Last month, we reported one of several decisions where district courts in the Eastern District of Michigan refused to enforce an order by the bankruptcy court in Houston that “spread” the Section 362 automatic stay to stop lawsuits against nondebtors. See Levitan v. Maclean, 23-12439 (E.D. Mich. Dec. 4, 2024). To read ABI’s report, click here.

Declining to rule as though she was on an appellate court reviewing the decision from Houston, the Chief District Judge for the Northern District of Ohio has decided to enforce the injunction aimed at halting lawsuits against nondebtors.

You decide who has the better argument: Chief District Judge Sara Lioi of Akron, Ohio, or the district judges who found fault with “spreading” the automatic stay.

To Stay or Not to Stay, That Is the Question

In the case before Judge Lioi, the plaintiff brought a Section 1983 action against Wellpath LLC and several individual defendants. Wellpath provides medical services for prisons and jails throughout the country. The individual defendants were often employees of Wellpath.

After Wellpath began a chapter 11 reorganization in Houston, Judge Lioi said that the bankruptcy court entered an order that “stays ‘any lawsuits’ in which Wellpath is a defendant, including ‘claims against the Non-Debtor Defendants . . . pursuant to section 362 of the Bankruptcy Code.’” As debtor in possession, Wellpath filed a suggestion of bankruptcy and argued that “this entire case must be stayed,” Judge Lioi said.

Quoting Section 362(a)(1), Judge Lioi said it was “clear” that the suit must be stayed against Wellpath. However, she went on to cite the Sixth Circuit for the idea that a “bankruptcy stay may also be extended to encompass non-debtors.”

“It appears the bankruptcy court intended to do so here,” Judge Lioi said, “as its interim order stayed any case in which Wellpath is a defendant, including ‘claims against the Non-Debtor Defendants[.]’” She went on to say that “several courts have stayed actions in which Wellpath is a defendant in their entirety.”

“Several decisions in the Eastern District of Michigan,” Judge Lioi said, “have come to a different conclusion as to the scope of the stay.” She described them as relying on the principle “that district courts have ‘jurisdiction concurrent with the originating bankruptcy court to determine the applicability of the bankruptcy court’s automatic stay.’”

Exercising jurisdiction to define the scope of the automatic stay, Judge Lioi said that “those decisions conclude that the bankruptcy court’s interim order ‘does not cite 11 U.S.C. § 105(a) and does not set forth the preliminary-injunction factors or contain any analysis on the subject’ and therefore ‘does not require a stay of proceedings against’ the non-debtor defendants.”

“To allow this matter to proceed as to the non-debtor defendants strikes the Court as more akin to granting relief from the bankruptcy court’s stay order, a power vested in the bankruptcy court,” Judge Lioi said. “[T]hat issue,” she said, “is best resolved by the bankruptcy court itself or appealed to the appropriate district court in Texas.

“[A]ny potential deficiencies in the interim order may well be resolved by the bankruptcy court’s final order, which is currently set for a hearing in January 2025,” Judge Lioi said. She therefore “defer[s] to the bankruptcy court on this issue and does not consider the lack of § 105 analysis to overcome the bankruptcy court’s stated intention to extend the stay to include ‘Non- Debtor Defendants[.]’”

Calling for a status report by January 31, Judge Lioi stayed the case, “subject to the lifting of the stay as to some or all defendants.”