ERIC L. FRANK, Bankruptcy Judge.
Saxby's Coffee Worldwide, LLC ("the Debtor") filed a chapter 11 bankruptcy petition in this court on August 5, 2009. On November 2, 2009, the Debtor initiated this adversary proceeding by filing a complaint ("the Complaint") against thirteen (13) Defendants (collectively, "the Defendants"). On the same day, the Debtor filed a motion for preliminary injunction ("the Motion") and a request for an expedited hearing on the Motion.
In the Complaint and the Motion, the Debtor identifies eight (8) lawsuits (collectively, "the Non-Bankruptcy Cases") filed by the Defendants. When the Debtor filed this bankruptcy case, the Non-Bankruptcy Cases were pending against the Debtor and, inter alia, six (6) particular non-debtor parties (collectively, "the Related Non-Debtors"). The Related Non-Debtors are three (3) natural persons, who are insiders and three (3) entities owned and controlled by one of the insiders.
The Debtor seeks an injunction under 11 U.S.C. § 105(a) to restrain the Defendants from proceeding against the Related Non-Debtors in the Non-Bankruptcy Cases.
Some, but not all, of the Defendants responded to the Complaint and the Motion. The responding parties are the plaintiffs in five (5) of the eight (8) Non-Bankruptcy Cases identified in the Complaint.
The responding Defendants in four (4) of the Non-Bankruptcy Cases appeared at the hearing, either pro se or through counsel, and opposed the Motion. The answering Defendants who are the plaintiffs in one (1) of the Non-Bankruptcy Cases appeared through counsel at the preliminary injunction hearing and consented to the relief requested by the Debtor.
The court held an evidentiary hearing on the Motion on November 18, 2009. At the conclusion of the hearing, the court took the matter under advisement. None of the parties requested the opportunity to file a post-hearing memorandum.
For the reasons set forth below, the Motion will be granted in part and denied in part. The injunction will be granted with respect to the three (3) Non-Debtor Parties who are natural persons and will be denied as to the three (3) Non-Debtor
The Debtor was formed as a business entity in the form of a limited liability company ("LLC") in July 2007. It has two (2) members: Joseph Grasso (70% interest) and Kevin Meakim (30% interest). Grasso and Meakim created the Debtor as the vehicle for purchasing the assets of an entity called Saxby's Coffee Inc. ("SCI"). The Debtor purchased the assets of SCI in July 2007. Grasso and Meakim had no prior relationship with SCI or its principals prior to the transaction.
SCI is a corporation formed by Nick Bayer ("N. Bayer") and John Larson in 2005. Prior to the sale of its assets to the Debtor, SCI was a coffee house franchisor. In July 2007, it had approximately twenty (20) shareholders and approximately twenty (20) active franchise locations. N. Bayer, who was both an officer and shareholder of SCI, acted on SCI's behalf in negotiating the terms of the asset sale transaction between SCI and the Debtor. After consummation of the transaction, N. Bayer became the President and CEO of the Debtor. He is not a member of the Debtor LLC and has no ownership interest in the entity.
Since its inception and purchase of SCI's assets, the Debtor also has been a coffee house franchisor. This business involves the marketing, selling and administering of franchise agreements for the operation of retail coffee shops. The Debtor generates revenue from franchise fees paid by new franchisees at the inception of the franchise relationship, as well as by ongoing franchise fees paid to the Debtor by operating franchisees.
As a result of the July 2007 SCI-Debtor transaction, the Debtor obtained SCI's twenty (20) franchise agreements. Since then, the Debtor closed eleven of those locations, but opened thirty (30) to thirty-five (35) new locations. Presently, the Debtor has more than forty (40) franchise locations in operation. Most are owned by independent franchisees. Several are operated either by the Debtor or by insider franchisees.
The Debtor attributes its expansion since 2007, in part, to the capital infusions it has received from Grasso and from an institutional lender. The Debtor credits Grasso for its ability to obtain institutional financing.
