Section 1123(b)(6) of the Bankruptcy Code provides that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.”  Section 105(a) of the Bankruptcy Code provides that the Court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].”  A number of courts have interpreted Section 105(a) as granting bankruptcy courts the equitable power to stay related third-party litigation against non-debtors of the bankruptcy.  For example, In re Seatco, Inc., 257 B.R. 469 (Bankr.N.D.Tex.2001), involved a clause in a debtor’s proposed Chapter 11 plan which purported to temporarily enjoin a creditor from pursuing its rights against a non-debtor guarantor while creditor was receiving payments under the plan.  The court held that such a temporary injunction did not violate the Bankruptcy Code.

Seatco noted, however, that before a temporary injunction restraining a lender’s collection efforts against a guarantor could be imposed, the court needed to have jurisdiction over that dispute. Id. at 475.  In the context of its case, it had at least “related to” jurisdiction.  Quite simply, an action by the lender against the guarantor was “related to” this bankruptcy case.  Here, the guarantor was the debtor’s founder, president and sole shareholder.

The evidence is undisputed that if CIT successfully pursued Kester on the Guaranty, Kester would not be able to satisfy CIT’s claims and CIT would be entitled to execute against Kester’s stock ownership in the Debtor, prompting Kester’s resignation as President and the cessation of his involvement in the business.  The evidence is also undisputed that if Kester was no longer affiliated with the Debtor, other key managers would leave, as would key customers.  The record is clear – Kester’s continued participation and involvement is essential to the Debtor’s business operations and will be essential to the Debtor’s successful reorganization under the Plan.  Thus, an action by CIT to enforce the Guaranty “could conceivably” affect the Debtor’s successful reorganization, and “related to” jurisdiction exists.

Id. at 476.

While the court noted that the reported decisions granting temporary injunctive relief in favor of non-debtor third parties generally involve injunctions issued during the case to facilitate the formulation of a plan of reorganization, the court saw no reason why a temporary injunction could not be entered at confirmation to facilitate the successful implementation of such a plan. It cited to Feld v. Zale Corp. (In re Zale), 62 F.3d 746, 761 (5th Cir.1995), which noted the distinction between a “temporary” injunction and a “permanent” injunction.

While a temporary stay prohibiting a creditor’s suit against a nondebtor * * * during the bankruptcy case may be permissible to facilitate the reorganization process in accord with the broad approach to nondebtor stays under section 105(a) * * *, the stay may not be extended post-confirmation in the form of a permanent injunction that effectively relieves the nondebtor from its own liability to the creditor.  Not only does such a permanent injunction improperly insulate nondebtors in violation of section 524(e), it does so without any countervailing justification of debtor protection * * * *  The impropriety of a permanent injunction does not necessarily extend to a temporary injunction of third-party actions.  Such an injunction may be proper under unusual circumstances.  These circumstances include (1) when the non-debtor and the debtor enjoy such an identity of interest that the suit against the non-debtor is essentially a suit against the debtor, and (2) when the third-party action will have an adverse impact on the debtor’s ability to accomplish reorganization. When either of these circumstances occur, an injunction may be warranted.

 Id. at 476-77.  The court disagreed that the temporary injunction proposed in the Plan affects the guarantor’s liability to the objecting creditor.  It noted that while the plan, if confirmed, would temporarily enjoin lender from pursuing the guarantor for those sums being paid to it under the Plan, the guarantor’s liability to the lender under the guaranty was not affected.  If the reorganized debtor defaulted on the plan after notice and an opportunity to cure, the temporary injunction terminated without further order of the court and the lender could pursue the guarantor on the guaranty for any amounts owing to it.  Further, if any portion of the lender’s claim was not allowable in the bankruptcy, but is otherwise recoverable pursuant to the guaranty, the lender could pursue the guarantor for any amounts not being paid under the plan.  As a result, the temporary injunction in the Plan did not violate Section 524(e) of the Bankruptcy Code. Id. at 475.

