Vol 7 (2010) - Issue 4

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Enjoining Foreign Actions Against Non-Debtor Entities: In re Lyondell Chemical Company

In the United States, parties are precluded from taking actions against a debtor and the property of its estate during the pendency of the debtor’s chapter 11 bankruptcy case. This ensures that the assets are protected while the debtors’ case is resolved and that one creditor does not receive favourable treatment over another by simply winning the race to the courthouse. Bankruptcy courts have further extended similar protections to actions against non-debtor third parties because of their potential impact on a debtor and its reorganisation. Last year, the bankruptcy court in In re Lyondell Chemical Company, 402 B.R. 571 (Bankr. S.D.N.Y. 2009), took one step further and enjoined all actions against certain foreign non-debtor third parties related to Lyondell, including actions that could be commenced in European courts, due to the impact such actions may have on Lyondell’s estate. Although it is not yet clear whether additional courts will follow suit, given our global economy, current economic crisis, and the impact that such injunction can have on all parties involved, it is certainly an issue worth watching.

I. Enjoining actions against third party nondebtors under the United States Bankruptcy Code
In chapter 11 cases, there are two avenues through which bankruptcy courts may enjoin actions against non-debtor third parties because of their potential impact on the debtor and its reorganisation.

The first is found under Section 362(a), which automatically stays actions against the debtor and the property of the estate.2 By its plain language, this section applies only to actions against the debtor. Courts, however, have extended its protections to non-debtor third parties in 'unusual circumstances', which include instances in which there is such identity between a debtor and non-debtor that a debtor may be said to be the real party defendant or there is a threat that the action will reduce or diminish the property of a debtor.

The second means utilised by bankruptcy courts to enjoin actions against non-debtor third parties is the broad authority afforded in Section 105(a).4 That section provides courts with the discretion to 'issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title'. Numerous courts have found that this section may be used to stay actions against non-debtors, even when Section 362 would not otherwise provide such relief.5 As one court explained, 'Section 105 injunctions are granted in these circumstances because one of the overriding purposes of the Bankruptcy Code is to provide debtors with breathing room from their creditors to increase the chances of a successful reorganisation. Because non-debtors do not fall within the protection of the automatic stay, at times section 105 must be invoked on their behalf to prevent creditors from frustrating an otherwise-viable reorganisation effort by pursuing actions against them. In other words, “Congressional intent to provide relief to debtors would be frustrated by permitting indirectly what is expressly prohibited by the Code.”'