Preliminary Injunctions After Harrington v. Purdue Pharma

The Supreme Court's opinion in Harrington v. Purdue Pharma left open a lot of questions about the extent of its scope. We now have one of the first opinions exploring those questions. Judge Craig Goldblatt of the Delaware bankruptcy court faced a request for a preliminary injunction in the bankruptcy of right-wing social media platform Parler. Judge Goldblatt concluded that "authority to 'extend the stay' survives Purdue Pharma." I'm skeptical. 

Judge Goldblatt denied the motion for the injunction, but his thoughtful opinion makes clear that the denial was on as-applied grounds, rather than on law grounds. I agree with Judge Goldblatt's application, but I think he got it wrong regarding the impact of Purdue Pharma. 

(1) Purdue Pharma means that there cannot be "likelihood of success on the merits"

Judge Goldblatt's thoughtful opinion notes that the typical standard for a preliminary injunction under Rule 65 or Rule 7065 is "likelihood of success on the merits." He acknowledges that if that is the standard, the preliminary injunction is foreclosed by Harrington v. Purdue Pharma, as no permanent injunction can issue. I agree. 

(2) Caselaw Does Not Support the Argument that "Likelihood of Success on the Merits" Actually Means "Avoiding Harm to the Debtor"

Nevertheless, Judge Goldblatt argues that an examination of caselaw shows that in bankruptcy cases "likelihood of success on the merits" doesn't really mean that, but instead means something like "avoiding the harm that the litigation against the third parties could cause to the debtor". Judge Goldblatt's authority for this claim is very thin, however.

Judge Goldblatt cites only two circuit-level for this proposition. One is the 4th Circuit's notoriously bad 1986 holding in A.H. Robins, a ruling in which the court engages in some painful legal calisthenics to get to the desired result. Judge Goldblatt does not quote that case about the preliminary injunction standard, however. Here's what it says:

the test for granting a stay or injunction in the circumstances: (a) possible irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.

In other words, harm to the debtor is a separate element from likelihood of success on the merits, such that success on the merits cannot refer to harm to the debtor. Nor does the (b)(2) alternative provide an out because no matter the balance of hardships, if there are no questions "going to the merits," then there is no basis for invoking (b)(2). 

I'll grant Judge Goldblatt that the 4th Circuit's discussion often seems to intermingle the elements of the injunctive test, but that's just a function of the 4th Circuit stretching the law to get to the result it wants. Nothing in the opinion waivers from the 4th Circuit's long-standing formulation (above) of the test for a preliminary injunction. At most what can be said is that the 4th Circuit's 1986 decision didn't delve too deeply into the application of its own formula, as it never once questioned whether there could be success on the merits; it's unclear if any party even raised the issue as the relatively novel question of  non-debtor releases was not yet before the court.

The other Circuit-level case Judge Goldblatt cites is a passing sentence in a short, not-for-publication Third Circuit opinion in W.R. Grace, which in turn cites to the 4th Circuit's 1987 holding in A.H. Robins that  “standard for the grant of a stay is generally whether the litigation could interfere with the reorganization of the debtor.”

The 4th Circuit's 1987 opinion merely says that "11 U.S.C. § 105 and 28 U.S.C. § 1334 give the court general equity power to stay litigation that could interfere with the reorganization of the debtor." It also says that "To enjoin a creditor's action against a codebtor under section 105, the debtor must show, inter alia, irreparable harm to the bankruptcy estate if the injunction does not issue." That's the extent of its discussion of the preliminary injunction standard. Notably, it never says that harm to the debtor is the end-all-be-all. It's just one of element (hence the "inter alia") in the preliminary injunction standard, which would, of course, include likelihood of success on the merits. 

Contrary to Judge Goldblatt's claim, there really does not seem to be any authority, then, for treating "likelihood of success on the merits" as just meaning "harm to the debtor." Accordingly, if likelihood of success on the merits really means just that, then Harrington v. Purdue Pharma also forecloses preliminary injunctions of suits by creditors against non-debtors.  

(3) Purdue Pharma Eliminates Section 105(a) as a Free-Standing Source of Authority for Injunctions

There's a more fundamental problem with Judge Goldblatt's opinion, however, namely the lack of authority for the court to issue the injunction. The debtor's motion was based on section 362 and 105(a), neither of which Judge Goldblatt discussed. I think we can skip 362 here as it really has no obvious applicability to non-debtors when there isn't a common asset like an insurance policy. But what of section 105(a)?  

In 1995, in Celotex v. Edwards, the Supreme Court faced an appeal of a section 105 injunction. The Court, however, confined itself to jurisdictional questions and did not "address whether the Bankruptcy Court acted properly in issuing the Section 105 Injunction."

Purdue Pharma, however, addressed section 105 in footnote 2. The Court states that "§105(a) alone cannot justify the imposition of nonconsensual third-party releases because it serves only to ‘carry out’ authorities expressly conferred elsewhere in the code." In other words, Purdue Pharma not only gutted nonconsensual third-party releases, but it also gutted preliminary injunctions of suits against third parties unless there is a basis for the injunction in an express provision of the Bankruptcy Code. There isn't. 

So I don't see any general statutory authority for bankruptcy courts to grant preliminary injunctions of suits against non-debtors, and even if there were such authority, I don't see any basis for concluding that it is on a "avoiding harm to the debtor" standard, rather than the normal "likelihood of success on the merits" standard that cannot be met. 

All of this is to say, I don't see how in the wake of Harrington v. Purdue Pharma a bankruptcy court can properly issue a preliminary injunction of a suit by a creditor against a non-debtor. 

 

Comments

[Lee Owen]

Could "likelihood of success on the merits" be satisfied by a court's finding of a likelihood of a CONSENSUAL 3rd party release in a Chapter 11 plan? Of course, we don't know what "consensual" means yet. But theoretically?