Hon. Ralph R. Mabey on In re Excel Innovations

Hon. Ralph R. Mabey on In re Excel Innovations

 
The courts of appeals do not agree on the standard for issuing an injunction to stay litigation against a nondebtor party. Many lower courts have followed the lead of the Fourth Circuit in granting a section 105 injunction against litigation that interferes with the reorganization of the debtor. In a case of first impression, In re Excel Innovations, however, the Ninth Circuit has rejected this standard, holding that the traditional preliminary injunction standard applies in bankruptcy cases. In this Expert Commentary, the Hon. Ralph R. Mabey speculates as to the reasons for the disconnect between the approaches of the lowers courts in this case (which followed the Fourth Circuit) and the Ninth Circuit and concludes that it may simply reflect the fact that appellate judges are far removed from the immediate practical considerations facing bankruptcy court judges as they manage large, complex cases.
 
Judge Mabey writes: “The financial, legal, or liquidity crisis that forces a company to seek protection under the Bankruptcy Code often also spawns litigation by creditors or shareholders against the directors and officers of the debtor. Even when the debtor is not a party to the action or the matter has been automatically stayed against the debtor, litigation against the directors and officers may be disruptive to the debtor, especially during the early stages of a chapter 11 case, or costly to the bankruptcy estate, either due to dissipation of shared insurance coverage between the debtor and the directors and officers or due to the expense and burden of responding to discovery. As a result, it is common for the debtor or the individual directors and officers to request the bankruptcy court to enjoin or stay the litigation against the nondebtor parties.
 
More than twenty years ago, the Court of Appeals for the Fourth Circuit in two published opinions in the A.H. Robins bankruptcy cases established a comprehensive standard for enjoining litigation against nondebtor parties. [citations omitted]. In [A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir.)], the Fourth Circuit found four independent grounds for staying or enjoining litigation against nondebtor parties, two of which were based on the extension of the automatic stay under subsections 362(a)(1) and (a)(3) of the Bankruptcy Code and two of which were based on an injunction issued under the authority of section 105(a) of the Bankruptcy Code and 28 U.S.C. § 1334.”