Finally, the Court considered the traditional factors governing the issuance of temporary injunctions.  First, the evidence was undisputed here that the debtor could reorganize its financial affairs, emerge from its bankruptcy case, and pay secured and unsecured priority claims in full with interest and provide a 35% distribution to its general unsecured creditors over 6 years without interest. In a liquidation, unsecured priority claims and general unsecured claims would receive no distribution.  “That opportunity to successfully reorganize is substantially threatened if CIT is not restrained from its efforts to collect those sums being paid to it under the Plan from Kester pursuant to the Guaranty.” Id. at 477.  Further, the harm to the debtor – the inability to successfully reorganize – outweighed the harm to the lender.  The court noted that if the plan was confirmed, the lender was free to pursue the guarantor on the guaranty for any amounts owing to it that are not being paid under the plan and, if the debtor defaulted on its plan payments to the lender after notice and an opportunity to cure, the lender could pursue the guarantor for all amounts owing to it without further order of the court.  In other words. the injunction expired on its own upon an uncured default.  “The only harm to CIT is that it may be forced to accept payment terms under the Plan that it finds unacceptable.”  The court went on that the granting of a temporary injunction did not disserve the public interest.  “Issuance of the injunction will facilitate the Debtor’s successful reorganization which is in the public’s interest.” Id. at 477-78.

In re Chicora Life Center, LC, 553 B.R. 61 (Bankr.D.S.C.2016), also provides an in-depth analysis of the issue.  In this case, a Chapter 11 debtor filed motion for preliminary injunction to prevent a creditor from bringing a collection action on a guaranty signed by debtor’s manager. The court started its analysis by quoting from the Fourth Circuit decision of Willis v. Celotex Corp., 978 F.2d 146, 149 (4th Cir.1992), where the court stated:

[A] bankruptcy court may properly exercise its authority under §105(a) to enjoin an action against a third party when the court finds ” ‘that failure to enjoin would [a]ffect the bankruptcy estate and would adversely or detrimentally influence and pressure the debtor through the third party.'”  Additionally, the bankruptcy court “‘may enjoin a variety of proceedings * * * which will have an adverse impact on the Debtor’s ability to formulate a Chapter 11 plan.”‘

Chicora Life Center applied a four-factor test traditionally used in evaluating preliminary injunction requests. Under this four-factor test, the movant seeking an injunction must establish:(1) that the movant is likely to succeed on the merits; (2) that he is likely to suffer irreparable harm in the absence of preliminary relief; (3) that the balance of equities tips in the movant’s favor; and (4) that an injunction is in the public interest.

The evidence before the court indicated that without an injunction, the lawsuit on the “Durbano’s guaranty” would have a major impact on the debtor’s ability to maintain ongoing operations and formulate a chapter 11 plan.  The Debtor required a source of funding to pay operating costs, including insurance, utilities, security, payroll and professional fees, while it attempted to settle issues with its anchor tenant, identify possible new tenants and formulate a chapter 11 plan.  In addition, any new tenant would likely require funds to up fit the space for occupancy.  In regard to all of the above, the record also demonstrated that the lawsuit against the guarantor would have a significant impact on the possible renewal of the line of credit. Without the funding from that line of credit, it was unlikely that the debtor would be ability to maintain its ongoing operations and to formulate and fund a chapter 11 plan. Id. at 65-66.

In determining whether a preliminary injunction should be granted, the court interpreted the “success on the merits” factor to require the debtor to show that it had a reasonable likelihood of reorganization. With respect to this issue, the evidence indicated that debtor had a significant equity cushion above the creditor’s lien, which strongly supported a finding that the debtor had a high likelihood of successfully reorganizing in this case and a possibility of paying all of its creditors in full. Id. at 66.

The debtor also made a clear showing that the balance of equities tipped in its favor. The uncontradicted evidence indicated that there was significant equity in the real estate above the creditor’s lien. In addition, no evidence was submitted to the court indicating that the value of the real estate was likely to decrease in the near future. Due to this equity cushion, the creditor’s lien appeared to be adequately protected and it did not appear that a preliminary injunction would prejudice the creditor’s ability to collect as its lien would remain fully secured during the duration of the injunction. Furthermore, the creditor presented no evidence which indicated it would be harmed by a delay of its collection actions on the guaranty. Id. at 66-67.

In In re Caesars Entertainment Operating Co., Inc., 808 F.3d 1186 (7th Cir.2015), the court held that nothing in Section 105(a) barred temporary injunction requested by a Chapter 11 debtors, enjoining third-party noteholders and indenture trustees from pursuing their “guaranty suits”, until 60 days after the court-appointed bankruptcy examiner completed his assessment of bankruptcy claims. The only limitation was that the order had to be “appropriate” to carry out the provisions of the Bankruptcy Code.

