Opinion
6:24-bk-00468-GER
06-10-2024
In re N.J. Criminal Interdiction LLC, Debtor.
Chapter 11
Subchapter V
ORDER (1) DISAPPROVING PLAN AND DENYING CONFIRMATION, AND (2) SETTING STATUS CONFERENCE
Grace E. Robson United States Bankruptcy Judge
THIS CASE came before the Court for hearing on April 25, 2024 at 10:30 a.m. (the "Hearing") to consider confirmation of the Final Subchapter V Plan of Reorganization for NJ Criminal Interdiction, LLC (the "Plan") (Doc. No. 71) filed by Debtor N.J. Criminal Interdiction, LLC ("Debtor"). The Plan includes an injunction for the duration of the Plan that would enjoin creditors and parties in interest from taking a broad range of actions as to Debtor's managing member Dennis Benigno ("Mr. Benigno"), a non-debtor, so long as Debtor and Mr. Benigno are in compliance with the terms of the Plan (the "Conditional Injunction"). Debtor admits that the Conditional Injunction is broad, but asserts it is integral to the Plan.
Any reference herein to the "Plan" refers to the Plan with the incorporated Modifications announced at the Hearing, and as further defined herein. Debtor filed the initial plan on March 14, 2024. Subchapter V Plan of Reorganization for N.J. Criminal Interdiction, LLC (the "Initial Plan") (Doc. No. 34). On March 22, 2024, Debtor filed a modification to the Initial Plan, where, for the first time, Debtor requested a conditional injunction for the benefit of non-debtor, Dennis Benigno. First Modification to Subchapter V Plan of Reorganization for N.J. Criminal Interdiction, LLC (the "Plan Modification") (Doc. No. 54).
See Plan, Art. VII, § S (Doc. No. 71 at 29-32).
Plan, Art. VII, § S.1(e) (Doc. No. 71 at 30) ("In consideration of the substantial contributions made and to be made by [Mr. Benigno], the Plan contemplates a broad third-party injunction . . . .").
Plan, Art. VII, § S.2. (Doc. No. 71 at 30-31).
The New Jersey Office of the State Comptroller ("Comptroller") and the New Jersey Division on Civil Rights ("DCR") filed Objections to the Conditional Injunction. Comptroller objects to the extent Debtor seeks to enjoin Comptroller from continuing its investigation or enforcing non-monetary rights relating thereto that this Court previously held was not subject to the automatic stay in the Order Determining Stay Does Not Apply. DCR separately objects: (1) because DCR did not receive proper notice of the Conditional Injunction; (2) to the breadth of the Conditional Injunction; and (3) to the extent the Conditional Injunction would prevent DCR from conducting its own investigation or seeking non-monetary remedies.
Prior to Debtor filing for bankruptcy, DCR initiated an investigation of Debtor for potential violations of the New Jersey Law Against Discrimination, and the investigation remains pending.
Office of the New Jersey State Comptroller's Limited Objection to Debtor's Final Plan of Reorganization (Doc. No. 75) and New Jersey Division on Civil Rights' Limited Objection to Debtor's Final Plan of Reorganization and Request for Adjournment of Hearing or, Alternatively, to be Heard via Remote Appearance (Doc. No. 79) (collectively the "Objections"). Because the Plan included material changes and was not filed until April 22, 2024 (three days before the Hearing, and four days after the deadline to file objections), the Court deems the Objections timely filed.
Order Granting Amended Motion of the Office of the New Jersey State Comptroller for Entry of an Order Determining the Automatic Stay Does Not Apply (the "Order Determining Stay Does Not Apply") (Doc. No. 68). Comptroller's Objection also points out that the Conditional Injunction conflicts with Article VII, Section F of the Plan which provides that the Plan will not effect, impair, or restrict any governmental unit from pursuing its police or regulatory enforcement powers, other than monetary claims that are dischargeable under the Bankruptcy Code; Debtor admitted the Conditional Injunction is intended to enjoin Comptroller and DCR.
At the Hearing, Debtor's counsel announced additional modifications to the Plan as follows: (1) no provision of Article VII, Section S, shall impair Comptroller's ability to exercise its police and regulatory powers consistent with the Order Determining Stay Does Not Apply; and (2) any party subject to the Conditional Injunction, including DCR, may seek relief from the Conditional Injunction from the Bankruptcy Court (the "Modifications"). Debtor's counsel requested the Modifications be accepted, adopted into, and enforceable provisions of the Plan.
