In re Mariner Health Cent., Inc., 2023 Bankr. LEXIS 95 (Bankr. N.D. Cal. 2023)

SUMMARY

In In re Mariner Health Cent., Inc., 2023 Bankr. LEXIS 95 (Bankr. N.D. Cal. 2023) (Mariner), United States Bankruptcy Judge William J. Lafferty, III denied a motion to stay litigation filed in California state courts against non-debtor affiliates of debtors-in-possession Mariner Health Central, Inc. (“Mariner”), Parkview Operating Company, LP (“Parkview”), and Parkview Holding Company GP, LLP (“Parkview Holding”) (collectively, “Debtors”).

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FACTS

Debtors are three members of a corporate family (the “Mariner Group”) that oversees, manages, and operates approximately 20 skilled nursing facilities (“SNFs”) in California, plus additional facilities outside California. Mariner Group has approximately 3,100 employees, most of whom are skilled professionals, including nurses, nursing aides, and other health professionals. Mariner, at *6-8.

Debtors have numerous non-debtor affiliates (“NDAs”). The Mariner Group includes a parent company, subsidiary holding companies, and operating companies for each SNF. Although the entities in Mariner Group are nominally legally distinct, to some extent they function as a unit. Mariner and two NDAs provide services to all operators of the SNFs. Id. at *8-11.

On April 8, 2021, in California state court, the State of California commenced an  action (the “PSC Action”) against Debtors, certain NDAs, and certain of their employees. The State alleged violations of state and federal laws regulating skilled nursing facilities. By September 2022, Debtors and at least 20 NDAs were defendants in the PSC Action and various lawsuits filed in California state courts. Many of the additional lawsuits were brought by personal injury claimants who were former or current residents of the SNFs. In addition, former and current employees of members of the Mariner Group filed prepetition state court lawsuits against Mariner and certain NDAs. In one lawsuit (the “Ledesma Action”), the plaintiffs obtained a multi-million dollar judgment against Mariner and Parkview and an injunction for statutory compliance against Parkview. Mariner and Parkview appealed, and the trial court stayed enforcement until September 22, 2022. Id. at *11-15.  

On September 19, 2022, Debtors filed chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware. On the same day, Debtors commenced an adversary proceeding, Mariner Health Central, Inc. et al. v. Filimon Arzeta et al. (later docketed as Adv. No. 22-04050-WL) (the “Covered Actions Proceeding” or the “Proceeding”).

In the Covered Actions Proceeding, Debtors’ complaint alleged two claims for relief. Both claims sought to stay proceedings against the NDAs in pre-petition lawsuits and arbitrations (the “Covered Actions”). In the first claim, Debtors sought a declaratory judgment under 11 U.S.C. §§ 105 and 362 that extended the automatic stay to prevent the defendants from continuing the “Covered Actions” against the NDAs. In the second claim, Debtors sought an injunction under 11 U.S.C. § 105 that enjoined the defendants from pursuing the “Covered Actions” during the Debtors’ reorganization. The Covered Actions consisted of lawsuits and arbitrations: (1) by current or former SNF residents against the NDAs for allegedly inadequate care, negligence, or other misconduct, and (2) by current or former employees against the NDAs for alleged wage violations or discrimination claims and/or for allegedly wrongful terminations.

On October 4, 2022, in the Covered Actions Proceeding, Debtors filed a motion (the “Covered Actions Motion” or “Motion”) entitled “Motion of the Debtors for an Order Extending the Automatic Stay, or in the Alternative Granting Injunctive Relief, to Stay Prosecution of Certain Actions Against Non-Debtor Affiliates.” In the Motion, Debtors alleged they had exhausted all insurance coverage for the Covered Actions. Motion, ¶ 43.

On October 28, 2022, on motion of the plaintiffs in the Ledesma Action, the Delaware bankruptcy court transferred venue of the cases to the United States Bankruptcy Court for the Northern District of California (the “Bankruptcy Court”). On January 11, 2023, the Bankruptcy Court conducted a hearing on Debtors’ Motion. Debtors asked for an injunction “for 60 to 90 days, simply to permit the Debtors a breathing spell to formulate and propose a plan of reorganization.” Mariner, at *37. On January 12, 2023, the Bankruptcy Court denied the Motion without prejudice. Id. at *59.

REASONING

First, the Bankruptcy Court denied without prejudice the Covered Actions Motion insofar as it sought to extend the automatic stay to the Covered Actions against the NDAs. Mariner, at *24-25. The Bankruptcy Court explained that “courts should be very careful about extending the stay.” Id. at *21. “Courts extending the stay to protect non-debtors have cited ‘unusual circumstances’ that they believe warrant such extraordinary relief.” Id. (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986) (internal citation omitted)). In the Ninth Circuit, “the availability of relief by extending the stay due to the purported ‘unusual circumstances’ test is at best uncertain.” Mariner, at *24. “Rather, the Ninth Circuit has stated its clear preference that debtors pursue extraordinary relief in favor of non-debtors through the more traditional and well settled remedy of injunctive relief.” Id. (citing Solidus Networks, Inc. v. Excel Innovations, Inc. (In re Excel Innovations, Inc.), 502 F.3d 1086. 1096 (9th Cir. 2007) (Excel)).

