Mirant Expanding the Use of 105(a) Injunctions

Mirant Expanding the Use of 105(a) Injunctions

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In the Mirant chapter 11 in the Northern District of Texas,1 Bankruptcy Judge D. Michael Lynn granted an order under §105(a) staying more than 100 legal actions against non-debtor third parties not covered by the automatic stay. The relief was granted on a single motion of the debtors without an adversary proceeding as normally required for injunctions under Bankruptcy Rule 7001. The cases stayed included a wide array of litigation, including securities class-action suits, antitrust claims, ERISA class-action suits, state law antitrust and unfair practices class-action claims, personal injury, wrongful termination, contract disputes, breach-of-fiduciary-duty claims, liens on the debtors' property and other torts. Pursuant to §105(a), the debtors filed a motion requesting an omnibus injunction staying parties in the non-debtor legal actions from proceeding with their claims against the debtors' current and former officers and directors and other entities for whom the debtors had indemnification obligations, and/or the duty to defend such actions.

 

Multiple Indemnity Obligations

Mirant's officers and directors were named individual defendants in the securities and ERISA class actions. In seeking to enjoin actions against its officers and directors, the debtors noted that the bylaws of Mirant indemnified both past and present officers and directors against all liability and expenses reasonably incurred in connection with their services to the company. The debtors also argued that Delaware General Corporation Law §145 requires indemnification of officers and directors in circumstances such as the litigation being pursued against them. Finally, the debtors expressed concern that, in addition to potential liability for contribution and indemnity claims, the debtors may be bound to unfavorable rulings under collateral estoppel.

A separate claim for indemnity arose from Mirant's spin-off from Southern Co. in 2001. Mirant had agreed to indemnify Southern from all liabilities arising from any acts or omission by or on behalf of any member of Mirant in the conduct of its business before the spin-off or in connection with the IPO or the distribution. Southern, as a named defendant in personal-injury claims resulting from an explosion at a subsidiary's plant prior to the spin-off, had asserted a right to indemnity from Mirant. Southern was also a named defendant in the securities litigation, for which it asserted a right to indemnity.

In an IPO after the spin-off, Mirant agreed to indemnify its underwriters against all securities claims. The underwriters also had potential indemnity claims in the securities litigation.

In a 2002 sale of the capital stock of a subsidiary, Mirant had agreed to indemnify the purchaser from pre-sale liabilities. Finally, as part of an asset purchase of generating plants, Mirant assumed environmental liability and indemnified the seller for any personal injury or property damage claims related to or arising from any hazardous substance. There were 55 personal-injury matters arising from exposure to asbestos pending against the seller, which Mirant identified as potential indemnity claims.

Adversary Proceeding

A request for a stay under 11 U.S.C. §105(a) is treated as an application for an injunction. Under Rule 7001, an injunction requires an adversary proceeding. Lyons v. Lyons (In re Lyons), 995 F.2d 923, 924 (9th Cir. 1993). Nevertheless, in following other Fifth Circuit authority, Bankruptcy Judge Lynn found that sufficient procedural safeguards were met to satisfy due process and did not require an adversary: "Parties have waived their right to protest the lack of an adversary proceeding when the court afforded them all the protections of an adversary proceeding...." In re Zale, 62 F.3d 746, 763 (5th Cir. 1995). Other courts have held similarly.2

In support of their motion for a §105(a) stay, the debtors also relied on two recent Northern District of Texas cases, In re Seatco and In re Bernhard Steiner Pianos USA Inc., 292 B.R. 109 (Bankr. N.D. Tex. 2002). These cases involved post-confirmation injunctive relief in which a bankruptcy court was asked to (and did) extend the stay under §105(a) to a third party to protect the debtors' ability to make payments to creditors under a confirmed reorganization plan. In Seatco, seeking an injunction through a plan was found to provide sufficient due process protections to negate the necessity of filing an adversary proceeding. In Mirant, a period of approximately 60 days between the filing of the §105(a) motion and entry of the order was deemed sufficient to provide the protections of an adversary proceeding.

Mirant additionally argued that (1) "unusual circumstances" existed to warrant the stay, and (2) the §105(a) relief involved only interpretation of the Bankruptcy Code and thus did not require an adversary proceeding. Rather, the court needed only to determine whether defense of the actions by the debtors' current officers and directors would hinder their roles in the debtors' restructuring efforts and whether the defense of the actions by the debtors' former officers and directors and other entities with indemnification agreements would have a negative impact on the property of the debtors' estates. Mirant also noted that the court could make any Bankruptcy Rule applicable to the §105(a) motion through §9014(c) if additional safeguards were deemed necessary.