In support of the Conditional Injunction, Debtor proffered the testimony of Mr. Benigno, which testimony was admitted without objection. Debtor proffered that the success of its reorganization depends on Mr. Benigno directing his full attention to Debtor's operations. Debtor posited that if Mr. Benigno is pulled into litigation, the requirements attendant to such litigation would prevent him from devoting his full attention to Debtor's operations and reorganization. Additionally, Debtor proffered that Mr. Benigno has or will provide the following "Substantial Contribution" by his: (i) continued support and assistance to Debtor; (ii) past management of Debtor's operations resulting in positive cash flow during the pendency of the case; (iii) continued management of Debtor's operations after confirmation; (iv) contribution of $10,000 to Debtor's estate to assist in making payments required at confirmation; (v) devotion and use of his time, resources, industry knowledge, and business contacts towards the successful completion of obligations under the Plan for the benefit of all creditors; (vi) extension of any applicable statute of limitations during the term of the Plan; (vii) voluntary decision not to take any salary during the pendency of the case; and (viii) personal payment of a fee totaling $25,000 to the hotel hosting Debtor's annual conference that otherwise would have been an administrative expense of the estate.
Debtor provides education courses for law enforcement personnel through in-person conferences throughout the country as well as through its website. See Plan, Art. II (Doc. No. 71 at 11). Debtor proffered at the Hearing that Mr. Benigno is required to travel around the country teaching training classes 26 weeks out of the year.
Subparagraphs (i) through (vi) are referenced in Article VII, Section S.1. (a)-(e) of the Plan; subparagraphs (vii) and (viii) were proffered by Debtor's counsel at the Hearing. Notably, much of the "Substantial Contribution" was made when no stay or other injunction in favor of Mr. Benigno was in place.
For the reasons that follow, the Court declines to issue the Conditional Injunction and disapproves the Plan.
DISCUSSION
"The Bankruptcy Code does not explicitly prohibit or authorize a bankruptcy court to enjoin a non-consenting creditor's claims against a non-debtor to facilitate a reorganization plan." Under limited circumstances, the Eleventh Circuit has approved the issuance of nonconsensual non-debtor releases or "bar orders" in bankruptcy cases pursuant to § 105 of the Bankruptcy Code as necessary or appropriate to carry out the provisions of the Bankruptcy Code. When analyzing the propriety of a bar order requested as part of a plan of reorganization, the Eleventh Circuit has directed bankruptcy courts to consider the factors set forth by the Sixth Circuit in In re Dow Corning Corp.
Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648, 656 (6th Cir. 2002) (citing Gillman v. Cont'l Airlines (In re Cont'l Airlines), 203 F.3d 203, 211 (3d Cir. 2000)).
For ease of reference, the Court will refer to non-consensual releases of non-debtors as a "bar order" throughout this Order.
All references to the Bankruptcy Code refer to 11 U.S.C. §§ 101-1532.
See 11 U.S.C. §§ 105, 1123(b)(6); Munford v. Munford, Inc. (In re Munford, Inc.), 97 F.3d 449, 454-55 (11th Cir. 1996); SE Prop. Holdings, LLC v. Seaside Eng g & Surveying, Inc. (In re Seaside Eng 'g & Surveying, Inc.), 780 F.3d 1070, 1078-79 (11th Cir. 2015).
In re Dow Corning Corp., 280 F.3d at 658. This controversial issue is currently under review by the Supreme Court, which is expected to issue its opinion in June 2024 in Harrington v. Purdue Pharma L.P., No. 23-124 (U.S. argued Dec. 4, 2023).
While bar orders are controversial, it appears universal that bankruptcy courts can issue preliminary injunctions staying actions against non-debtors where the integrity of the bankruptcy estate is threatened, such as where proceedings against an officer would impede the reorganization process. When an injunction is sought in such context, the party seeking the relief must satisfy the usual preliminary injunction standard.
See, e.g., Solidus Networks, Inc. v. Excel Innovations, Inc. (In re Excel Innovations, Inc.), 502 F.3d 1086, 1094 (9th Cir. 2007); Areal Plus Grp. v. Fisher Island Invs., Inc., No. 1:14-cv-20310-KMM, 2014 WL 12535947, at *6 (S.D. Fla. Sept. 30, 2014) (citing Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1242 (6th Cir. 1993)); MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 93 (2d Cir. 1988) (first citing Manville Corp. v. Equity Sec. Holders Comm. (In re Johns-Manville Corp.), 801 F.2d 60, 64 (2d Cir. 1986); and then citing In re Davis, 730 F.2d 176, 183-84 (5th Cir. 1984)) (recognizing that § 105 "has been construed liberally to enjoin suits that might impede the reorganization process"); Oberg v. Aetna Cas. & Sur. Co. (In re A.H Robins Co.), 828 F.2d 1023, 1026 (4th Cir. 1987) (recognizing that the bankruptcy court had authority to stay third-party actions under § 105 because it would place a substantial burden on debtor's officers, directors, and employees and detract from the reorganization process).