On remand from the Seventh Circuit, the bankruptcy court noted that to obtain an injunction under Section105(a), it was unnecessary to satisfy the traditional elements for injunctive relief.  In re Caesars Entertainment Operating Co., Inc., 561 B.R. 441 (Bankr.N.D.Ill.2016). As long as the third-party litigation would “‘defeat or impair’” the bankruptcy court’s “‘jurisdiction over the case before it,’” the debtor need show only that (1) there is a “‘likelihood of success on the merits,’” which in this context meant the likelihood of a successful reorganization, and (2) the injunction would serve the public interest.  The debtor need not show irreparable harm or an inadequate remedy at law.

In analyzing this issue, the court noted that no one contested the strength of the debtors’ business.  The business was a “substantial,” operating a “very valuable gaming franchise” with “a signature property in Las Vegas”  The debtors had more than $5 billion in annual revenue and in 2015 generated $1 billion in EBITDA.  The critical question, therefore, was not whether the company could be restructured successfully. Rather, the question is whether a temporary injunction “is likely to enhance the prospects for a successful resolution of the disputes attending the CEOC bankruptcy.” Id. at 449.  In this regard, the evidence strongly suggested that it would.

The debtors’ goal in seeking injunctive relief is to have a short spell, one during which CEC is not subject to the imminent threat of an adverse judgment, when the parties can negotiate a consensual plan along the lines of the Notes RSA. . . . . The Notes RSA, it was explained, embodies a “tentative settlement” of those claims under which CEC would make a “substantial contribution” that the debtors valued at roughly $2.5 billion.

Id.  The court then noted that the enjoined litigation threatened reorganization.  It stated that CEC had a market capitalization of $1.8 billion and an enterprise value of roughly $3 billion.  Yet, the plaintiffs’ claims alone would result in a judgment of $7.095 billion, considerably more than double CEC’s value.  The court then stated that “[b]ankruptcy courts have often enjoined litigation against a non-debtor, usually but not always a guarantor of the debtor’s debts, who intends to contribute financially to the debtor’s reorganization.” Id. at 451.

Because the debtors’ reorganization depends, one way or another, on the estate’s claims against CEC, because CEC does in fact “lack the money to satisfy all its obligees,” and because CEC will indeed be “drained of capital by the lenders’ suits to enforce the guaranties” if those suits are not enjoined before adverse judgments are entered, an injunction of the BOKF action, the action with an imminent trial date, is appropriate.

Id. at 453.  The court then discussed the public policy interests.  Here, it noted that “[i]n the bankruptcy context, the relevant public interest is the interest in successful reorganizations, since reorganizations preserve value for creditors and ultimately the public. Id. at 453.

Of course, “guaranties should be respected and honored wherever possible, and … courts should be wary of placing limits on the enforcement of commercial guaranties except in cases of the most pressing need.”  But that does not mean “the enforcement of guaranties can never be blocked.”  Sometimes “the needs and concerns of other creditors simply trump commercial predictability.”  This is one of those times – particularly since CEC had no assets other than its equity interest in CEOC when it gave the guarantees.  Only as a result of the disputed transactions that give rise to the estate’s claims against CEC does CEC have “independent value” that could satisfy the guaranty creditors’ claims.

Id. at 454.  Finally, in balancing the equities, the court found as follows:

The debtors will be harmed if injunctive relief is not granted because the BOKF and UMB actions will proceed to trial and ultimately to judgment.  If the result is unfavorable and the guarantees are reinstated and enforced, these creditors stand to obtain a judgment against CEC for $7.1 billion, more than twice the company’s value.  No longer will CEC be able to make a financial contribution to the debtors’ reorganization.  CEC will instead file its own bankruptcy.  The chances of a global settlement in the CEOC bankruptcy will be slim. The chances of a settlement that CEC funds will be nil.

Id. at 454-55.

On the other hand, the guaranty creditors stood to lose nothing but time if an injunction is granted – and not much time at that.  The BOKF and UMB actions, set for trial on March 14, would merely be delayed for a brief period after the examiner submits his initial report.  If there has been no resolution of the bankruptcy and the injunction expires, BOKF and UMB would be free to pursue their actions.  The guaranty creditors identify no particular harm from a short delay. Id. at 455.

