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 1123(a)(5) states that “a plan shall provide adequate means for the plan’s implementation.” 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 these sections 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 temporarily enjoined 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 this regard, the court stated that it had “related to” jurisdiction. 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.[1]
While the court noted that the reported decisions granting temporary injunctive relief 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.[2]
In Seatco, the court ruled that the temporary injunction did not affect 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. 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 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.” And 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 provided 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 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 build out 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 able to maintain its ongoing operations and 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 its case and a possibility of paying its creditors in full. Id. at 66.
Debtor has also made a clear showing that the balance of equities tipped in its favor. Again, the evidence indicated that there was significant equity in the real estate. No evidence was submitted suggesting that the value of the real estate was likely to decrease in the near future. Due to this equity cushion, the creditor’s lien was 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 §105(a) barred temporary injunction requested by a Chapter 11 debtors seeking to enjoin 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.
In In re Caesars Entertainment Operating Co., Inc., 561 B.R. 441 (Bankr.N.D.Ill.2016), the court considered this issue on remand from the Seventh Circuit. It first noted that to obtain an injunction under §105(a), it was unnecessary to satisfy the traditional elements for injunctive relief” The debtor needed 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. In other words, 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” and a “very valuable gaming franchise” with “a signature property in Las Vegas.” The debtors had more than $5 billion in annual revenue and 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 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. [3]
The court then noted that the enjoined litigation threatened the 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.[4]
The court also 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.[5]
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.[6]
On the other hand, the creditors stood to lose nothing but time – and not much time at that. Their actions, set for trial on March, 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, these creditors 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 of nondebtors,[7] “[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 are 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 §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.[8]
Finally, Acis Capital stated that when a bankruptcy court issues a temporary injunction under §105(a), the court must also consider the four-prong preliminary injunction test. 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.
In In re Central Florida Civil, LLC, 649 B.R. 77 (Bankr.M.D.Fla.2023), the court followed the Sixth Circuit decision in Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir.2002) in determining whether a temporary plan injunction was appropriate. In Dow Corning, the court relied upon the confluence of two catch-all provisions to uphold a bankruptcy court’s power to enjoin a non-consenting creditor’s claim against a non-debtor to facilitate a Chapter 11 plan. Dow Corning, 289 F.3d 656-57. It determined that a bankruptcy court may issue such an injunction after identifying “unusual circumstances” based on the following factors:
(1) There is an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate; (2) The non-debtor has contributed substantial assets to the reorganization; (3) The injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor; (4) The impacted class, or classes, has overwhelmingly voted to accept the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; (6) The plan provides an opportunity for those claimants who choose not to settle to recover in full and; (7) The bankruptcy court made a record of specific factual findings that support its conclusions.
Id. at 658. Central Florida noted that it has “discretion to determine which of the Dow Corning factors will be relevant in each case.”
With respect to the first fact, the court noted that an identity of interests typically manifests itself based on the existence of an indemnity relationship. In Central Florida, however, no such indemnity relationship existed between the debtor and its owners. Instead, certain creditors held guaranty claims against the owners for debts of the debtor. Notwithstanding, the court found that if the guarantors would be forced to expend substantial time and energy litigating their guaranties, the debtor’s business would suffer as would the prospects for a successful reorganization, as their professional services were vital to the debtor’s post-confirmation operations. The court concluded that ongoing litigation against the guarantors would deplete their contribution of human capital, which was a significant asset of the bankruptcy estate. Likewise, any judgments resulting from that litigation would likely lead to repossession of equipment owned by the guarantors, which are used for the debtor’s business. Id. at 82-83.
In this case, the plan required the owners/guarantors to contribute $5,000 annually for a total of $25,000 over the five-year plan term. The court found this contribution of $25,000 noteworthy as it nearly doubled the projected monthly payments to unsecured creditors. Moreover, one of the guarantors worked for the debtor without compensation. Accordingly, based on the increased payments to the unsecured creditors and the post-petition services performed without compensation, the court found the owners/guarantors were making a substantial contribution to the debtor’s reorganization. Id. at 83.