In re Excel Innovations, 502 F.3d at 1095.
Here, Debtor is seeking a temporary injunction to aid its reorganization effort and does not seek the release of claims against non-debtors. Therefore, it is appropriate to analyze the Conditional Injunction under the standards governing the issuance of a preliminary injunction under Federal Rule of Civil Procedure 65. As noted by Debtor, bankruptcy courts in this District have approved temporary conditional injunctions as part of a plan under the more stringent Dow Corning factors. However, because Debtor did not satisfy its burden for the issuance of a preliminary injunction, the Court will not consider whether it should also apply the Dow Corning factors.
See, e.g., In re Glob. Travel Int'l, Inc., No. 6:22-bk-438-TPG, 2022 WL 4690426, at *1 (Bankr. M.D. Fla. Sept. 30, 2022) (applying the factors set forth by the Sixth Circuit in In re Dow Corning Corp., 280 F.3d at 658 per In re Seaside Eng 'g & Surveying, 780 F.3d at 1079). While the Court considered Mr. Benigno's "Substantial Contribution" as part of Debtor's likelihood of a successful reorganization, the Court makes no determination as to whether Mr. Benigno's "Substantial Contribution" would satisfy the requirement if interpreted as part of the Dow Corning factors.
A preliminary injunction is "an extraordinary remedy never awarded as of right." A court should only exercise its authority to do so when appropriate and only in "unusual circumstances" such as where essential to the debtor's reorganization efforts or where there is such an identity between the debtor and third party that a judgment against the third party will in effect be a judgment against debtor. To obtain a preliminary injunction in a bankruptcy case, a debtor must establish: (1) it has a substantial likelihood of a successful reorganization; (2) it will suffer irreparable harm unless the injunction is issued; (3) the threatened injury to movant outweighs whatever damage the proposed injunction may cause the enjoined parties; and (4) if issued, the injunction will not be adverse to public interest. When considering a preliminary injunction as part of a contested matter, the moving party must satisfy the traditional requirements for an injunction under Rule 65 by clear and convincing evidence on each element. Failure to meet even one required element dooms the moving party's request. As discussed herein, Debtor did not meet its heavy burden of establishing all the elements necessary for a preliminary injunction to issue.
Benisek v. Lamone, 585 U.S. 155, 158, 138 S.Ct. 1942, 1943, 201 L.Ed.2d 398 (2018) (quoting Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24, 129 S.Ct. 365, 376, 172 L.Ed.2d 249 (2008)).
Kapila v. Defosset (In re Universal Health Care Grp., Inc.), Ch. 11 Case No. 8:13-bk-01520-KRM, Adv. No. 8:15-ap-220-KRM, 2016 WL 10706276, at *1 (Bankr. M.D. Fla. Dec. 2, 2016).
In re Melbourne Beach, LLC, No. 6:17-bk-07975-KSJ, 2019 WL 10734362, at *2 (Bankr. M.D. Fla. Oct. 9, 2019).
MV Realty PBC, LLC v. Off. of the Att'y Gen. (In re MV Realty PBC, LLC), 658 B.R. 194, 204 (Bankr. S.D. Fla. 2024) (first citing Bestwall LLC v. Off. Comm. of Asbestos Claimants (In re Bestwall LLC), 71 F.4th 168, 184 (4th Cir. 2023), cert. denied sub nom. Comm. of Asbestos Claimants v. Bestwall LLC, No. 23-675, 2024 WL 2116275 (U.S. May 13, 2024), and cert. denied sub nom. Esserman v. Bestwall LLC, No. 23-702, 2024 WL 2116276 (U.S. May 13, 2024); and then citing In re Excel Innovations, 502 F.3d at 1095-96) (noting that when considering a request for an injunction under 11 U.S.C. § 105(a) "bankruptcy courts typically consider whether the debtor has a reasonable likelihood of successful reorganization, rather than a reasonable likelihood of success in any particular litigation").