The Debtor LLC is governed by a Limited Liability Company Operating Agreement ("the Operating Agreement"). (Ex. D-4). The Operating Agreement was executed
(Id. ¶ 14) (emphasis added).
There is no written employment contract between the Debtor and its CEO, N. Bayer. There is no written indemnity agreement between the Debtor and N. Bayer. Nonetheless, before the bankruptcy case was filed, the Debtor was paying the legal expenses incurred by N. Bayer in the Non-Bankruptcy Cases,
From the evidence presented, it appears that N. Bayer, Grasso and Meakim are all active in the management of the Debtor, with duties that substantially overlap.
Several of the Non-Bankruptcy Cases are rooted, in one way or another, in the asset purchase agreement between the Debtor and SCI. The plaintiffs in several of those cases (Defendants in this adversary proceeding) are shareholders of SCI who contend that the asset sale transaction constituted a fraudulent transfer of SCI's assets. Another of the Non-Bankruptcy Cases involves the claim of a law firm for payment of the counsel fees incurred in defending the Debtor and certain Non-Debtor Parties in one of the "fraudulent transfer-based" Non-Bankruptcy Cases.
Other Non-Bankruptcy Cases are unconnected to the asset sale transaction and, instead, are based on alleged breaches of lease guaranties or other contracts between the plaintiffs and SCI. In these lawsuits, the Debtor and certain of the Related Non-Debtors were named as defendants based on "alter ego" or other legal theories.
The state and federal court lawsuits identified by the Debtor in the Complaint, the Motion and at the hearing are set out below:
The John Larson Case, the Fabschutz Case, the Katz Case, the Segal McCambridge Case and the Jennifer Larson Case appear related to the SCI-Debtor asset sale transaction. The Exchange Ontario Case, the Kamros Case and the Goodwill Case appear related to contracts entered into by SCI.
The Related Non-Debtors whom the Debtor seeks to "protect" through the requested § 105 injunction are:
Set forth below is a table that sets out which Non-Debtor Parties are defendants in each Non-Bankruptcy Case identified in the Complaint:
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N. Bayer Grasso Meakim WSC WSCMG CSI
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John Larson Case ✓
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Fabschutz Case ✓ ✓ ✓
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Katz Case ✓ ✓ ✓ ✓ ✓
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Segal McCambridge
Case ✓ ✓ ✓ ✓ ✓
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Kamros Case ✓
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Exchange Ontario Case ✓ -------------------------------------------------------------------------- Jennifer Larson Case ✓ -------------------------------------------------------------------------- Goodwill Case ✓ --------------------------------------------------------------------------
The Defendants who responded to the Motion are the plaintiffs in the John Larson Case, the Fabschutz Case, the Katz Case, Segal McCambridge Case and the Exchange Ontario Case. All of the responding parties, except the Fabschutz plaintiffs, oppose the relief requested by the Debtor.
In three (3) of the Non-Bankruptcy Cases, judgments have been entered against certain Non-Debtor Parties as follows:
Briefly put, the Debtor contends that the court should enjoin the Defendants from proceeding in the Non-Bankruptcy Cases against the Related Non-Debtors because the litigation "will cause significant interference with, and impairment of, the Debtor's efforts to reorganize." (Motion ¶ 9).
More specifically, the Debtor contends that permitting the Non-Bankruptcy Cases to proceed will distract the Debtor's key individuals from devoting the necessary time, energy (and in the case of Grasso, assets) to the Debtor's reorganization. The Debtor also suggests that, due to the existence of the Related Non-Debtors' indemnification rights against the Debtor, the entry of judgments against at least some of the Related Non-Debtors effectively would establish claims against the Debtor outside of the bankruptcy claims allowance process. Finally, the Debtor emphasizes that it seeks an injunction for only a limited time because it expects to file its plan of reorganization during the first quarter of 2010.
