying that “this concern warrants care in deciding whether to grant the injunctive relief requested here; and it certainly does not support a request for injunctive relief in this case, on the facts as presented at this time.” [Emphasis added.]
Although Judge Lafferty is allowing plaintiffs to proceed with dozens of lawsuits against nondebtors, officers and employees, his opinion is a not-too-subtle warning that plaintiffs should cooperate with the chapter 11 process or face an injunction in the weeks or months to come.
Judge Lafferty sits on the Ninth Circuit Appellate Panel. We recommend reading his 41-page opinion in full text.
The Nursing Home Operator
Affiliated debtors operate 20 skilled-nursing homes in California. They originally filed their chapter 11 petitions in Delaware in September. The judge in Delaware transferred the cases to Oakland.
Before bankruptcy, the debtors and affiliated nondebtors were defendants in about three dozen lawsuits that fell into two categories. The majority were personal injury or wrongful death suits related to patient care. The remainder were suits for wrongful termination or employment discrimination.
The impetus for the chapter 11 filing was an $8 million judgment in state court after a jury trial in 10 consolidated personal injury suits. The debtors’ appeal is pending.
Early in the chapter 11 case, the debtors filed a motion asking Judge Lafferty to spread the automatic stay to cover nondebtors or impose a preliminary injunction under Section 105(a), the so-called All Writs Act. Unlike most cases where the debtors from the outset seek an injunction until plan confirmation, the debtors were only asking for a 60-to-90-day stay.
Judge Lafferty said he was
mindful of the effects of extending such relief to reach entities that have chosen not to file bankruptcy, but still wish to avail themselves of the benefits of an automatic stay, while simultaneously avoiding the disclosure obligations and fiduciary duties of a chapter 11 debtor-in-possession.
Jurisdiction, Yes; Spread the Stay, No
Judge Lafferty found core jurisdiction over both of the debtors’ claims to spread the automatic stay or impose an injunction. Even if the pursuit of an injunction was only “related to” and not core, he said that the parties all had consented to the entry of final orders.
Citing Ninth Circuit authority, Judge Lafferty said that “the availability of relief by extending the stay due to the purported ‘unusual circumstances’ test is at best uncertain.”
Citing In re Excel Innovations Inc., 502 F.3d 1086 (9th Cir. 2007), which he cited throughout the opinion, Judge Lafferty said that “the Ninth Circuit has stated its clear preference that debtors pursue extraordinary relief in favor of non-debtors through the more traditional and well settled remedy of injunctive relief.”
Given the circuit’s preference for injunctive relief, Judge Lafferty quickly denied the portion of the motion to extend the automatic stay and “focuse[d] on Debtors’ request for injunctive relief under Section 105(a).”
No Section 105(a) Injunction Either
Judge Lafferty laid out the usual four-part test for an injunction: (1) the likelihood of success on the merits; (2) the likelihood of irreparable harm; (3) the balance of hardships; and (4) public policy. Citing Excel, he said that “the bankruptcy court should examine the record actually before it in making a decision to grant injunctive relief and not rely on generalities from the initial days of the case.” [Emphasis added.]
In a chapter 11 case, Judge Lafferty said that likelihood of success means the likelihood of successful reorganization. At the present time, he said that the likelihood of reorganization was “highly uncertain.” Therefore, he concluded that “the Debtors have [not] in any meaningful way carried their burden on this factor.”
In contrast, irreparable harm “yields a decidedly different picture,” Judge Lafferty said. Excel concentrates “on the balance of harms between the respective parties.”
Judge Lafferty said that “the Debtors’ generalized claims of potential frustration of their efforts to reorganize are unconvincing,” because the debtors offered “no precise evidence.” However, he added a caveat by saying that his conclusion could be “brought again to the Court’s attention if any such obligations do appear to be burdensome in fact.”
At “this early stage,” Judge Lafferty said, “there is simply no identifiable likelihood of irreparable harm.”
Regarding the balance of hardships, Judge Lafferty alluded to “alleged egregious instances of bodily harm” and plaintiffs who were dying while the litigation was pending. He found that the debtors had not met their burden because the factor “edges slightly” in favor of plaintiffs.
The public policy concern “is at best neutral,” Judge Lafferty said.
Judge Lafferty denied the debtors’ motion for a Section 105(a) injunction because the debtors had “not met their burdens on the first three factors, and the fourth was “not of sufficient consequence to affect the outcome.”
Reference to 3M
Judge Lafferty devoted the last pages of his opinion to discussion of In re Aearo Tech. LLC, 642 B.R. 891, 909–912 (Bankr. S.D. Ind. Aug. 26, 2022), where Bankruptcy Judge Jeffrey J. Graham of Indianapolis found no jurisdiction to impose an injunction protecting the nondebtor parent, 3M Corp. To read ABI’s report, click here.
Although Judge Graham found no jurisdiction to protect nondebtors, Judge Lafferty referenced the remark by Judge Graham that he “had no doubt but that granting such an injunction might be an enormous aid in facilitating a successful and consensual resolution of the numerous matters for which the injunction had been sought.”
Judge Lafferty said he was of “two minds” about an injunction. On one hand, he said that an injunction might “hasten a consensual resolution.” On the other, it might “tilt the ‘leverage’ in these cases in favor of the Debtors and the [nondebtors] in such a way that meaningful negotiations with the Plaintiffs Group and the [Creditors’] Committee would be delayed or frustrated.”
The concern about “leverage shifting,” Judge Lafferty said, “warrants care in deciding whether to grant the injunctive relief requested here; and it certainly does not support a request for injunctive relief in this case, on the facts as presented at this time.”
Because “facts and circumstances [may] change significantly,” Judge Lafferty said that the debtors “may be able to succeed” in obtaining an injunction “as these cases develop.” He denied the injunction motion without prejudice.
Following a masterful synthesis of Ninth Circuit precedent, Bankruptcy Judge William J. Lafferty, III, of Oakland, Calif., declined (for now) to enjoin lawsuits against individuals and nondebtor affiliates of chapter 11 debtors.
In his January 12 opinion, Judge Lafferty said that requested “injunctive relief request is, at least to some extent, part of the exercise of leverage shifting that frequently occurs in the distressed circumstances that pertain in chapter 11 cases.” He continued by saying that “this concern warrants care in deciding whether to grant the injunctive relief requested here; and it certainly does not support a request for injunctive relief in this case, on the facts as presented at this time.” [Emphasis added.]
Although Judge Lafferty is allowing plaintiffs to proceed with dozens of lawsuits against nondebtors, officers and employees, his opinion is a not-too-subtle warning that plaintiffs should cooperate with the chapter 11 process or face an injunction in the weeks or months to come.