Further, the court agreed with the subchapter V trustee’s evaluation that the owners’ knowledge, skills, and experience are critical to the debtor’s operation. Therefore, absent the injunction, the ongoing litigation would hinder their obligations, which in turn would seriously jeopardize the viability of the reorganization. Id. Additionally, the creditors that actively participated, were entitled to vote, and were impacted by the plan injunction, overwhelmingly accepted the Plan. Id. at 85.
Finally, of the impacted classes, the plan provided for full repayment of the secured claims. Therefore, the plan provided a “mechanism to pay for all, or substantially all, of the class or classes affected by the injunction.” Nevertheless, the plan injunction potentially prejudiced the unsecured class which will receive much less than full repayment through the Plan. In this regard, the court noted:
This potential prejudice is alleviated by two considerations. First, the unsecured creditors’ rights to collect on their guaranty claims are not terminated, merely delayed. The injunction will end in five years or less, whether upon successful completion of the confirmed plan or some other contingency. At that time, the affected creditors may pursue their claims against the Converses because the Plan Injunction provides for the tolling of all applicable statutes of limitations. Second, the Amended Plan provides a mechanism to potentially increase the disposable income payments to Class 19. The Amended Plan allows unsecured creditors to review the Debtor’s annual tax returns and ongoing financial reports. Aided by this review, the unsecured creditors may seek a post-confirmation modification of the projected disposable income payments based on the Debtor’s actual disposable income.[9]
In In re 1600 Hicks Road LLC, 649 B.R. 172 (Bankr.N.D.Ill.2023) the court also found a temporary injunction possible. In this case, the debtor filed an adversary proceeding seeking the extension of the automatic stay in its second bankruptcy case and a preliminary injunction to halt efforts by a creditor to enforce a deficiency judgment against the debtor’s owners and managers. The court first noted that it had jurisdiction to stay actions in other courts, including “suits to which the debtor need not be a party but which may affect the amount of property in the bankrupt estate,” or “the allocation of property among creditors.” And to protect this jurisdiction, the court could issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title, including a stay. Id. at 175-76.
Citing the decision of Levey v. Sys. Div., Inc. (In re Teknek, LLC), 563 F.3d 639, 648 (7th Cir.2009), it stated that the Seventh Circuit has allowed bankruptcy courts “in limited circumstances” to enjoin claims, “if they are sufficiently ‘related to’ claims on behalf of the estate.” Id. at 179-80. It also noted that §105 also enables the bankruptcy court to protect its jurisdiction by enjoining, at least temporarily, the prosecution of a third party’s action against a non-debtor in another court. Id. at 180. In this regard, it observed that bankruptcy 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.
In this case the court determined that a temporary stay of actions against the debtor’s principals was appropriate because the financial fate of the debtor, its tenant and the principals of both of those entities were inextricably entwined. The tenant had leased from the debtor the property on which it operated, and for years it paid rent in the form of making mortgage payments on debtor’s behalf. If the tenant’s operations were impacted because its principals were defending litigation over their guarantees, this would impact whether funds were available for the tenant to pay rent to the debtor.
The court held that 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 means 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. Id. at 181.
The fact that a plan had not yet been confirmed was not outcome determinative, with the court stating:
The Bank has raised objections to Debtor’s proposal and may continue to pursue these objections more formally now that a plan is on file. But Congress codified chapter 11 in order to permit debtors to resolve disputes with their creditors in an orderly, organized fashion. One of the purposes of chapter 11 is to provide debtors the breathing space to formulate a plan and to seek confirmation of that plan. The nature of this relief presumes there will be disagreements about whether there will be a resolution among the parties in interest and how it can best be accomplished, but debtors deserve the opportunity to make the attempt. In this situation, the principals of the Debtor have put their money on the line and outlined the parameters of a potential reorganization. The court finds that Debtor has satisfied the not particularly high standard of a “reasonable likelihood of success in reorganization.[10]
Further, successful reorganizations are in the public interest. In 1600 Hicks Road, for example, the court noted that it was in the public interest to maintain the business that operates on the debtor’s real property, a business that employs not just the debtor’s principals but also a sales manager and sales team. The proposed result of a reorganization would benefit all parties in interest – paying the lender in full and relieving the principals of the obligation of their guaranty. It would also result in payment of real estate taxes. Id. at 183.
