Co-defendant Injunctions The Non-debtor Stay

Co-defendant Injunctions The Non-debtor Stay

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To facilitate the bankruptcy process, the Bankruptcy Code stays various proceedings, thereby providing a debtor with a reorganizational "safe haven." 11 U.S.C. §362(a). However, this stay does not apply to non-debtor entities that are potentially liable for the debtor's debts. The pursuit of these non-debtor entities can seriously affect a debtor's reorganization efforts.

Accordingly, many debtors and/or co-defendants lodge the argument that the same theory supporting §362's automatic stay supports a stay of proceedings against non-debtor co-defendants.1 To a creditor's dismay, these non-debtor entities may find refuge in §105(a)'s broad grant of power, which includes the power to enjoin.

The Bankruptcy Court's Power Under §105

When Congress enacted §105(a), it intentionally granted bankruptcy courts broad authority and power to act in furtherance of the bankruptcy process. Specifically, §105(a) states that "the court may issue any order, process or judgment necessary or appropriate to carry out the provisions of this title." 11 U.S.C. §105(a). The provisions of Title 11 and the court's power to adjust the debtor-creditor relationship mandate such broad power and authority.

Although the breadth of §105(a) allows the court to act whenever necessary or appropriate, §105(a) has limits. First, §105(a)'s own terms prohibit the court from affecting substantive rights and remedies set forth in the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure. Omni Mfg. Inc. v. Smith, 21 F.3d 660 (5th Cir. 1994). Thus, while Congress created §105(a) to aid the enforcement of Title 11's rights and remedies, it prohibited any change or creation of additional rights and remedies.

Second, non-Title 11 anti-injunction statutes also limit the court's power. For example, 28 U.S.C. §2283 prohibits a federal court from enjoining state court proceedings, though it excepts injunctions necessary to aid the court's jurisdiction. Additionally, Congress has enacted other more specific anti-injunction statutes. For example, 26 U.S.C. §7421(a) prohibits the injunction of tax collection efforts, and 29 U.S.C. §104 prevents injunctions that otherwise restrain proceedings involving labor disputes.

Despite such anti-injunction statutes and regardless of "other rights and remedies," §105(a) allows the bankruptcy court to issue orders necessary to carry out the provisions of the Code. Since the Code provides for the reorganization of a debtor's estate and the stay of proceedings against a debtor's assets, §105(a) naturally grants the authority to issue injunctive relief where necessary to aid in the reorganization process. 11 U.S.C. §105(a) (1999); Celotex Corp. v. Edwards, 514 U.S. 300, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995).

Situations Supporting Injunctive Relief

While §105(a)'s grant of power includes the power to enjoin, the question arises—what circumstances support the issuance of an injunction? As stated above, injunctive relief is appropriate where necessary to carry out the provisions of Title 11. Such circumstances include situations where (a) creditors seek relief from a third party outside of bankruptcy, and (b) where a creditor's action impairs the bankruptcy process.

Enjoining Creditors from Seeking Relief from Co-debtors

Often, non-debtor entities are co-liable for a bankrupt debtor's debts. Such co-debtors include guarantors, sureties and insurance companies. More often than not, the co-debtor's liability is inconsequential to the debtor. In other situations, an effective reorganization may necessitate the protection of a co-debtor.

For example, since guarantors are often the debtor's insiders, such insiders are a potential source of capital. However, an insider may lose the ability to fund a reorganization after a finding of liability and entry of judgment. Chase Manhattan Bank v. Third Eighty-Ninth Associates, 138 B.R. 144, 146-47 (S.D.N.Y. 1992). Further, participation in such lawsuits may limit an insider's ability to meaningfully participate in the reorganization process. A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1008 (4th Cir. 1986). Consequently, protecting insider guarantors may enhance reorganization prospects, not to mention preventing res judicata. Since reorganization theoretically provides for the creditor's claim, enjoining such lawsuits can be just and fair.

Proceedings against sureties and insurance companies may also dictate issuance of an injunction because of an estate's potential loss. For example, if the debtor and its management are insured under the same insurance policy, management's liability may result in the debtor losing coverage by the apportionment of the insurance policy, or because of indemnification principles. Homsy v. Floyd, 51 F.3d 530, 534 (5th Cir. 1995); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1008 (4th Cir. 1986). Similarly, if the debtor and its management jointly paid a surety bond, a plaintiff's recovery from that surety bond diminishes estate assets. Celotex Corp. v. Edwards, 514 U.S. 300, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995).