The responding Defendants who contest the Motion assert that the Debtor has not met its burden of proof for the grant of an injunction under 11 U.S.C. § 105. They contend that the evidence is insufficient to support a finding that the Non-Bankruptcy Cases will interfere with the Related Non-Debtors' efforts to assist the Debtor's reorganization. With respect to N. Bayer, they contend that the evidence does not support the conclusion that the Debtor is under any obligation to indemnify him. To the extent that the Debtor does have an indemnification obligation, certain Defendants suggest that the damage is already done insofar as judgments have already been entered against N. Bayer in three (3) of the Non-Bankruptcy Cases, against Meakim in two (2) of the Non-Bankruptcy Cases and against Grasso in one (1) of the Non-Bankruptcy Cases.
The automatic stay of the Bankruptcy Code, 11 U.S.C. § 362(a), applies only to a "debtor" and "may not be invoked by entities such as sureties, guarantors, co-obligors, or others with a similar legal or factual nexus to the ... debtor." McCartney v. Integra Nat'l. Bank North, 106 F.3d 506, 509-10 (3d Cir.1997). However, "[t]he law is clear that in some circumstances discretionary stays, beyond the scope of section 362, are appropriate and that a court's power to issue such injunctions stems from section 105 of the Code."
The issuance of an injunction that restrains creditors from enforcing their claims against nondebtors in non-bankruptcy fora is an exception to the general principle that "to enjoy the benefits of bankruptcy a recipient needs to suffer the burdens." In re M.J.H. Leasing, Inc., 328 B.R. 363, 366 (Bankr.D.Mass.2005); see also In re Juneau's Builders Ctr., Inc., 57 B.R. 254, 256 (Bankr.M.D.La.1986) ("the stay must, in some sense, be `earned' by the beneficiary of the stay submitting to the invasive authority of the bankruptcy court into his private financial life ... [thus] assur[ing] a comprehensive commitment of the beneficiary's assets to the satisfaction of his obligations, a fundamental aspect of the debtor/creditor readjustment process that justifies the extraordinary effect of a stay of creditor pursuit of self-interest"); In re Venture Properties, Inc., 37 B.R. 175, 177 (Bankr.D.N.H.1984) ("It has been a cardinal principle of bankruptcy law from the beginning that its effects do not normally benefit those who have not themselves `come into' the bankruptcy court with their liabilities and all their assets") (emphasis in original). A
The entry of an injunction restraining one set of nondebtors from proceeding against another set of nondebtors is appropriate only in "unusual circumstances," McCartney, 106 F.3d at 510, and should "not be granted lightly," In re Excel Innovations, Inc., 502 F.3d 1086, 1095 (9th Cir.2007).
In general terms, a § 105 injunction restraining creditors from proceeding against non-debtors is justified only if the creditors actions would "interfere with, deplete or adversely affect property of the [bankruptcy estate] or ... would frustrate the statutory scheme embodied in Chapter 11 or diminish [the debtor's] ability to formulate a plan of reorganization." In re Lazarus Burman Assocs., 161 B.R. 891, 898 (Bankr.E.D.N.Y.1993).
Courts have recognized three (3) circumstances in which the entry of a § 105 injunction restraining creditors from proceeding against non-debtors may be appropriate:
See, e.g., McCartney, 106 F.3d at 510; Lazarus Burman Assocs., 161 B.R. at 897-900; In re Monroe Well Service, Inc., 67 B.R. 746, 751-52 (Bankr.E.D.Pa.1986).
More than twenty (20) years ago, the court in Monroe Well Service, outlined the following test for the issuance of a § 105 injunction restraining actions against nondebtors:
Monroe Well Service, 67 B.R. at 752-53.