In re Engineering Recruiting Experts, LLC, 2025 WL 2506031 (Bankr.M.D.Fla. Sept. 2, 2025) was a post-Purdue Pharma case.[11] In this Subchapter V case, the plan injunction provided for an extension of the automatic stay to “any co-debtor.” The plan injunction terminates upon the earliest of: (1) discharge or dismissal; (2) the debtor’s principal leaves his employment; (3) plan default; or (4) voluntary written waiver by the co-debtor.
First, the court ruled that Purdue was inapplicable, as that decision related to non-consensual third-party permanent releases rather than temporary injunctions. Second, the court found that the plan injunction was authorized by §§ 105(a) and 1123(a)(5) where it was necessary “to facilitate the successful implementation of the Plan.” Id. at *2.
In determining whether to issue a temporary injunction of third-party actions as part of confirmation, the court applied the Zale factors used by the Fifth Circuit, i.e.,
(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.[12]
In this regard, the court noted the following:
The success or failure of the Debtor lies mainly, if not exclusively, with the efforts, reputation, and dedication of [Mr. McHatton].” Mr. McHatton is the Debtor’s founder, managing member, sole shareholder, and only employee that brings in new clients and business. Mr. McHatton and the Debtor share an identity of interest such that a suit against Mr. McHatton would in effect be a suit against the Debtor. In expanding the Debtor’s business, Mr. McHatton guaranteed certain debts of the Debtor. Were these creditors to pursue Mr. McHatton they would take Mr. McHatton’s focus away from bringing in new clients and business. Given that there are no other employees to bring in clients, Mr. McHatton’s complete attention to the business is absolutely necessary for the success of the Debtor. Absent Mr. McHatton’s continued involvement, the Debtor’s operations could not continue. Such circumstances make Mr. McHatton’s continued participation essential to the Debtor’s successful reorganization and meet the two-factor test established in Zale.
The court also considered the traditional four-factor test for a preliminary injunction, which requires the injunction proponent to show that: (1) it has a substantial likelihood of success on the merits; (2) it will suffer an irreparable injury unless the injunction is granted; (3) the harm from the threatened injury outweighs the harm the injunction would cause the opposing party; and (4) the injunction would not be adverse to the public interest. Id. at *4. First, the Debtor has established a substantial likelihood of success on the merits, which in the present context is the likelihood that the Debtor will complete the Plan payments and receive a discharge. Id.
Second, absent the injunction, the debtor will suffer irreparable injury. Mr. McHatton was not only the sole owner but also the only individual responsible for generating new business and attracting clients. Continued collection on business debts would ultimately proceed to lawsuits against Mr. McHatton. Defending such lawsuits would significantly divert his attention from critical business functions – particularly client acquisition and revenue generation. Third, the harm from the threatened injury outweighed the harm the injunction would cause the opposing parties. The potential prejudice to the debtor would be extreme. Absent the injunction, the debtor’s operations would likely cease. This would harm not only the debtor but all creditors as well. Conversely, prejudice to enjoined creditors is limited. Further, the plan injunction would merely delay the enjoined creditors from collecting against Mr. McHatton. Given the plan provisions that would toll the applicable statute of limitations, the creditors would be able to pursue their claims against Mr. McHatton when the debtor received a discharge after completing the five-year unsecured payment schedule. Id.
However, in In re K3D Property Services, LLC, 635 B.R. 297 (Bankr.E.D.Tenn.2021), the court refused to confirm a Chapter 11 plan which included a temporary injunction. The plan provided:
For 48 months following the effective date of the Plan, the Confirmation Order shall temporarily restrain any creditor, party-in-interest or any third party from pursuing any officer, director, shareholder, managing person, guarantor, or co-borrower of the Debtor for collection of all or any portion of their Claims or any claim that could have or should have been brought against the Debtor. The temporary injunction shall restrain claims against Kenneth and Denia Morris (husband and wife) and Kurtis and Kyle M. Morris (husband and wife), (collectively the “injunction beneficiaries”) but only if the injunction beneficiaries retain their equity in Reorganized Debtor) and for as long as the Ken and/or Kurtis Morris remain with the Debtor.
