Rochelle's Daily Wire

Writing the first decision on a question left open by the Supreme Court in its Purdue decision last month, Delaware’s Bankruptcy Judge Craig T. Goldblatt declined to enter a preliminary injunction at the outset of a chapter 11 case that would have barred suits against the debtor’s former officers.

Judge Goldblatt’s July 15 opinion could be read to mean that nondebtor injunctions after Purdue will not be permissible without showing that an injunction is necessary for the success of the chapter 11 effort. However, the opinion is not a per se bar to preliminary injunctions stopping suits against nondebtors.

The Prepetition Suit

The corporate debtor had operated a website known as Parler. Three years before the chapter 11 filing in April, a former executive sued the debtor and some of its former executives in state court in Nevada, alleging that the website was removed from the “app store” for having failed to stop the site from being used to incite violence. The suit also claimed that the defendants had schemed to oust him and deprive him of his interest in the company.

Some of the defendants asserted their rights of indemnification in cross claims against the debtor. After the bankruptcy filing, the debtor removed the suit to federal district court in Nevada.

In chapter 11, the debtor filed a motion asking Judge Goldblatt to impose a 60-day preliminary injunction barring the plaintiff from suing the former officers. Among other things, the debtor contended that the indemnification obligations meant that the suit was in substance a suit against the company and that answering discovery requests would distract management from prosecution of a chapter 11 plan.

At the outset of his opinion, Judge Goldblatt said that “cases have long recognized that bankruptcy courts may enter a preliminary injunction that operates to stay actions against non-debtors.”

The Effect of Purdue

The landscape on nondebtor injunctions changed when the Supreme Court handed down its decision in Harrington v. Purdue Pharma L.P., 219 L. Ed. 2d 721 (Sup. Ct. June 27, 2024). To read ABI’s report, click here. To watch ABI’s webinar on Purdue, click here.

As Judge Goldblatt said, the Supreme Court “held in Purdue Pharma 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.”

The Purdue decision, Judge Goldblatt said, “raises the question [of] whether courts may grant third parties the protection of a preliminary injunction.” While Purdue “does not preclude the entry of such a preliminary injunction,” he said that it “does 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.”

After Purdue, “success on the merits” cannot mean the likelihood of obtaining nondebtor, nonconsensual, third-party releases. However, Judge Goldblatt said that preliminary injunctions “may still be granted if the Court concludes that” management needs a breathing spell from outside litigation or the parties might be able to negotiate a plan with consensual releases. “Both of those outcomes,” he said, “may be viewed as ‘success on the merits’ for this purpose.”

The Four-Part Test for PIs After Purdue

The requisites for obtaining a preliminary injunction are: (1) likelihood of success on the merits; (2) irreparable harm; (3) harm to the defendant; and (4) the public interest. To be successful in the Third Circuit, the movant must establish the first two factors. The court will consider the third and fourth factors only if the first two have been shown.

Judge Goldblatt began application of the four-part test for preliminary injunctions by analyzing “likelihood of success” and what the term means after Purdue. “Some” pre-Purdue cases, like the Third Circuit’s decision in WR Grace, “focused more on avoiding the harm that the litigation against the third parties could cause to the debtor without directly addressing the debtor’s right to obtain permanent relief,” Judge Goldblatt said.

Judge Goldblatt read the pre-Purdue cases to imply “that ‘success on the merits’ is the debtor’s successful confirmation of a plan of reorganization,” not the likelihood of obtaining a permanent injunction.

Likewise, Judge Goldblatt pointed to the Fourth Circuit’s A.H. Robbins decision as justifying an injunction by stopping interference with reorganization. He saw “nothing” in Purdue to require reconsideration of WR Grace or A.H. Robbins in terms of justification for a preliminary injunction, as opposed to a permanent injunction.

Applying the Four-Part Test

Judge Goldblatt said that none of the arguments proffered by the debtor “demonstrates that there is anything sufficiently exceptional about the circumstances here to warrant the entry of a preliminary injunction.” He explained why.

First, regarding indemnification rights, Judge Goldblatt said that dilution of the recoveries by other creditors “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.” Furthermore, security interests covering all of the debtor’s properties could make indemnification rights “wholly beside the point.”

Judge Goldblatt concluded that “the debtor has not met its burden of proving that the preliminary injunction . . . is necessary to the success of the bankruptcy case.”

Second, regarding responding to discovery in the Nevada suit, Judge Goldblatt read caselaw as “suggest[ing] that the cost of participating in discovery will not in the typical case be a basis for granting a third-party injunction.”

Third, with regard to diverting the attention of management from the reorganization, Judge Goldblatt noted that the defendants were all former officers. He was “unaware of any case in which a court granted a preliminary injunction . . . in the absence of the members of management being named as parties in the third-party action.”

Fourth, the debtor contended that judgment against the former officers would have a collateral estoppel effect on the debtor. Judge Goldblatt dismissed the argument because the debtor was only seeking a 60-day injunction, and no trial could be held in Nevada in such a short time.

Conclusion

Summing up, Judge Goldblatt said that the debtor had not shown that a preliminary injunction would be “critical to the success of the bankruptcy case” or that the absence of an injunction would result in irreparable harm. “Because the debtor cannot establish these factors,” he said that it was “essentially the end of the analysis.”

Even if he were to employ the entire four-factor analysis, Judge Goldblatt said he still would not issue a preliminary injunction. So, he denied the motion for a preliminary injunction.

Observation

Although the debtor lost in the case before Judge Goldblatt, his opinion is a checklist showing debtors in the future what they must show to warrant a preliminary injunction. For debtors generally, the opinion looks to be more of a win than a loss.