Vital Pharms., Inc. v. Alfieri, 23 F.4th 1282, 1290-91 (11th Cir. 2022). While Debtor is not seeking a permanent injunction, the standard is essentially the same, except for a permanent injunction movant must establish actual success on the merits. See Amoco Prod. Co. v. Vill. of Gambell, 480 U.S. 531, 546 n.12, 107 S.Ct. 1369, 1404 n.12, 94 L.Ed.2d 542 (1987) (citing Univ. of Tex. v. Camenisch, 451 U.S. 390, 392, 101 S.Ct. 1830, 1832, 68 L.Ed.2d 175 (1981)).
Federal Rule of Bankruptcy Procedure 7065, which incorporates Rule 65, applies only to adversary proceedings. However, courts utilize the Rule 65 requirements when analyzing injunctions in bankruptcy cases. See In re Excel Innovations, 502 F.3d at 1093.
Provincetown Boston Airlines, Inc. v. Miller (In re Provincetown Boston Airline), 52 B.R. 620, 625 (Bankr. M.D. Fla. 1985) (recognizing that "no injunctive relief should be granted pending confirmation of a Chapter 11 plan protecting a non-debtor . . . unless the traditional test for issuance of preliminary injunctions is met"); Fowler v. C.H. Masland & Sons (In re Fowler Floor & Wall Covering Co., Inc.), 93 B.R. 55, 57 (Bankr. M.D. Pa. 1988) ("[T]he usual rules for granting an injunction will determine whether or not a third party non-debtor can be enjoined from certain actions.").
In re Melbourne Beach, LLC, No. 6:17-bk-07975-KSJ, 2019 WL 10734362, at *2 (Bankr. M.D. Fla. Oct. 9, 2019) (holding that to obtain an injunction prohibiting third parties from proceeding against a non-debtor, the movant must make a "clear and convincing showing" debtor will suffer irreparable injury unless the injunction issues, among other factors); Regency Realty Assocs. v. Howard Fertilizer, Inc. (In re Regency Realty Assocs.), 179 B.R. 717, 720 (Bankr. M.D. Fla. 1995) ("It does not need any special emphasis to point out that a temporary restraining order or a preliminary injunction are extraordinary and drastic remedies which may be granted only upon a clear and convincing showing that the movant has carried its heavy burden on each element required by [Federal Rule of Civil Procedure] 65 as adopted by [Federal Rule of Bankruptcy Procedure] 7065.").
Wreal, LLC v. Amazon.com, Inc., 840 F.3d 1244, 1248 (11th Cir. 2016) (citing Siegel v. LePore, 234 F.3d 1163, 1176 (11th Cir. 2000) (en banc)).
Irreparable Harm
Debtor did not prove that it was substantially likely to suffer irreparable harm if the Court did not issue the Conditional Injunction. There was no evidence of threatened litigation or other proceedings that could harm Debtor other than pending investigations by Comptroller and DCR. While Debtor has attributed disruption of its operations and financial problems to a December 6, 2023 report issued by Comptroller, Debtor successfully coordinated and conducted its annual conference (its largest revenue generating activity of the year) from April 28, 2024 through May 3, 2024. In fact, Debtor's counsel represented to the Court that over 900 registrants attended the annual conference. The Court cannot find that Debtor would suffer irreparable harm if the Conditional Injunction does not issue because the only evidence that investigations by Comptroller or DCR would negatively impact Debtor was the time and expense of compliance. Debtor also maintains that the applicable statute of limitations for the State of New Jersey to assert any claims has passed, so there is no claim that DCR could bring against Debtor. While DCR disputes the lapse of the applicable statute of limitations, if Debtor is correct, then there is an even smaller likelihood of disruption to its business and irreparable harm. There was no evidence that Mr. Benigno was jointly liable with Debtor on any debt. The mere possibility of proceedings by a creditor or governmental entity against Mr. Benigno that would necessarily take time away from his handling of Debtor's business operations and the possibility of legal fees is not enough for the Court to find it was substantially likely that Debtor would suffer irreparable harm if the Conditional Injunction does not issue.
Debtor also stated it was already suffering from a $210,000 wrongful termination lawsuit and a $500,000 software failure at the time of Comptroller's report. See Plan, Art. II (Doc. No. 71 at 12-13).
See Plan, Art. II (Doc. No. 71 at 11-12); Motion to Assume Event Contract with Gaylord Palms Resort & Convention Center (Doc. No. 32).
See Motion to Assume Event Contract with Gaylord Palms Resort & Convention Center (Doc. No. 32).
The representations were made at a hearing conducted on March 26, 2024 in connection with the assumption of the event agreement with the facility at which the conference was to take place, as well as at the Hearing.
