Post-Purdue Pharma, Two Bankruptcy Courts Chime In on Preliminary Injunctive Relief for Nondebtors

At a Glance

• As shown by two recent bankruptcy court decisions, the Supreme Court’s Purdue Pharma ruling should not be interpreted as a bar to granting preliminary injunctions enjoining suits against nondebtors.
• The Coast to Coast Leasing bankruptcy court found the debtor’s argument persuasive, that the principals potentially facing litigation were going to be instrumental in the reorganization process, both through their intention to fund a plan of reorganization and through their continued attention, time and effort to the debtor’s reorganization efforts.
• The Parlement Technologies bankruptcy court found that debtors may premise their requests for preliminary injunctions on such relief affording debtors the opportunity to negotiate plans of reorganization that may include consensual releases of nondebtors. Consensual third-party releases were explicitly excluded from and not called into question in the Purdue Pharma opinion.

For decades, bankruptcy courts have extended the automatic stay through preliminary injunctions halting litigation against a debtor’s nondebtor codefendants. Such relief was relatively routine when the codefendants were the debtor’s officers or directors, or the debtor was contractually obligated to indemnify the codefendant.

The Supreme Court’s landmark decision in Harrington v. Purdue Pharma L.P., et al. on June 27, 2024, called all of this into question. In Purdue Pharma, the Court held that nondebtors in Chapter 11 cases may not receive permanent injunctive relief in the form of nonconsensual releases under a debtor’s plan of reorganization. For more information regarding the Supreme Court’s Purdue decision, please see Faegre Drinker’s update, Supreme Court Denies Nonconsensual Third-Party Releases in Purdue.

Two courts have since chimed in post-Purdue Pharma and held that preliminary injunctive relief extending the automatic stay to halt litigation against nondebtors remains a viable remedy so long as likelihood of success on the merits is not premised on obtaining a permanent injunction barring claims against nondebtors without the consent of affected claimants.

First, on July 15, 2024, Judge Craig T. Goldblatt of the U.S. Bankruptcy Court for the District of Delaware issued an opinion in the Parlement Technologies, Inc. Chapter 11 proceeding (Case No. 24-10755), which held that when debtors are seeking a preliminary injunction to extend the automatic stay to nondebtors, they will not succeed when making the argument that they will have a “likelihood of success” in getting nonconsensual third-party releases under a plan, which was a possibility before Purdue Pharma.

Second, on July 17, 2024, Judge Jacqueline P. Cox of the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, issued an opinion in the Coast to Coast Leasing, LLC Chapter 11 proceeding (Case No. 24-03056), holding that the Supreme Court’s Purdue Pharma decision does not necessarily preclude bankruptcy courts from granting third-parties, including current management, the protection of a preliminary injunction.

Extension of the Automatic Stay to Nondebtors

The automatic stay is the primary protection that gives a debtor the “breathing room” to reorganize its business while in Chapter 11. Importantly, the automatic stay stops all pending civil actions and enjoins all future civil actions on account of prepetition claims against the debtor outside the bankruptcy court.

While the automatic stay typically applies to actions with respect to a debtor in bankruptcy, courts will often extend the automatic stay to affiliates or third-parties that did not file for bankruptcy relief if “unusual circumstances” exist. Unusual circumstances typically arise in one of the following two situations: (1) where there is such identity between the debtor and the nondebtor that the debtor may be said to be the real party and that a judgment against the nondebtor will in effect be a judgment or finding against the debtor, and (2) where stay protection is essential to the debtor’s efforts for reorganization (e.g., where the nondebtor is a member of the management team who should not be subject to distractions during the critical time postpetition).

Debtors have requested extensions of the automatic stay to protect directors and officers, parent entities, affiliates, and codefendants in cases where those parties could be at risk of potential litigation but are otherwise solvent and do not need to reorganize in Chapter 11.

Extension of the automatic stay is often achieved through a debtor’s request for an injunction to extend the stay protections under section 362 of the Bankruptcy Code to nondebtors pursuant to section 105(a) of the Bankruptcy Code. Preliminary injunctions are often viewed as extraordinary remedies and are granted in limited circumstances.

In re Parlement Technologies, Inc. Chapter 11 Proceeding

The debtor in Parlement Technologies once operated the social media site and app known as Parler. In March 2021, a former executive of Parler sued the debtor and several former officers in Nevada state court (Nevada Action) based on claims of breach of contract, conspiracy and tortious discharge, along with allegations that the app was removed from Apple’s App Store because the company had not taken sufficient steps to prevent the app from being used to incite violence. The debtor filed for Chapter 11 in April 2024.

In June 2024, the debtor filed a motion to extend the automatic stay via preliminary injunction to the co-defendants in the Nevada Action, its former officers. The plaintiff in the Nevada Action objected to the motion.

Opinion

Notwithstanding the Supreme Court’s Purdue Pharma decision, Judge Goldblatt found that bankruptcy courts still have the authority to extend the automatic stay to nondebtors via a preliminary injunction, although the court’s authority to do so can no longer be premised on the likelihood of a debtor obtaining a nonconsensual third-party release for the nondebtor as part of a plan of reorganization.