Second, the Bankruptcy Court denied without prejudice the Covered Actions Motion insofar as it sought a preliminary injunction under 11 U.S.C. § 105(a) to stay the Covered Actions for 60-90 days. The Bankruptcy Court stated: “Injunctive relief is extraordinary, and should be granted sparingly, and only to the extent that the standards for such relief are satisfied and to the extent necessary to achieve the purpose of the injunctive relief.” Mariner, at *25 (citing Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 23 (2008) (Winter)).

The four-part test for injunctive relief is: “(a) has 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?” Mariner, at *25 (citing Winter, at 20). The decision to order injunctive relief “must be based upon a fair assessment of the four required factors as they apply to the scenario at hand, including the likelihood of irreparable harm.” Mariner, at *48.

The two “most important factors” are the likelihood of success and the presence of irreparable injury. In the chapter 11 context, “likelihood of success” means “the likelihood of a successful reorganization.” Mariner, at *25-26 (citing, inter alia, Excel, 502 F.3d at 1093, 1095). Excel requires “some particularized evidence of likelihood of plan confirmation/successful reorganization and alleged irreparable harm.” Mariner, at *29 (citing Excel, 502 F.3d at 1097).

[a] The Bankruptcy Court found that the evidence of Debtors’ likelihood of successfully reorganizing was “mixed.” Debtors had been “somewhat successful” in getting first-day orders and stabilizing their business with revenues sufficient to cover ordinary expenses. There was no immediate indication that a feasible reorganization plan was “categorially impossible.” On the other hand, there were “obvious challenges” to a feasible reorganization plan. Among other things, the business apparently lacked a cushion to cover “what may be extraordinary expenses of litigation awards,” and “stunningly,” Debtors claimed “to have no insurance to cover tort claims.” Mariner, at *29-32.

In the PSC Action, the State sought injunctive relief “that if successful could, among other things, materially increase the staffing requirements for Debtors’ businesses, and thus materially increase the expenses incurred in running the Debtors’ businesses.” Debtors did “not presently contest that the PSC Action is an exercise of the State’s police and regulatory powers that is not subject to” the automatic stay. As a result, “Debtors may have to take as a given whatever additional obligations or burdens the Superior Court imposes on them for the operation of their heavily regulated businesses.” Id. at *34.

[b] Because Debtors’ likelihood of success was highly uncertain, Debtors had a heightened burden of showing irreparable harm. Id. at *35. Although Debtors alleged a likelihood of irreparable harm from allowing the Covered Actions to continue, “it should be obvious that litigation proceeds frequently slowly, and certainly incrementally, to its final outcome, and that at this early stage there is simply no identifiable likelihood of irreparable harm.” Id. at *48.

[c] Debtors did not meet their burden of showing that the balance of hardships supported injunctive relief. Instead, the balance of hardships was slightly in favor of the defendants. Under Excel, “delay in prosecution of [the] action sought to be enjoined is never a ‘non-factor’” in the analysis. Mariner, at *51 (citing Excel, 502 F.3d at 1097). Allowing the Covered Actions to proceed could potentially delay and impair Debtors’ reorganization efforts and affect their ability to continue as a going concern. The Bankruptcy Court was “not unsympathetic” to those concerns. Mariner, at *52. Granting injunctive relief, however, would subject the defendants in the Covered Actions Proceeding (i.e., the plaintiffs and claimants in the Covered Actions) to “markedly different” hardships. The plaintiffs in the Covered Actions included elderly individuals, dependent adults, and victims of alleged wage and employment discrimination. Many of them “alleged egregious instances of bodily harm, neglect, and both financial and physical abuse.” Ibid.

[d] The public policy factor was neutral at best. Debtors argued that public policy would be promoted by their reorganization “because they provide much needed skilled nursing services to elderly persons from underrepresented or underserved backgrounds.” Id. at *54-55. On the other hand, the defendants in the Covered Actions Proceeding “would argue that the public would be better served by the prosecution of their actions because this would shed light on the alleged abuse and wrongful employment practices of Debtors and compensate them for their alleged suffering.” Id. at *55. Each goal would benefit the public. The public interest in promoting a successful reorganization did not require granting a preliminary injunction. The fourth factor was “discretionary.” Id. at *54 (citing Excel, 502 F.3d at 1089). A different approach “would necessarily collapse the first and fourth elements.” Mariner, at *54.  

AUTHOR’S COMMENTS

Mariner stressed that the denial of Debtors’ Motion was without prejudice “to a later effort by the Debtors, based upon a more favorable factual record, or consensual reorganization milieu.” Id. at *59. The Bankruptcy Court stated that it was “of two minds about the practical effects of an injunction in these cases. It may be that such an injunction would aid discussions with the NDAs and hasten resolution of this case. It may also be that such an injunction would tilt the ‘leverage’ in these cases in favor of the Debtors and the NDAs in such a way that meaningful negotiations with the Plaintiffs Group and the Committee would be delayed or frustrated.” Id. at *57-58.  

