Date: 1/29/2008

The Ninth Circuit Court of Appeals recently ruled that before a bankruptcy court can issue a preliminary injunction against a non-debtor under 11 U.S.C. § 105(a), the court must apply general preliminary injunction standards and weigh the possible hardship caused to the debtor and non-debtors alike. In In re Excel Innovations, 502 F.3d 1086 (9th Cir. 2007), the debtor Excel Innovations, Inc. sought a preliminary injunction to stay arbitration between two non-debtors, Indivos Corporation and former Excel CEO Ned Hoffman. Hoffman had previously been involved in management for Excel and Indivos, respectfully. The bankruptcy court granted an injunction staying the arbitration between Indivos and Hoffman under the authority of 11 U.S.C. § 105(a), which allows a court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." Id. at 1092. The bankruptcy court ruled that a § 105(a) injunction is proper if the arbitration could conceivably have any effect on the administration of the bankruptcy estate. Id. The Ninth Circuit BAP affirmed, noting that the Ninth Circuit had not yet established a case law standard for a motion to enjoin a non-debtor under § 105(a).

The Ninth Circuit reversed both rulings, holding that a § 105(a) injunction against a non-debtor party can only be issued after "the usual preliminary injunction standard" is applied. Id. at 1094. That is, "a bankruptcy court must consider whether the debtor has a reasonable likelihood of a successful reorganization, the relative hardship of the parties, and any public interest concerns if relevant." Id. In so ruling, the Ninth Circuit was critical of the lower courts in their use of prior Ninth Circuit decisions. The lower courts cited In re American Hardwoods, 885 F.2d 621, 623 (9th Cir 1989), in which the Ninth Circuit discussed bankruptcy subject matter jurisdiction. In the lower courts’ view, American Hardwoods stood for the proposition that a preliminary injunction is proper when another action "could conceivably have any effect on the administration of the bankruptcy estate." In re Excel Innovations, Inc., 502 F.3d at 1096. The Ninth Circuit ruled, however, that this standard only determined whether a bankruptcy court had subject matter jurisdiction, and not whether preliminary injunction was proper. If American Hardwoods set the standard for preliminary injunctions, the court reasoned, then every preliminary injunction would be granted. Id. Moreover, in reversing the lower courts, the Ninth Circuit noted that not only had they applied an incorrect legal standard, but also that the record did not contain evidence that the lower courts had reviewed the likelihood of a successful reorganization for Excel, or the hardship to enjoined non-debtor Indivos. Id. at 1096-98.

Accordingly, the court reversed, vacating the lower court’s injunction, and remanded for further proceedings.

Jan D. Sokol

Bankruptcy Law