Michigan Magistrate Judge Refuses to Recognize Bankruptcy Court’s Interim Stay of Litigation Against Nondebtors in Wellpath Case, Says Section 362 Alone Cannot Justify Nondebtor Litigation Halt

Relevant Document:
Order Declining Stay

In an unusual Dec. 4 decision, U.S. Magistrate Judge Kimberly G. Altman of the U.S. District Court for the Eastern District of Michigan refused to recognize Judge Alfredo R. Pérez’s Nov. 12 amended interim order extending the Wellpath Holdings debtors’ automatic stay to protect nondebtor defendants from litigation. According to Judge Altman, under Sixth Circuit precedent bankruptcy, judges lack authority to halt suits against nondebtors absent a showing that a preliminary injunction is warranted, and Judge Pérez did not make any preliminary injunction findings in his interim order.

Bankruptcy courts routinely stay litigation against nondebtors (including affiliates, management and codefendants) as either an extension of the debtor’s automatic stay under section 362 or an exercise of equitable authority under section 105(a) of the Bankruptcy Code. However, the practice has drawn new scrutiny after the U.S. Supreme Court’s Purdue Pharma decision, which prevents bankruptcy courts from permanently releasing claims against nondebtors without claimant consent.

Judge Altman’s decision does not cite Purdue but instead focuses on the statutory basis for Judge Pérez’s interim order and the absence of any preliminary injunction findings. Judge Pérez has scheduled a final hearing on the nondebtor stay motion for Jan. 14, 2025, at 10 a.m. ET, after which he will presumably enter an order that includes an analysis of the preliminary injunction factors – effectively mooting Judge Altman’s decision.

Still, the magistrate judge’s unilateral refusal to recognize a bankruptcy court’s stay order is extremely rare – Judge Altman cites only one other unpublished case in which this occurred – and could provide support for other courts to effectively nullify temporary nondebtor litigation stays (under Purdue or otherwise), especially in the first days of a chapter 11 case.

The Wellpath debtors, which provide medical care to incarcerated individuals, asked Judge Pérez to halt approximately 1,500 claims and lawsuits against nondebtor defendants (including their physicians, directors and officers and sponsor HIG Capital) on the first day of the case. At the first day hearing on Nov. 12, the Office of the U.S. Trustee objected, arguing that extending the stay to protect nondebtors requires an adversary proceeding and injunctive relief; Judge Pérez entered an interim 45-day stay protecting nondebtors until a final hearing could be held.

Judge Pérez’s amended interim order provides that the suits against nondebtors “are stayed in their entirety, including the plaintiffs’ claims against the Non-Debtor Defendants, on an interim basis pursuant to section 362 of the Bankruptcy Code.” The amended order does not cite section 105(a) and “does not set forth the preliminary-injunction factors or contain any analysis on the subject,” Judge Altman points out.

On Nov. 18, a physician employed by the debtors filed a notice of the 45-day interim stay in the Michigan personal injury action. In her Dec. 4 decision, Judge Altman concludes that the notice does not require a stay of the Michigan proceeding.

As an initial matter, Judge Altman says she has authority to consider the effectiveness of Judge Pérez’s interim stay order because the district court has “jurisdiction concurrent with the originating bankruptcy court to determine the applicability of the bankruptcy court’s automatic stay.” Then, the magistrate concludes that she cannot recognize the stay because the U.S. Court of Appeals for the Sixth Circuit has held that bankruptcy courts cannot stay claims against debtors under section 362.

Judge Altman notes that under Sixth Circuit case law, “the debtor’s stay may be extended to nonbankrupt parties in unusual circumstances” under section 105(a), but doing so requires injunctive relief and cannot be done, even on an interim basis, without “the establishment of unusual need to take this action to protect the administration of the bankruptcy estate.”

Judge Pérez’s interim order does not cite section 105(a), “set forth the preliminary-injunction factors” (including a substantial likelihood of success, danger of irreparable injury and balancing of the harms to the debtors and the claimants) or “contain any analysis on the subject,” Judge Altman points out. Absent a showing that a preliminary injunction is warranted, the magistrate concludes, “neither this Court nor the bankruptcy court can otherwise ‘extend’ the automatic stay to non-debtor defendants.”