Miracle Restaurant Group

A United States Bankruptcy Court in the Eastern District of Louisiana (the Court) recently held that temporary injunctive relief was  appropriate during the term of a Sub V Chapter 11 plan to protect insiders and guarantors whose support and credit were essential to performance of the plan terms.  It found that such injunctive relief to protect non-debtors was not contrary to the Supreme Court ruling in Harrington v. Purdue Pharma L.P. (In re Purdue Pharma), 603 U.S. 204 (2024) and the issuance of such injunctive relief remained consistent with Fifth Circuit authority. In re Miracle Restaurant Group, LLC, 2025 WL 1400915 (Bankr. E.D. LA. May 13, 2025).  To view the opinion, click here.

FACTS:

Miracle Restaurant Group, LLC (the Debtor) sought bankruptcy relief under Subchapter V of Chapter 11 of the Bankruptcy Code on June 20, 2024.  The Debtor operated 25 Arby’s franchises in Illinois, Indiana, Texas, Mississippi, and Louisiana on the filing date.  By the time of plan confirmation, it had closed some restaurants and unsuccessfully tried to market the others.  It settled on operating nine locations to generate income to fund a plan of reorganization. The Court held an evidentiary hearing in April and after the Debtor had resolved most plan objections, it approved all terms of a nonconsensual Sub V plan except for objections filed by the office of the United States Trustee and two unsecured creditors, one of which, Woodvine, had a large claim based on a matured promissory note. This opinion addressed only the reasons the Court overruled these objections.

These parties objected to Article X of the plan, which contained a clause that first stated that guarantors and insiders would not receive a discharge of any debt related to the Debtor but then granted injunctive relief which would prevent claimants from attempting to collect joint debt from third parties during the term of the plan, so long as the plan was not in default.  The objecting parties asserted that this clause created an impermissible temporary, nonconsensual, non-debtor injunction, which violated the Supreme Court holding in Purdue Pharma  and also  Fifth Circuit precedent.  The Court overruled the objections, finding no violations and concluding the injunction was critical to performance of the plan terms.

REASONING:

The Court first addressed Purdue Pharma, agreeing with a decision from the Southern District of New York, In re Hal Luftig co.,  667 B.R. 638 (Bankr. S.D. N.Y 2025), that the argument had no merits. The very language of Purdue Pharma restricted its holding to a permanent release and injunction that would effectively discharge claims against a nondebtor without the consent of creditors.  The clause in question here referred only to a temporary injunction and specifically stated that nondebtors would not receive a discharge.

The Court then analyzed the argument that the temporary injunction was prohibited by a recent Fifth Circuit case, In re Highland Capital Mgmt., L.P. 132 F. 4th 353 (5th Cir.), referred to by the parties as Highland II.  The case had taken a circuitous route to the Fifth Circuit, starting with the Circuit overruling an exculpatory clause as too broad but upholding certain gatekeeper provisions (Highland I) and then returning after remand to clarify the scope of its Highland I ruling. The Court observed that the Fifth Circuit “was not asked to and did not address temporary, non-consensual, non-debtor injunctions…”  The objection based on Highland II  was rejected.

The Court then looked at long-standing Fifth Circuit precedent which allowed temporary, non-consensual, non-debtor injunctions,  In re Zale Corp. 62 F. 3d 746 (5th Cir. 1995).  The Zale  court had used § 105 to find temporary stays prohibiting a creditor’s suit against a nondebtor during the bankruptcy proceeding to facilitate the reorganization process were authorized.  It ruled a bankruptcy court could issue such temporary stays if “unusual circumstances” existed.  Those circumstances were primarily related to the anticipated success of the proposed plan.

The Court found this case satisfied the “unusual circumstances” test. The Chief Executive Officer, who was responsible for day to day management, a part owner and his related company, and other insiders all had guaranteed the Debtor’s obligations and might have been subject to lawsuits during the plan term.  The plan called for a ballon payment at the end of the three-year term by refinancing the unpaid balances.  In order to obtain the necessary financing, the credit of these insiders/guarantors was critical. Any suit against them would damage their credit and pose an obstacle to the necessary refinancing.  These circumstances were similar to the examples of unusual circumstances set forth in Zale and met its criteria.

In addition to addressing the Zale standards, the Court recognized the Debtor must also satisfy the normal four prong test for temporary injunctive relief: (1) a substantial likelihood of prevailing on the merits; (2) a substantial threat of irreparable injury; (3) the injury to the Debtor in the absence of injunctive relief would outweigh injury to other parties if it was granted; and (4) the issuance would not disserve the public interest. The Court found the first prong was met by the relief assuring plan performance, both interim payments and the balloon.  The balance of harms favored issuance, since Woodvine was being paid in full under the plan and was free to pursue its guarantees should default occur.  Public policy would be served if the businesses could reorganize, rather than liquidate.  With all prongs satisfied, the Court overruled the objections and issued the injunctive relief.

AUTHOR’S COMMENTS:

This decision follows closely Hal Luftig in concluding that Purdue Pharma did not address and therefore does not preclude temporary nonconsensual injunctions which assist in plan performance.  In each case, likelihood of prevailing on the merits is met by arguing that by freeing up managers and guarantors to assist the reorganization effort, they will use their energy, skill and credit resources to support a successful plan.  In the Fifth Circuit these are the “unusual circumstances” but in all circuits they are necessary to meet the first prong for injunctive relief.  In the Ninth Circuit temporary injunctions to protect insiders have always required this showing.  Purdue Pharma did nothing to disturb that standard. 

[The Commercial Finance Newsletter is written by an ad hoc group of layers in the Business Law Section of the California Lawyers Association.  This review was written by the Hon. Meredith Jury, U.S. Bankruptcy Judge, Central District of California (Ret.), a member of the ad hoc group.   The opinions contained herein are solely those of the author.]