The Monroe Well Service test, which slightly restates the traditional standards for the issuance of a preliminary injunction, has been accepted and employed by other courts. See, e.g., In re PTI Holding Corp., 346 B.R. 820, 826 (Bankr.D.Nev. 2006); In re Labrum & Doak, LLP, 237 B.R. 275, 306 (Bankr.E.D.Pa.1999); In re United Health Care Org., 210 B.R. 228, 233 (S.D.N.Y.1997), appeal dismissed, 147 F.3d 179 (2d Cir. 1998); In re Fowler Floor & Wall Covering Co., Inc., 93 B.R. 55, 57 (Bankr.M.D.Pa.1988); In re University Medical Ctr., 82 B.R. 754 (Bankr.E.D.Pa. 1988); see also Excel Innovations, 502 F.3d at 1095-96.
With these principles in mind, I return to the case sub judice.
As stated at the outset, the Debtor seeks to restrain the Defendants from prosecuting their claims against six (6) Non-Debtor Parties. One (1) of the Related Non-Debtors is an officer of the Debtor, two (2) are both owners and managers of the Debtor and three (3) are entities owned and controlled by one (1) of the owner/managers of the Debtor. The pending cases the Debtor seeks to restrain also sit in differing procedural postures. Notably, in several cases, judgments have already been entered against certain Non-Debtor Parties.
In light of the factual mosaic presented, I find it most efficient to distinguish among the Related Non-Debtors in evaluating the Debtor's injunction request.
N. Bayer has no ownership interest in the Debtor. No evidence was presented suggesting that he will contribute his personal assets to the Debtor's reorganization or that those assets are essential to the effort. The Debtor's request that his creditors be enjoined from proceeding against him is based primarily on the conventional rationale that N. Bayer plays a key role in the management of the Debtor and that the Debtor's operations and reorganization require his full time and attention. As stated in Part II.A., supra, I credit the evidence suggesting that N. Bayer's efforts are critical to the reorganization of the Debtor. See nn.5-6, supra.
Similarly, I conclude that diversion of Grasso's time, energy and attention to defense of the Non-Bankruptcy Cases poses a meaningful threat to the Debtor's reorganization. Whatever the evidence lacked in the way of specificity regarding the precise amount of time he expends in managing the Debtor, see n.5, supra, is more than made up by his role as the Debtor's primary investor. After hearing his testimony, I have little doubt that his active participation is integral to the Debtor's reorganization and that he will need to devote a substantial amount of his time in the immediate weeks ahead to the formulation and implementation of the Debtor's reorganization strategy. Requiring him to spend a substantial amount of time addressing the Non-Bankruptcy Cases poses a meaningful threat to the Debtor's successful reorganization.
The evidence regarding Kevin Meakim was the least fulsome of the three individual Non-Debtor Parties. Nonetheless, I credit N. Bayer's testimony that Meakim is substantially involved in the Debtor's operations. I note that Meakim is the
Therefore, with respect to N. Bayer, Grasso and Meakim, I am satisfied that the first prong of the Monroe Well Service test is met.
Turning next to the second prong of the test, I observe that both the Debtor and the responding Defendants parties paid little, if any, attention at the hearing to the issue whether there is a reasonable likelihood that the Debtor will successfully reorganize. Perhaps this reflects an implied concession by some of the Defendants— i.e., those asserting that the Debtor was the recipient of a fraudulent transfer—that the Debtor's business is valuable and therefore, is a "good candidate for reorganization." PTI Holding Corp., 346 B.R. at 831.
In any event, at this early stage of the case, there are sufficient indicia that the Debtor has a reasonable prospect of reorganizing. After commencement of this case, the Debtor negotiated consensual cash collateral agreements with its primary secured lender. As a result, it has continued to operate its business and has more than forty (40) franchisees operating in different locations. It has committed itself to the prompt filing of its reorganization plan. It has filed monthly operating reports that suggest that the Debtor is operating at or near a break-even level and is not hemorrhaging cash.