* * * *
Claims included within the injunction are those that arose prepetition or that arise up through the Effective Date. The injunction shall terminate at the end of the 48th month following the effective date of the Plan or at such other time as the Court, in the Confirmation Order, may direct.
* * * *
Should the Debtor be in violation of the Plan’s payment terms and if that violation remains uncured for a period of 30 days after receipt by the Debtor of written notice from any party directly affected by such violation, the affected party may apply to this Court to dissolve the temporary injunction but only as to the affected party. As the issuing court, the Bankruptcy Court shall have exclusive jurisdiction to extinguish or modify the temporary injunction.
* * * *
The injunction is not a discharge or release. To the extent they have liability, the injunction beneficiaries shall not be discharged or released from any liability for any claim and debt. The injunction does not discharge or release a third party’s liabilities. While the injunction operates, any applicable statute of limitations shall be tolled to preserve any claim or cause of action.
The injunction applies to the individual person and entity and also to their assets both real property and personal property.
In deciding not to confirm its instant plan due to its temporary injunction, the court noted that most temporary injunctions arise prior to confirmation, i.e., a third-party injunction extends relief to nondebtor parties for the purpose of protecting the debtor while it develops a plan. The stay is extended to preserve the orderly conduct and integrity of the reorganization proceedings. Id. at 312. Cases that allow such injunctions focus on getting the debtor to confirmation and preserving the debtor’s assets so that a plan can be formulated. With respect to post-confirmation injunctions, as was requested in K3D, the court was “hesitant to accept the argument that the Sixth Circuit would abandon the Dow Corning factors applied at confirmation in favor of a standard resembling pre-confirmation injunctions.” Id. at 313. Thus, while Dow Corning dealt with permanent post-confirmation injunctions, the court held that a plan proponent must satisfy its parameters and factors even for a temporary injunction. Dow Corning stated that:
when the following seven factors are present, the bankruptcy court may enjoin a non-consenting creditor’s claims against a non-debtor: (1) There is an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate; (2) The non-debtor has contributed substantial assets to the reorganization; (3) The injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor; (4) The impacted class, or classes, has overwhelmingly voted to accept the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; (6) The plan provides an opportunity for those claimants who choose not to settle to recover in full and; (7) The bankruptcy court made a record of specific factual findings that support its conclusions.
With respect to the first factor, i.e., identity of interests, K3D found that typically contractual indemnification meets that test. In K3D, no such indemnification obligation existed. Nevertheless, the court found such an identity of interests in this case:
While the relationship of the debtor with the injunction parties is not a traditional indemnification, the court finds that there is an identity of interests between the Morris brothers and the Debtor. It reaches this conclusion based on the following facts. Ken Morris is the face of the business and is the key to the reorganization of this Debtor. Ken Morris testified that litigation with creditors based on their guaranties will take time, energy, and “mind space.” They both testified that continued defense would use personal and financial resources that they may need based on their current financial conditions to ensure that they can make the reorganization successful. They intend to save the funds necessary to make the month 44 contribution from their salaries. They argue that litigation expenses could drive them to filing their own chapter 7 cases and jeopardize the additional contribution.[13]
With respect to the second factor, the court found that the principals agreement to make two new value contributions of $100,000 to be a substantial amount. Id. at 320. As to the third factor, the court found that the injunction for the Morris brothers was essential to the reorganization the plan proponents’ ability to be able to accumulate their second contribution would be impaired absent an injunction. “If he must continue fighting off creditors, it may bankrupt him. Judgments could result in the loss of his ownership and result in a change of management.” Id.
With respect to the fourth factor, the Debtor had the overwhelming support of its creditors who would be enjoined from pursuing the injunction beneficiaries. However, the fifth factor was an insurmountable problem. The plan did not provide a mechanism to pay all, or substantially all, of the classes affected by the injunction, rather, it provided for a payment of only 20% to unsecured creditors. Id. at 321. And the sixth factor was also not meet in that the injunction would delay creditors for four years while the risk of the loss of the injunction beneficiaries’ assets continues, i.e., “[t]he opportunity to pursue the amount not paid through the plan should be available at confirmation, not four years later.” Id. And it was ultimately because these last two factors were not met that the court found the injunction not appropriate and denied confirmation.