In In re Acis Capital Management, L.P., 604 B.R. 484 (N.D.Tex.2019), the court noted that while the Fifth Circuit forbid the discharge of the debts or nondebtors, “[t]he impropriety of a permanent injunction does not necessarily extend to a temporary injunction of third-party actions.” Id. at 525 (citing to In re Zale Corp., 62 F.3d at 761.)  It noted that Zale provided a non-exhaustive list of “unusual circumstances” that might justify such an injunction: “1) when the nondebtor and the debtor enjoy such an identity of interests that the suit against the nondebtor is essentially a suit against the debtor, and 2) when the third-party action will have an adverse impact on the debtor’s ability to accomplish reorganization.” Id. 

In Acis Capital, the bankruptcy court expressly found that the Temporary Injunction was a “critical component of the Plan,” and that “[t]he Temporary Plan Injunction [was] essential to [Acis’] ability to perform the Plan.”

HCLOF has twice demanded that Acis effect an optional redemption of the CLOs, and its directors testified that it will do so again if given the chance.  The bankruptcy court found that an optional redemption would be an economically “[ir]rational” transaction that would serve as the last step in Highland’s “intentional scheme to keep assets away from Mr. Terry as a creditor.”  It further found that if HCLOF succeeds in forcing an optional redemption, Acis “[will] have no going concern value,” and “Terry will be precluded from reorganizing the business and paying creditors” in accordance with the Plan.  Thus the Temporary Injunction enjoins third-party conduct that would adversely impact the ability of Acis to reorganize. These are unusual circumstances that justify the bankruptcy court’s Temporary Injunction.

Acis Capital also addressed the Supreme Court’s decision of Stern v. Marshall, 564 U.S. 462 (2011).  It noted that whatever the precise contours of Stern, it only concerns the power of a bankruptcy court to enter a “final judgment” on certain causes of action. Id. at 527.  It noted that when a bankruptcy court exercises powers that is independent of its authority to enter a final judgment on a claim – “e.g., when it makes use of its authority under §105(a) to issue a temporary plan injunction – Stern simply does not apply. Id. (citing to In re Yellowstone Mountain Club, LLC, 646 Fed.Appx. 558, 558-59 (9th Cir.2016) (per curiam) (holding that Stern did not apply because “the bankruptcy court issued a preliminary injunction [pursuant to Section 105(a)], not a final judgment”)

The Temporary Injunction does not “withdraw from judicial cognizance any matter” of any kind whatsoever.  Instead, it temporarily enjoins a number of parties and non-parties from taking any action * * * *To the extent that the Temporary Injunction affects any legal claims, it does not prevent an Article III court from entering a final judgment on those claims after the Temporary Injunction is lifted. In other words, it has no res judicata effect on those claims.

Id. at 528.

Finally, Acis Capital stated that when a bankruptcy court issues a temporary injunction under Section 105(a), the court must also consider the four-prong preliminary injunction test.  The factors are (1) a substantial likelihood of success on the merits, (2) a substantial threat of irreparable injury if the injunction is not issued, (3) that the threatened injury if the injunction is denied outweighs any harm that will result if the injunction is granted, and (4) that the grant of an injunction will not disserve the public interest.  In this case, all of the factors were satisfied.

The first factor, when applied to a temporary plan injunction, turns on whether the reorganization plan is likely to succeed.  In this regard, the bankruptcy court separately determined that the Plan was feasible, and that the Plan was substantially likely to succeed. Id. at 529.  With respect to the second factor, it noted that the bankruptcy court did not clearly err in finding that, without the Temporary Injunction, Acis faced a substantial threat of irreparable injury: specifically, “evisceration of the Acis CLOs, by parties with unclean hands.”  It stated that without the Temporary Injunction, Acis will had no opportunity to reorganize instead of liquidate – and, as the Code contemplated, the debtor should be given the opportunity to successfully reorganize.  To deny Acis the chance to reorganize would be to subject it to a substantial threat of irreparable injury.  With respect to the fourth factor, the bankruptcy court did not clearly err in finding that the public interest favors an injunction.  “The public has an interest in allowing businesses to reorganize instead of liquidate.” Id. at 529.


Matthew T. Gensburg