The third prong of the Monroe Well Service test requires that the court balance the relative harms as between the Debtor and the Defendants. This is "arguably, the most critical element" in the analysis. 2 Collier on Bankruptcy ¶ 105.03[1], at 105-41 (Alan N. Resnick, Henry J. Sommer eds., 16th ed. 2009) ("Collier"). This element "overtly and consciously acknowledges that each party to the litigation has rights to be considered, and overly and consciously attempts to determine which of those rights is paramount." PTI Holding Corp., 346 B.R. at 831. It is also significant, however, that in making this choice, "the bankruptcy court has broad powers to shape the injunction so as to minimize the harm to the creditor." 2 Collier ¶ 105.03[1], at 105-41. Thus, it would be somewhat inaccurate to
In this case, the potential harm to the Debtor is manifest: the distraction of the Non-Bankruptcy Cases threatens the Debtor's ability to reorganize. I must weigh this risk against the potential harm to the Defendants.
In general terms, the potential harm to the Defendants should not be minimized. The Defendants have a substantial interest in "the enforcement of bargained-for rights." PTI Holding Corp., 346 B.R. at 831; see also K-Mart Corp. v. Oriental Plaza, Inc., 875 F.2d 907, 916 (1st Cir. 1989) ("there is a strong public interest in fair dealing and the solemnity of contracts; if commerce is to function in our capitalistic system, entrepreneurs must play by the rules"). Further, litigants always face some risk to their ability to succeed in their litigation when delayed from obtaining a prompt judicial resolution of his or her claims. See Shearin v. Doe 1 through 10, 2007 WL 4365621, at *2 (D.Del. Dec.11, 2007) (a lengthy delay creates risk of loss of evidence, including the fading of the memory of witnesses); In re Genesis Health Ventures, Inc., 367 B.R. 516, 522 (Bankr.D.Del.2007) (same). In cases involving commonplace requests for the entry of money judgments, litigants also face potentially increased risks with respect to the collectibility of any judgment entered.
At the same time, however, the Defendants have not identified any particularized harm they are likely to suffer if delayed for a short period of time from enforcing their remedies against N. Bayer, Grasso and Meakim. The Debtor has been careful to tailor the Motion to limit the time period of the injunction requested to approximately seven (7) months,
In considering the consequences of the requested injunction on the Defendants, it is also relevant that the Defendants are substantial creditors of the Debtor.
Further, the Debtor necessarily will address the Defendants' disputed claims in its proposed plan in some fashion. Ideally, the plan confirmation process will engender fruitful, substantive negotiations among the parties with a view toward a global settlement and a consensual plan. Or, perhaps and alternatively, the success of the reorganization will depend on the outcome of litigation, with the Debtor vigorously prosecuting objections to the Defendants' and perhaps initiating other litigation. Whatever direction this case takes, it is unlikely that the Defendants' claims will lie dormant during any period in which an injunction is in force. Movement toward resolution of those claims, at least in some fashion, will take place.
In my best judgment in balancing the competing interests of the parties under the third prong of the Monroe Well Service test, I conclude that, if appropriately circumscribed, the benefits to the Debtor of an injunction restraining the prosecution of the Non-Bankruptcy Cases against N. Bayer, Grasso and Meakim outweigh the detriment to the Defendants.
The last prong of the Monroe Well Service test is whether the issuance of the injunction is in the public interest. Here, the issuance of the injunction will serve the public interest in several ways.
To the extent that the injunction is necessary to and will foster the Debtor's reorganization it serves "one of the most important public interests." In re Integrated Health Services, Inc., 281 B.R. 231, 239 (Bankr.D.Del.2002); accord PTI Holding Corp., 346 B.R. at 832. In this regard, I have considered the potentially negative consequences that the failure of the Debtor's reorganization effort and the liquidation of its business would have on its own staff of nine (9) employees as well as on its more than forty (40) franchisees. The franchisees are separate businesses with their own owners and employees. Thus, the Debtor's failure is likely to have a negative ripple effect beyond the consequences to its owners and management (N. Bayer, Grasso and Meakim) that is not in the public interest.
Further, the bankruptcy system also has an interest in protecting its claim resolution process. The issuance of an injunction would prevent the entry of judgments in the Non-Bankruptcy Cases against Grasso and Meakim which could effectively determine the Debtor's rights and obligations. Id. at 833 ("[a]n injunction here protects that core process, and allows it to function in the manner anticipated by Congress").