In re Parlement Technologies, Inc., 661 B.R. 722 (Bankr.D.Del.2024) dealt with this issue post Purdue Pharma.[14] In Purdue Pharma the Supreme Court recently 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. According to Parlement Technologies, that holding raised the question whether courts may grant third parties the protection of a preliminary (temporary) injunction. It concluded that it still could. However, Purdue Pharma did affect how courts should consider what is meant by “likelihood of success on the merits” when applying the traditional four-factor test applicable to requests for preliminary injunctions. Parlement Technologies, held that following Purdue Pharma:
“success on the merits” cannot be based on the likelihood that the non-debtor would be entitled to a non-consensual third-party release through the plan process. But a preliminary injunction may still be granted 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.[15]
Having established the test, the Court then concluded that the debtor has not met its burden of demonstrating an entitlement to preliminary injunctive relief. First, it noted that the debtor contended that it was obligated to indemnify its former officers who were defendants in the Nevada Action. However, under the unique facts of this case, this was not enough.
If a standard corporate obligation to indemnify officers or directors for liability arising out of the performance of their duties were sufficient to warrant a preliminary injunction, there would be nothing at all extraordinary about the relief. It is true, as the debtor points out, that the caselaw talks about, as one basis for granting a preliminary injunction, circumstances in which “there is such an identity between the debtor and the [non-debtor defendants] that the debtor may be said to be the real party defendant and [the effect of a judgment would be to hold the debtor liable].” And there are certainly circumstances in which the allowance or disallowance of a particular claim may have make-or-break significance for the debtor’s reorganization efforts. But there is nothing at all in the record before the Court to suggest that is the case here. Rather, as the Court understands it, the debtor is proposing simply to sell its assets and distribute the proceeds to creditors in accordance with their statutory priority.
While it is true that in such a context, every dollar of indemnity that the debtor may owe to its former officers would operate to dilute the recoveries of other creditors, that is not, without more, a sufficient basis to conclude that minimizing the debtor’s indemnity obligation is critical to the success of this bankruptcy case.[16]
Second, the debtor contended that if the Nevada Action went forward, the debtor would be subject to discovery demands that it could not afford to meet under the terms of its existing DIP facility. The problem with this argument was that the case law suggests that the cost of participating in discovery will not in the typical case be a basis for granting a third-party injunction. Id. at *6. Third, the debtor contended that the distraction of dealing with the demands of discovery in the Nevada Action might prevent the company’s officers from focusing their attentions on the bankruptcy case. However here, the defendants in the Nevada Action were all former officers of the debtor. No current officer or director was a party to that lawsuit. Id.
Finally, the debtor contended that it faced the risk of collateral estoppel if the Nevada Action is permitted to proceed to judgment. But here, the debtor was only seeking a 60-day stay of the Nevada Action. That case was in the district court where the court had before it motions to transfer and to remand or abstain. There was no trial date set in that case and absolutely nothing in the record suggests that there was any risk that it would go to judgment in the 60 days for which the debtor seeks a stay. As such, the record did not support staying the action on account of the risk of the collateral estoppel effect on the bankruptcy estate of any potential judgment in that action. Id. at *7.
An in depth analysis of temporary injunctions was also provided in In re Engineering Recruiting Experts, LLC, 783 B.R. 32 (Bankr.M.D.Fla.2025). Here, the Plan Injunction provided for an extension of the automatic stay to “any co-debtor.” Significantly, the Plan Injunction terminated upon the earliest of: (1) discharge or dismissal; (2) the co-debtor left his employment; (3) the occurrence of a plan default; or (4) a voluntary written waiver by the co-debtor. The Plan also required the debtor to submit quarterly reports to the Subchapter V Trustee and to all creditors. Any creditor or interested party, including the Subchapter V Trustee, could file an objection with the Court post-confirmation to increase payments based on actual disposable income exceeding projected disposable income, thereby potentially increasing plan payments. Finally, the Plan tolled any applicable statute of limitations, thus allowing creditors to pursue their claims against the co-debtor after the plan payments are completed and a discharge is entered.