Section 105 provides authority to enjoin or stay actions against non-debtors in "unusual circumstances," such as (1) "when the non-debtor and the debtor enjoy such an identity of interests 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." In re Zale, 62 F.3d at 761. Mirant argued the existence of "unusual circumstances" in that Mirant had material indemnification obligations to non-debtor defendants or was subject to indemnification claims by non-debtor defendants. Mirant asserted that the claims against the officers and directors would hinder the roles of these individuals in the reorganization effort and expose the debtors to potential liability under theories of respondeat superior and/or contribution.

Injunction Prerequisites

In seeking to establish entitlement to a §105(a) injunction, a debtor must meet the traditional four prerequisites to a preliminary injunction:

  1. a substantial likelihood that the debtor will prevail on the merits
  2. a substantial threat that the debtor will suffer irreparable injury if the injunction is not granted
  3. that the threatened injury to the debtor outweighs the threatened harm an injunction may cause to the party opposing the injunction, and
  4. that the granting of the injunction will not disserve the public interest.

Arnold v. Garlock Inc., 278 F.3d 426, 438-439 (5th Cir. 2001).

In granting the §105(a) motion, the court found that the current officers and directors named as defendants in the lawsuits were necessary to the debtors' reorganization and that such individuals' time and effort should be reserved to the continuing operations and restructuring efforts of the debtors rather than expended in litigation: "Permitting pursuit of a claim against officers and directors, past or present (or other third-party indemnities), may force the debtors to protect their interests notwithstanding the stay applicable to debtors, which may impose a negative impact on the estate." The court agreed that a finding against any current or former officer or director might be argued to impute liability to Mirant under the theory of respondeat superior and collateral estoppel. Thus, Mirant's rights could be impinged even though a stay as to those rights would be in place if the claims against the officers and directors were allowed to proceed.

The court found an "appreciable risk" that the continuation of the litigation would impede the debtors' ability to reorganize successfully and would have a negative effect on the estate. The potential harm was found to outweigh any delay of the litigation or any public harm caused by the issuance of a stay: "Successful reorganization of public companies maximizes value, preserves jobs and serves the public interest."

Significant Benefits to the Estate

By filing a single §105(a) motion early in the case, Mirant protected the estate from indemnity claims, bolstered the reorganization process and preempted numerous potential lift-stay motions on a wide variety of lawsuits. The debtors faced only three objections to the §105(a) motion (including a successful objection by the authors), but enjoined more than 100 varying legal actions. The vast majority of those plaintiffs never appeared or objected.

Although the cases stayed involved a wide variety of claims, the legal issues regarding the debtors' indemnity obligations were substantially the same for all parties involved in the non-debtor litigation. The motion also gave the debtors the opportunity to commence negotiations early in the case with actively represented plaintiffs in large, complicated class actions against the debtors, thus setting the tone and the path for future dealings. The debtors' motion amounted to a de facto consolidation of all the claims, regardless of their nature, under an umbrella of various indemnity claims, permitting the debtor to close the umbrella and enjoin all parties with a single order. By taking a proactive position on a broad mix of claims, Mirant was able to deal up-front with the scope of stay against large personal injury claimants with complex multiparty contribution and indemnity claims while concurrently negotiating with drastically different claimants such as those in the securities and ERISA class actions. The consolidated motion substantially reduced court time and the need for repetitive briefing of parallel legal issues.

Conclusion

There has been a developing trend in utilizing a §105(a) stay to help effectuate a "successful reorganization" consistent with the underlying policies of the Bankruptcy Code. Filing a §105(a) motion early in a chapter 11 case can help a debtor protect itself, its officers and directors, and allow more time, energy and money to go into the reorganization process. As the case law develops in different jurisdictions, obtaining a §105(a) injunction is becoming an important issue in forum-shopping due to the substantial benefits that are derived to the debtor's estate and its principals from such a stay. As courts have become more comfortable over the past 20 years in using §105 to enjoin non-debtor litigation, the scope and breadth of non-debtor stays continues to expand.


Footnotes

1 Case Number 03-46590. Return to article

2 See In re Seatco, 257 B.R. 469 (Bankr. N.D. Tex.), opinion modified on reconsideration, 259 B.R. 279 (Bankr. N.D. Tex. 2001), citing In re American Dev. Int'l. Corp., 188 B.R. 925, 935 (N.D. Tex. 1995). Return to article

Bankruptcy Code: 
Journal Date: 
Thursday, April 1, 2004