Finally, the issuance of the injunction may lead to the concentration of litigation in the bankruptcy court with the concomitant beneficial effect of promoting judicial economy, particularly if the bankruptcy reorganization process as a whole results in
I perceive no particular countervailing public policy considerations—other than the appropriate reluctance with which a bankruptcy court should issue a stay restraining the rights of creditors against nondebtors. To the extent that there are competing public policy interests here, I conclude that the public interest is better served by the issuance of the injunction.
CSI is an entity owned by Grasso and Meakim. It is in the business of roasting coffee beans and supplies product to the Debtor's franchisees. The record suggests that it has been named as a defendant in only one of the Non-Bankruptcy Cases, the Katz Case. No judgment has been entered against CSI in that litigation. The Debtor has no duty to indemnify CSI for any liability that it may be determined to have in the Katz Case.
From the meager evidence offered with respect to CSI, it is possible to infer that CSI plays a significant role in the operation of the Debtor's franchisees. It does, after all, supply coffee to businesses that hold themselves out as coffee houses. The successful operation of the franchisees, in turn, is important to the Debtor because the Debtor derives revenue from ongoing payments it receives from the franchisees. However, I conclude that the Debtor did not meet the burden of proof necessary to justify the issuance of an injunction.
It is neither obvious nor intuitive that one (1) lawsuit against a party that supplies product to entities that have a franchise relationship with the Debtor—even a party that may be a substantial supplier of product to the Debtor's franchisees (and there is nothing in the record to support that last assumption)—poses a material threat to the Debtor's reorganization. The Debtor did not generate a record that would permit me to conclude that: (a) allowing the Katz Case to proceed against CSI, would so disrupt CSI that (b) CSI's ability to service its customers (the Debtor's franchisees) would be impaired and (c) the franchisees would be unable to obtain the products they need from alternative suppliers, and (d) the negative effect on the franchisees would be materially detrimental to the Debtor. The connection between the litigation against CSI and the Debtor is too attenuated to justify the intervention of this court to restrain this one non-debtor from proceeding in its lawsuit against this particular, other non-debtor. For this reason, the request for an injunction to restrain the Katz Case against SCI fails to satisfy the requirement that there be danger of imminent, irreparable harm to the estate or the debtor's ability to reorganize.
In concluding that the Debtor's request with respect to CSI does not meet the first prong of the Monroe Well Service test, I am cognizant that the Katz Case against CSI is one of a number of lawsuits in which Grasso and entities he controls have been targeted. I have considered the possibility that the litigation against CSI might materially distract its principal, Grasso (as well as its other principal, Meakim), from carrying out their duties to the Debtor during the next critical months in the reorganization process. But I am not convinced that this is the case.
I understand the Debtor to contend that Grasso's and Meakim's formation of CSI and the purchase of the Bucks County Coffee assets was subsequent to and unconnected with the SCI-Debtor asset sale transaction that is the focus of the plaintiff's allegations in the Katz Case. Grasso's testimony suggested that CSI is a separate
For all of these reasons, no § 105 injunction will issue to restrain litigation against CSI.
The case for an injunction to restrain the Defendants' litigation against WSC and WSCMG is virtually nonexistent.
Grasso testified that WSC is a corporation that he formed four (4) years ago that presently has no assets. On cross-examination, Grasso mentioned in passing that WSC would somehow be a vehicle through which Grasso would infuse a further capital contribution into the Debtor as part of the reorganization. However, he provided no detail regarding the role WSC would play in the process, whether WSC's unblemished credit position was somehow essential to the unquantified financing to be provided or whether Grasso's financial contribution could be provided to the Debtor by Grasso directly or through some other entity that he has or could create.
As for WSCMG, Grasso stated that he did not know anything about that entity and even expressed doubt whether such an entity even exists. There is nothing further in the evidentiary record regarding WSCMG.