In his decision, Judge Goldblatt cited to the traditional four-factor test for review of preliminary injunction requests: (1) likelihood of success on the merits; (2) irreparable harm; (3) harm to the defendant; and (4) the public interest. The bankruptcy court primarily took issue with the factor relating to the “likelihood of success on the merits.”

In the typical case of a preliminary injunction request outside of the bankruptcy context, the court’s focus for this prong rests on the likelihood that the party seeking the injunction will ultimately be successful in obtaining permanent injunctive relief against the party for which it seeks the preliminary injunction.

However, in the bankruptcy context where a debtor is seeking to stay a proceeding against a nondebtor via preliminary injunction, bankruptcy courts have historically focused more on the harm that the litigation against third-parties could cause the debtor’s successful reorganization without directly addressing the debtor’s right to obtain permanent injunctive relief for nondebtors in its plan of reorganization.

In reviewing previous bankruptcy court and Third Circuit decisions, Judge Goldblatt held that to the extent a debtor in the future seeks to justify a preliminary injunction on the notion that it is likely to succeed on the merits by ultimately obtaining a third-party release under a plan without the consent of affected claimants — i.e., permanent injunctive relief — such an argument would now fail in light of the Purdue Pharma decision.

However, the decision recognizes that the possibility still exists for a bankruptcy court to extend the stay to claims against nondebtors via a preliminary injunction in instances where assertion of those claims would interfere with the debtor’s reorganization efforts.

Judge Goldblatt then analyzed the debtor’s arguments for why the preliminary injunction was necessary. He ultimately found that the debtor did not present sufficient evidence to show there was anything unusual about the circumstances to warrant the entry of a preliminary injunction.

In re Coast to Coast Leasing, LLC Chapter 11 Proceeding

Three of the debtor’s principals and two affiliates in Coast to Coast Leasing are currently facing pending/threatening litigation from four creditors regarding their guarantees of debts owing by the debtor. The debtor filed an adversary proceeding and subsequent motion seeking a two-week temporary restraining order and preliminary injunction to halt the litigation against the guarantors. The four creditors objected to the relief sought.

Opinion

The bankruptcy court in Coast to Coast Leasing reviewed both the Purdue Pharma decision and the Parlement decision (along with local precedent) and highlighted that both decisions were distinguishable from the Coast to Coast proceeding.

Regarding the Purdue Pharma decision, Judge Cox noted that the Sackler family was seeking “much broader relief” than the case at hand. In Purdue Pharma, the Sacklers were seeking to release and enjoin claims against them, through the plan of reorganization, without the opioid claimants’ consent. Here, however, the guarantors were not seeking a release of the guaranty claims, but simply a temporary restraining order to enjoin the creditors from bringing claims against the guarantors for two weeks.

Regarding the Parlement Technologies decision, Judge Cox highlighted Judge Goldblatt’s decision that a bankruptcy court may still grant a preliminary injunction if the court concludes that “‘(a) providing the debtor’s management a breathing spell from the distraction of other litigation is necessary to permit the debtor to focus on the reorganization of its business or (b) because it believes the parties may ultimately be able to negotiate a plan that includes a consensual resolution of the claims against the non-debtors.’” Either of those outcomes, Judge Cox held, would be seen as satisfying the factor relating to the “likelihood of success on the merits” that courts look to when analyzing a preliminary injunction request.

Given this reasoning and considering that the principals facing the lawsuit intend to fund the debtor’s plan and play a vital role in the reorganization, the bankruptcy court granted the two-week temporary restraining order and subsequently extended the temporary restraining order to September 3, 2024.

Impact of the Decisions

As evidenced by the decisions in Coast to Coast Leasing and Parlement Technologies, the Purdue Pharma decision should not be interpreted as a bar to a bankruptcy court’s granting preliminary injunctions enjoining suits against nondebtors. However, debtors in the future will have to focus their motions for extending the automatic stay to nondebtors via preliminary injunction to arguments demonstrating that the preliminary injunction (a) provides the debtor’s management a breathing spell from the distraction of other litigation, which is necessary to permit the debtor to focus on the reorganization of its business, or (b) will provide an opportunity to negotiate a plan that includes a consensual resolution of the claims against the nondebtors.

For example, in Coast to Coast Leasing, the bankruptcy court found the debtor’s argument persuasive, finding that the principals potentially facing litigation were going to be instrumental in the reorganization process, both through their intention to fund a plan of reorganization and through their continued attention, time and effort to the debtor’s reorganization efforts.

Likewise, Judge Goldblatt observed in Parlement Technologies that debtors may premise their requests for preliminary injunctions that such relief will afford the debtor the opportunity to negotiate a plan of reorganization that may include consensual releases of nondebtors. Consensual third-party releases were explicitly excluded from and not called into question in the Supreme Court’s Purdue Pharma opinion.