Non-Debtor Co-Defendants Must be Critical to the Debtors Successful Bankruptcy Case to Obtain Stay Protections

Daniel Denaroso

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

In In re Parlement Technologies, Inc., (f/k/a Parler LLC, f/k/a Parler, Inc.), the United States Bankruptcy Court for the District of Delaware (the “Court”) held that Parlement Technologies (the “Debtor”) failed to demonstrate that staying an action against a non-debtor defendant was critical to the success of a bankruptcy case and thus was not entitled to a preliminary injunction staying the prepetition case against the non-debtor defendant.[1] The Court concluded that while the Supreme Court’s decision in Purdue Pharma prohibiting nonconsensual third-party releases does not preclude a bankruptcy court from entering a preliminary injunction concerning third-party claims, courts must now consider the meaning of “likelihood of success on the merits” (a requirement in any case for a preliminary injunction) in a different light.[2] On that basis, the Court held that the Debtor did not satisfy its burden to show that a preliminary injunction was necessary to avoid interference with the Debtor’s reorganization efforts.[3]  

In March 2021, before the Debtor commenced its chapter 11 case, a former executive filed a nine-count complaint against the Debtor, certain owners, and former executives.[4] The allegations included “breach[] of contract, conversion, conspiracy, and tortious discharge.”[5] Several individual defendants crossclaimed against the Debtor for indemnification.[6] In April 2024, the Debtor filed a voluntary petition under chapter 11 of title 11, United States Code (the “Bankruptcy Code”) commencing an adversary proceeding to extend the stay under Bankruptcy Code sections 105(a) and 362.[7] The former executive filed the initial proceeding to hold the Debtor’s owners and other executives liable for the Debtor’s failure to stem violent rhetoric and perpetuating a scheme that would oust the former executive from his stake in the Debtor.[8] On June 14, 2024, the Debtor filed a motion to extend the automatic stay to certain non-debtor officers and owners of the Debtor.[9] The Debtor argued that “a preliminary injunction is appropriate primarily because, by virtue of the debtor's asserted obligation to indemnify the other defendants, the action is in substance a claim against the debtor.”[10]

The issue here is whether under 28 U.S.C § 157(b) a bankruptcy court “may enter a preliminary injunction that operates to stay actions against non-debtors.”[11] The Court noted that granting a preliminary injunction is based on the application of a four-factor test including: “(1) likelihood that plaintiff will prevail on the merits; (2) irreparable injury to the plaintiff absent an injunction; (3) harm that the defendant will suffer by the injunction; and (4) the public interest.”[12]Pertinent to the first prong of this analysis is a recent Supreme Court decision, Purdue Pharma, which held “that non-debtors may not receive permanent injunctive relief in the form of a third-party release, under a plan of reorganization, even when a bankruptcy court finds that the release is necessary to facilitate the debtor's reorganization.”[13] The Supreme Court noted that it is unusual to analyze the “likelihood of success on the merits” prong as a successful confirmation of a plan of reorganization, rather than the likelihood of success of the claim against the third party.[14]Despite language in Purdue Pharma that appears to deny the applicability of this prong, the Court limited the holding only to permanent injunctions.[15] The reason for this view was to maintain the reasoning held in the 1986 A.H. Robins decision that a court’s authority to enter preliminary injunctions to stay third-party claims is based on a possible impact on a debtor’s plan of reorganization.[16]

The Court noted that for non-debtors to gain the protection of the automatic stay, the Debtor must first establish some extraordinary circumstances, because “‘preliminary injunctive relief is an extraordinary remedy, which should be granted only in limited circumstances.’”[17] The Court held “[t]he debtor . . . failed to meet its burden of demonstrating the necessity of the preliminary injunction” by failing to establish any extraordinary circumstances.[18] Given that an obligation to indemnify the other defendants is standard in bankruptcy proceedings, without any additional evidence speaking to an extraordinary circumstance, the Court rejected the Debtor’s arguments that an injunction was warranted.[19] The Court also rejected the Debtor’s contention that, should the case move forward against the non-debtor co-defendants, the Debtor will be subject to discovery demands it cannot afford under its existing debtor-in-possession loan.[20] The Court characterized this argument as “bootstrapping” given the injunction would benefit those who incurred the loan.[21] The Court rejected the Debtor’s claim that the prior proceeding would be too much of a distraction for the Debtor’s officers to focus on the bankruptcy proceeding because no present officer was a defendant in the lawsuit.[22]Finally, the Court reject the Debtor’s last claim that a judgment on the prior action would risk collateral estoppel.[23] The Court reasoned that the Debtor was only requesting a sixty-day injunction from the prior action, which did not have a trial date much less any way for judgment to be rendered within sixty days.[24] For those reasons, the Court held that the Debtor was not entitled to a preliminary injunction extending the automatic stay to non-debtor defendants.[25]

In providing its analysis on the holding of Purdue Pharma, the Court construed the language of the case to be “‘confined . . . to the question presented’” rather than to broaden the scope of Purdue Pharma beyond permanent injunctions.[26] By maintaining that the holding in Purdue Pharma applies only to permanent injunctions, the Court maintained as an appropriate basis for a preliminary injunction finding interference with a debtor’s reorganization efforts.[27]