On this record, there is no basis for a finding that the Defendants' litigation against WSC and WSCMG poses any threat to the Debtor's reorganization or that the issuance of a § 105 injunction is appropriate.
Finally, I address the contours of the injunction to be issued.
As stated earlier, I have concluded that a § 105 injunction restraining the Defendants from litigating their claims against N. Bayer, Grasso and Meakim is warranted. Like Judge Fox in Monroe Well Service, I exercise the court's equitable powers to restrain the conduct of one set of non-debtors against another set of non-debtors "very reluctantly." 67 B.R. at 747. It is therefore imperative to tailor the injunction to be as narrow as possible, yet adequate to accomplish the purpose that it serves.
In re Apollo Molded Products, Inc., 83 B.R. 189, 192-94 (Bankr.D.Mass.1988).
Whether or not one accepts the ultimate conclusion of the court in Apollo Molded Products, the implicit concern it expresses is valid. The § 105 injunction should not provide nondebtors with a comfortable, "free ride" on the coattails of the debtor. The issuance of a § 105 injunction should not eliminate the keen sense of urgency that insider nondebtors would otherwise have to resolve, as promptly as possible, the outstanding legal and monetary disputes that gave rise to the bankruptcy case. Stated another way, the nondebtors should continue to feel pressure to expedite the reorganization process so that the injunction may be lifted as soon as possible and the ordinary legal relationships among the nondebtors restored.
For these reasons, I do not accept the Debtors' implicit assumption that a preliminary injunction for a fixed time period of approximately seven (7) months, see n.15, supra, is appropriate in this case. The Debtor has not developed a record that provides a specific explanation why it may need until March 31, 2009 to file a proposed plan of reorganization.
In this case, the filing of a plan by March 31, 2010 would be within six (6) months after the commencement of the case. I acknowledge that the filing of a chapter 11 plan in a business case within six (6) months after its commencement is not uncommon, raises no obvious red flags suggesting dilatoriness and, in some circles, may even be considered prompt. However, the Debtor is a small business.
Put a little differently, absent the Debtor's invocation of the equitable powers of the court, I might otherwise be prepared to grant the Debtor more time to deliberate before it filed its chapter 11 plan. But where the Debtor seeks and obtains the extraordinary remedy of a preliminary injunction, restraining some of its creditors from proceeding against nondebtors, an adjustment must be made in the ordinary reorganization process to fairly accommodate the competing interests of the debtor and its creditors.
In this case, the appropriate adjustment required after the issuance of the § 105 injunction is closer judicial oversight of this reorganization case with an insistence that the Debtor propel the plan confirmation process as efficiently and expeditiously as possible. Succinctly put, equitable relief must be coupled with rigorous case management.
This reasoning leads me to restrict the term of the preliminary injunction that will issue so that, by its own terms, it terminate naturally within a relatively short period of time. The § 105 injunction that I will enter to restrain the Defendants from prosecuting or initiating litigation against N. Bayer, Grasso and Meakim will expire on February 15, 2009, unless extended by further court order. I will hold a hearing on February 12, 2009 to determine whether the injunction should be extended. By that date, I expect the Debtor will have either filed a proposed chapter 11 plan that has a reasonable prospect of being confirmed or will otherwise demonstrate that it has made substantial progress toward achieving a confirmable plan. The extension of the preliminary injunction will depend on whether the Debtor can demonstrate that it has made suitable progress in the reorganization process.
One further issue must be addressed. I have not lost sight of the fact that several of the Defendants already have judgments against N. Bayer, Grasso and Meakim. As explained below, the entry of those judgments makes it appropriate to impose a condition on the preliminary injunction.
In one sense, the entry of the judgments does not alter the need for the injunction. While the judgments eliminate the time and energy that N. Bayer, Grasso and Meakim would spend in defending the Non-Bankruptcy Cases (unless they were to initiate appropriate proceedings relief from the judgments), arguably, they would spend an equivalent amount of time dealing with the disruptions in their personal life that execution against their personal assets would likely create. Thus, the need for an injunction in order to protect the reorganization process is as great, if not greater, with respect to the Defendants who hold judgments against N. Bayer, Grasso and Meakim.