The United States Trustee argued that the Plan Injunction is prohibited because the Supreme Court abrogated past decisions relied on by bankruptcy courts in this Circuit. However, the court noted that these decisions, like Purdue, related to non-consensual third-party permanent releases rather than temporary injunctions. Id. at 35. It stated that the Supreme Court did not consider §1123(a)(5), which the court found distinguishable from §1123(b)(6). Section 1123(a) outlines mandatory provisions to be included in a plan, including subsection (5), which states that “a plan shall provide adequate means for the plan’s implementation, such as–” and then provides a non-exhaustive list of examples. In the circumstances in this case, the Plan Injunction was necessary for implementation of the plan and thus is authorized by §1123(a)(5) in conjunction with §105. Id. at 36.
In determining whether to issue a temporary injunction of third-party actions as part of confirmation, the Court applied the so-called Zale factors, i.e., (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. The court then applied the Zale factors as follows:
The success or failure of the Debtor lies mainly, if not exclusively, with the efforts, reputation, and dedication of [Mr. McHatton].” Mr. McHatton is the Debtor’s founder, managing member, sole shareholder, and only employee that brings in new clients and business. Mr. McHatton and the Debtor share an identity of interest such that a suit against Mr. McHatton would in effect be a suit against the Debtor. In expanding the Debtor’s business, Mr. McHatton guaranteed certain debts of the Debtor. Were these creditors to pursue Mr. McHatton they would take Mr. McHatton’s focus away from bringing in new clients and business. Given that there are no other employees to bring in clients, Mr. McHatton’s complete attention to the business is absolutely necessary for the success of the Debtor. Absent Mr. McHatton’s continued involvement, the Debtor’s operations could not continue. Such circumstances make Mr. McHatton’s continued participation essential to the Debtor’s successful reorganization and meet the two-factor test established in Zale.[17]
Next, the court considered the traditional four-factor test for a preliminary injunction. First, the debtor had established a substantial likelihood of success on the merits, which in the present context was the likelihood that the debtor would complete the Plan payments and receive a discharge. When the court confirmed the Plan, the court determined that the debtor satisfied feasibility under the heightened standard provided by §1191(c)(3). Id. at 38.
Second, absent the injunction, the debtor would suffer irreparable injury. The co-debtor was not only the sole owner but also the only individual responsible for generating new business and attracting clients. Continued collection on business debts would ultimately proceed to lawsuits against the co-debtor. Defending such lawsuits would significantly divert his attention from critical business functions. Id. Third, the harm from the threatened injury outweighed the harm the injunction would cause the opposing parties. The potential prejudice to the debtor would be extreme. Absent the injunction, the debtor’s operations would likely cease. This would harm not only the Debtor but all creditors as well. Conversely, prejudice to enjoined creditors is limited. Id. Further, the Plan Injunction will merely delay the enjoined creditors from collecting against the co-debtor. Given the plan provisions that would toll the applicable statute of limitations, the creditors would be able to pursue their claims against the co-debtor when the debtor received a discharge after completing the five-year unsecured payment schedule. Id.
Fourth, the injunction would not be adverse to the public interest. The public interest was served by facilitating the debtor’s continued operations and ensuring plan payments to creditors are completed, including substantial payments to the Internal Revenue Service. At the same time, creditors were protected and could eventually realize the benefit of the co-debtor’s personal guarantee. Id. at 38-9.
[1] Id. at 476.
[2] Id. at 476-77.
[3] Id.
[4] Id. at 453.
[5] Id. at 454.
[6] Id. at 454-55.
[7] The court cited to In re Zale Corp., 62 F.3d 746, 760-61 (5th Cir.1995).
[8] Id. at 528.
[9] Id. at 86.
[10] Id. at 182-83.
[11] Harrington v. Purdue Pharma, L.P., 603 U.S.204, 144 S.Ct. 2071, 219 L.Ed.2d 721 (2024).
[12] Id. at *3 (quoting Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 761 (5th Cir.1995)).
[13] Id. at 319-20.
[14] Harrington v. Purdue Pharma L.P., — U.S. –, 144 S.Ct. 2071 (2024).
[15] Id. at 724.
[16] Id. at *5.
[17] Id. at 37.
Matthew T. Gensburg
mgensburg@gcklegal.com