Further, even though these types of actions are not directed at the debtor, collateral estoppel may result in estate liability. Accordingly, actions against these co-debtors can affect the debtor, the estate and the reorganization process. Thus, an injunction against such proceedings is sometimes necessary to carry out the provisions of Title 11.

Enjoining Actions That Impair the Bankruptcy Process

In carrying out the provisions of Title 11, reorganization without disruption is essential. However, disruption can come from more than just proceedings against estate assets. Other proceedings, though not directly affecting estate assets, are often disruptive to the reorganization process. In re Johns-Manville Corp., 26 B.R. 420 (Bankr. S.D.N.Y. 1983).

For example, take the case of Oberg v. Aetna Casualty & Surety Co., 828 F.2d 1023 (4th Cir. 1987). In Oberg, asbestos plaintiffs attempted to remove the debtor from the lawsuit by suing only upon insurance proceeds and by bringing suit only in states where no right to contribution or indemnity existed. The plaintiffs argued that their lawsuits would not affect the debtor's ability to reorganize.

Upon review, the Fourth Circuit stated that despite the plaintiffs' apparently benign attempts at recovering from insurance, the litigation still dragged in the debtor because of the contractual duty to aid in its defense, and because the debtor essentially possessed all the evidence. Oberg v. Aetna Casualty & Surety Co., 828 F.2d 1023, 1026 (4th Cir. 1987). The court further held that the lawsuit was essentially against the debtor, even though nominally so, requiring the debtor's participation and effort.

Thus, proceedings against third parties, though occurring outside the bankruptcy court and not directed at the debtor, can still detrimentally affect the debtor's bankruptcy. Due to such disruption, an injunction may be appropriate. However, anyone seeking an injunction must show more than mere disruption to the bankruptcy; they must demonstrate that an injunction is appropriate pursuant to certain established factors.

Injunction Factors

In demonstrating that an injunction is appropriate, courts consider more than mere necessity. In fact, bankruptcy courts use the more standard factors for issuance of injunctions. Feld v. Zale Corp., 62 F.3d 746 (5th Cir. 1995). These factors often do not support injunctive relief, no matter how much the debtor thinks an injunction is necessary.

In issuing injunctions, courts typically consider (1) a substantial likelihood that the movant will prevail on the merits, (2) a substantial threat that the movant will suffer irreparable injury if the injunction is not granted, (3) that the threatened injury to the movant outweighs the threatened harm an injunction may cause, and (4) the public interest. Feld v. Zale Corp., 62 F.3d 746, 765 (5th Cir. 1995); American Imaging Services Inc. v. Eagle-Picher Industries Inc., 963 F.2d 855, 858 (6th Cir. 1992). While courts typically balance all four factors as competing interests instead of prerequisites to issuance, some courts do not apply the "public interest" factor and view it as an anomaly. In re L&S Industries Inc., 989 F.2d 929, 932 (7th Cir. 1993).

Other courts ignore the traditional injunction factors and merely consider such notions as the necessity of an effective reorganization or other Title 11 procedure. Monarch Life Insurance v. Ropes & Gray, 65 F.3d 973 (7th Cir. 1993). Such applications are rare and exist in few jurisdictions, even though it provides an easier application than traditional factors.

Though applying traditional injunction factors is more difficult, it is not necessary to prove every factor. These are merely factors for consideration. Consideration of each factor may also weigh upon the degree of the previous factor. Thus, the most important argument at the injunction hearing is that the facts require injunctive relief, even though one or more factors are lacking in strength.


Though an extraordinary and often inappropriate remedy, the use of non-debtor injunctions can greatly aid reorganization. Not only can injunctions protect estate assets, they also prevent distractions from the reorganization process.

Further, non-debtor injunctions are strategic tools that may prevent a single creditor's dominance. However, courts may disagree with an offensive use of injunctions. Therefore, perhaps the most important thing to remember is that it is the bankruptcy court that has the power to issue necessary and appropriate orders to enforce Title 11's provisions, based on the court's views of what is appropriate, in light of all of the facts.


1 Notwithstanding, of course, chapter 13's co-debtor stay, which is not the subject and focus of this article. Return to article

Journal Date: 
Thursday, April 1, 1999