At the same time, however, the entry of the judgments creates a greater risk that the Defendants holding the judgments could be subjected to mischief, such
In these circumstances, an appropriate quid pro quo for the benefits N. Bayer, Grasso and Meakim will receive under the § 105 injunction is that they provide their judgment creditors with a financial disclosure. While I am unconcerned about the precise form of the disclosure, the financial disclosure should contain the same substantive content as is found in Schedules A-G of the bankruptcy schedules. See Fed. R. Bankr.P.1007(b). This is information that the judgment creditors would be entitled to discover, absent a bankruptcy court injunction, in order in order to ascertain what assets are available for satisfaction of the judgment. Here, the judgment creditors will receive this information, but will not be permitted to issue execution against the disclosed assets pursuant to applicable nonbankruptcy law so long as the injunction is in place.
The required financial disclosure imposes only a modest burden on N. Bayer, Grasso and Meakim, while restricting the rights of the judgment creditors only so far as necessary to protect the Debtor's interest in reorganizing. Also, in the event that issues arise in the future regarding asserted fraudulent transfers by N. Bayer, Grasso and Meakim, the disclosure provides the judgment creditors with an appropriate financial baseline prepared contemporaneously rather than retrospectively.
In my view, this disclosure requirement fairly accommodates the competing interests of the Debtor, N. Bayer, Grasso and Meakim on the one hand, and the judgment creditors on the other.
For the reasons and in the manner set forth above, the Motion will be granted in part and denied in part.
I also note that the Debtor's President, Nicholas Bayer, testified that there were eighteen (18) lawsuits pending against the Debtor when the bankruptcy case was filed. Mr. Bayer provided no further details regarding the ten (10) lawsuits that were not identified in the Complaint. I infer that the Related Non-Debtors were not named as defendants in those ten (10) cases, that all activity has been stayed and that the Debtor saw no need to seek any further relief from this court in connection with those cases.
The testimony regarding the management of the Debtor was not as precise as might be ideal. However, I attribute the lack of detail to the nature of the proceeding—an expedited preliminary injunction hearing lasting one-half day. In these circumstances, I found the evidence sufficient to convince me that N. Bayer, Grasso and Meakim all play significant roles in the management of the Debtor.
While Katz makes a plausible argument, he offered no evidence to support his contention that the Related Non-Debtors' failure to obtain new counsel was part of a pattern of dilatory, inequitable conduct. Nor is it obvious to me why the failure of an party who is a natural person (and who has a right to proceed pro se) to obtain counsel is grounds for the entry of a default judgment. I am not prepared to draw the inference that the Debtor and the Related Non-Debtors have acted in bad faith on the meager record presented: three (3) hearsay documents and a court order that entered a default judgment against the Related Non-Debtors (apparently without a hearing) because they did not obtain counsel within twenty-one (21) days of the order granting their prior counsel leave to withdraw.
Notwithstanding the boilerplate allegations of the Related Non-Debtors' state court counsel regarding lack of cooperation, it is likely that each counsel's prime motivation for seeking leave to withdraw was the lack of payment of fees. Significantly, two (2) of the three (3) motions for leave to withdraw were filed after the Debtor's chapter 11 bankruptcy case was filed, making it likely that the Debtor was financially unable (and perhaps legally unable) to pay the counsel fees incurred by the Related Non-Debtors. (That said, I do find it puzzling that Grasso would permit a default judgment to be entered against him, thereby exposing the substantial personal assets that he described in his testimony).
To be clear, I make no value judgment regarding the propriety of the Related Non-Debtors' conduct in the Katz case. I conclude only that the evidence of bad faith on the part of the Debtor and the Related Non-Debtors was inadequate to bar the grant of § 105 injunction if the Debtor has otherwise satisfied the requirements for obtaining one.