The Bankruptcy Court declined to give controlling weight to the public policy of promoting successful reorganizations. Debtors cited Delaware precedent to support their entitlement to a preliminary injunction. The Bankruptcy Court emphasized that “the Delaware Bankruptcy Courts have not engaged rigorously with this formulation of the public interest element.” Id. at *53-54 (citing, inter alia, In re American Film Technologies, Inc., 175 B.R. 847, 849 (Bankr. D. Del. 1994)). In addition, the Bankruptcy Court explained that its analysis was consistent with  Ninth Circuit precedent. Mariner, at *54 (citing Excel, 502 F.3d at 1089).

Courts outside the Ninth Circuit have distinguished or criticized Excel and Mariner. See Roman Cath. Diocese of Rockville Ctr. v. Ark320 Doe (In re Roman Cath. Diocese of Rockville Ctr.), 2023 Bankr. LEXIS 1419, at *63 (Bankr. S.D.N.Y. 2023) (“Indeed, the very uncertainty that the court [in Mariner] found weighed against the injunction in that case – the early posture and lack of ascertainable plan structure – are more commonly (and in the Court’s opinion, wisely) cited by courts in this district as reasons for allowing the debtor some degree of flexibility in establishing likelihood of success early in a case.”); In re Brier Creek Corporate Ctr. Assocs. Ltd., 486 B.R. 681, 694 n.10 (Bankr. E.D.N.C. 2013) (“Contrary to the Ninth Circuit’s interpretation in Excel Innovations, however, the ‘unusual circumstances’ exception as recognized in the Fourth Circuit is a separate and distinct basis for staying non-debtor litigation than the basis for granting an injunction under § 105.”) For these reasons, among others, debtors seeking to protect non-debtor affiliates may decide to file bankruptcy outside the Ninth Circuit, in venues more likely to stay litigation against non-debtor affiliates. In Mariner, Debtors filed their petitions in the Delaware bankruptcy court, but it transferred venue to the Northern District of California.

One takeaway from Mariner is that, in the Ninth Circuit, a chapter 11 debtor will not obtain a stay of litigation against non-debtor affiliates merely by invoking the policy in favor of successful reorganizations. That is only one factor in the preliminary injunction analysis. Mariner requires a fact-intensive showing on each of the four factors involving in seeking a preliminary injunction. For example, Debtors argued that not enjoining the Covered Actions would divert Debtors’ attention from their efforts to formulate a plan. That argument did not persuade the Bankruptcy Court. There was “no precise evidence of senior management distraction because of the Covered Actions.” Irreparable harm “must be stated with particularity, and not merely asserted generally.” Mariner, at *39 (citing Excel, 502 F.3d at 1098).

Similarly, Debtors argued that, absent a stay of the litigation against the NDAs, the Covered Actions might result in judgments having preclusive effect against the Debtors. The Bankruptcy Court stated that this was a “very real, if not apparently imminent, danger.” Mariner, at *43-44. The Covered Actions were, however, “all in the very early stages of litigation,” and “there appeared to be little if any imminent peril” of trials or summary adjudications. Although preclusive effects might arise in the context of discovery, precautions could be taken by, for example, restricting use of requests for admissions. Under California law, “truly preclusive effects from litigation would only result from the entry of a final judgment, and such judgment would only be afforded preclusive effect if consistent with public policy.” Before giving preclusive effect to any final judgment in the Covered Actions, a court “would have to conclude that a party who had the protections of a federal bankruptcy court automatic stay in not participating in [the] litigation should still be precluded from challenging the prior judgment.” Id. at *45-46.

Debtors argued that not enjoining the Covered Actions would require Mariner to participate in its capacity as the entity providing administrative services and as the party contractually obligated to assist in defending litigation against the NDAs and indemnifying them. The Bankruptcy Court stated that Debtors’ “generalized claims of potential frustration of their efforts to reorganize” were “unconvincing.” If discovery obligations in the Covered Actions became burdensome, that could be brought again to the Bankruptcy Court’s attention. Id. at *39-41. There was no evidence that any alleged obligation to indemnify the NDAs would create any imminent likelihood of irreparable harm. Id. at *43.

Another takeaway from Mariner is that, in the Ninth Circuit, a motion to extend the automatic stay to protect non-debtor entities based on “unusual circumstances” is at best a questionable substitute for an adversary proceeding that seeks injunctive relief based on a showing that satisfies the four-factor test applied in Mariner. See id. at *24 (“the Ninth Circuit has stated its clear preference that debtors pursue extraordinary relief in favor of non-debtors through the more traditional and well settled remedy of injunctive relief.”) (citing Excel, 502 F.3d at 1096).

These materials were written by Leonard L. Gumport, shareholder of Gumport Law Firm, PC, located in Pasadena, California, with editorial assistance by Matthew D. Resnik of RHM LLP in Encino, California (matt@rhmfirm.com).