Article Courtesy of David Simonds and Edward McNeilly (Hogan Lovells)
In re Mariner Health Cent., Inc, 2023 WL 187175 (Bankr. N.D. Cal. Jan. 12, 2023)
In In re Mariner Health Central, the United States Bankruptcy Court for the Northern District of California (the “Bankruptcy Court”) denied the debtors’ motion to extend the automatic stay to certain non-debtor affiliates (the “Non-Debtor Affiliates”) of Mariner Health Central, Inc. (together with its affiliated debtors and debtors in possession, the “Debtors”) or to enjoin litigation against the Non-Debtor Affiliates, finding that the Debtors had not satisfied the high standard required to extend the automatic stay to the Non-Debtor Affiliates or grant a preliminary injunction to halt the litigation.
The Debtors were responsible for the day-to-day operation of twenty skilled nursing facilities. The Non-Debtor Affiliates included two entities – one that provided operational and administrative support for the facilities and one that provided occupational, physical and therapeutic services to facility residents. Prior to filing the bankruptcy case, the Debtors and the Non-Debtor Affiliates were defendants in numerous personal injury lawsuits filed in California state courts alleging various torts that caused personal and emotional injury and wrongful death. Purportedly to minimize the impact of these ongoing lawsuits on its reorganization efforts, the Debtors sought to extend the automatic stay to the Non-Debtor Affiliates under section 362(a)(1) of the Bankruptcy Code or, in the alternative, to enjoin the prepetition litigation against the Non-Debtor Affiliates under section 105(a) of the Bankruptcy Code, in each case for 60 to 90 days,
The Debtors asserted that (1) the burden of discovery and litigation would detract from their reorganization efforts, (2) the threat of an unfavorable determination against the Non-Debtor Affiliates would result in indemnification claims against Debtors, and (3) the threat of estoppel, preclusive effects, or prejudice from continued discovery and litigation would hamper their reorganization. The Bankruptcy Court declined to grant the requested relief.
First, with respect to the motion to extend the automatic stay to the Non-Debtor Affiliates, the Bankruptcy Court followed the Ninth Circuit’s directive that it was preferable for the Debtors to seek relief for non-debtors through the traditional and well-settled remedy of injunctive relief rather than seek to extend the automatic stay to non-debtors.
Second, the Bankruptcy Court denied the alternative request for a preliminary injunction to enjoin the litigation against the Non-Debtor Affiliates. The Bankruptcy Court stated that injunctive relief is an extraordinary remedy that should be granted sparingly and only in cases where the moving party adequately satisfies the following four-part test: “(a) [H]as the proponent demonstrated a likelihood of success on the merits; (b) has the proponent demonstrated that there is a likelihood that they will suffer irreparable harm in the absence of injunctive relief; (c) do the balance of hardships tip in favor of one party or the other; (d) would granting the injunctive relief further public policy[.]”
The Bankruptcy Court found none of the four factors were satisfied here. First, at this stage of the Debtors’ reorganization, the Bankruptcy Court could not determine the likelihood of the Debtors proposing a confirmable plan of reorganization. Second, the Debtors failed to properly allege irreparable harm that needed to be avoided in the requested 60- to 90-day period. Third, in comparing the harms to be suffered by the Debtors with the harms to be suffered by the non-movants, the non-movant parties would be more greatly harmed. Finally, the Bankruptcy Court held that the public interest factor in this situation was “neutral.”
Accordingly, the Court denied the alternative request for a preliminary injunction. This case illustrates the high burden that debtors must satisfy to obtain an extension of the automatic stay in favor of, or to enjoin litigation against, non-debtors. The Ninth Circuit’s conceptual preference for protecting non-debtors via an injunction, rather than an extension of the automatic stay, further complicates attempts to extend the automatic stay to non-debtors in the Ninth Circuit.