There was no evidence on the time, expense, or other financial impact Debtor would suffer-only a general proffer that "if I am pulled away from the Debtor's operation to address legal matters, it is likely the Debtor will be forced to employ an operations manager and additional instructors who can fulfill my tasks, the costs of which may impair the Debtor's ability to fulfill its obligations under the Plan." Debtor's Ex. 6 at 4 (Doc. No. 76-6); see also Annotated Exhibit List (Doc. No. 82).
See Winter, 555 U.S. at 22, 129 S.Ct. at 375-76 (citing Mazurek v. Armstrong, 520 U.S. 968, 972, 117 S.Ct. 1865, 1867, 138 L.Ed.2d 162 (1997)) ("Issuing a preliminary injunction based only on a possibility of irreparable harm is inconsistent with our characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.").
Likelihood of Successful Reorganization
"In the bankruptcy context, reasonable likelihood of success is equivalent to the debtor's ability to successfully reorganize." Debtor's financial projections evidenced the ability to pay claims in full over the life of the Plan. However, because the Plan is premised on issuance of the Conditional Injunction, which the Court declines to issue, Debtor did not prove it is substantially likely to successfully reorganize. In addition, the Plan does not comply with the Bankruptcy Codebecause the Conditional Injunction is overly broad and intentionally designed to enjoin the State of New Jersey from exercising its police and regulatory powers in a manner that is inconsistent with § 362(b)(4) of the Bankruptcy Code. While this Court has authority to enjoin a governmental entity from enforcing a money judgment, it has no authority to enjoin any other exercise of police or regulatory power. Because this Court cannot issue the Conditional Injunction as to the State of New Jersey, the Plan does not provide adequate means for its implementation as required under § 1123(a)(5) of the Bankruptcy Code. For these reasons, the Plan cannot be confirmed.
LTL Mgmt. v. New Mexico (In re LTL Mgmt, LLC), 645 B.R. 59, 81-82 (Bankr. D.N.J. 2022) (quoting Union Tr. Philadelphia, LLC v. Singer Equip. Co. (In re Union Tr. Philadelphia, LLC), 460 B.R. 644, 660 (E.D. Pa. 2011)); accord MV Realty PBC, LLC v. Off. of the Att'y Gen. (In re MV Realty PBC, LLC), 658 B.R. 194, 204 (Bankr. S.D. Fla. 2024).
To confirm a plan under subchapter V, the applicable requirements of 11 U.S.C. § 1129(a) must be met other than subparagraphs (8), (10), and (15). Relevant here, § 1129(a)(1) requires that the Plan comply with all applicable provisions of the Bankruptcy Code.
Section 362(b)(4) excepts the exercise of police and regulatory powers from the automatic stay.
See In re Pearl Res. LLC, 651 B.R. 285, 291 (Bankr.S.D.Tex. 2023). But see In re LTL Mgmt, 645 B.R. 59 (extending the automatic stay to governmental entities under § 105(a) based on unusual circumstances to allow debtors to devote time to reorganization effort); In re MV Realty PBC, 658 B.R. at 203 (quoting In re LTL Mgmt., 645 B.R. at 81) (holding that § 105(a) can enjoin actions that are excepted from the automatic stay where "there is a serious conflict between a governmental unit's exercise of state police power and the policy of the bankruptcy code"). Even if the Court found it had authority to enjoin the exercise of police powers by Comptroller or DCR, it would not do so under the circumstances of this case.
Public Interest and Relative Harms
Pursuant to the Modification, the Conditional Injunction would not alter Comptroller's rights. However, enjoining DCR from both investigating potential violations of civil rights laws and enforcing those laws would be adverse to the public interest. If there are civil rights violations, then the public is better served by permitting the State of New Jersey to exercise its police power to investigate and enforce civil rights laws designed to protect New Jersey residents from discrimination and bias-based harassment. Under these circumstances, the Court finds that the threatened injury to Debtor does not outweigh the potential harm to DCR or Comptroller (on behalf of the residents of New Jersey).
Notice
Finally, if a plan provides for an injunction against conduct not otherwise enjoined under the Bankruptcy Code, then notice of the deadline to file objections and consider confirmation of the plan must include a statement that the plan proposes an injunction in conspicuous language, describe the nature of the injunction, and identify the entities that would be subject to the injunction. Conduct against a non-debtor such as Mr. Benigno is not enjoined under the Bankruptcy Code. Therefore, Debtor was required to provide notice of the Conditional Injunction to affected entities under Federal Rule of Bankruptcy Procedure 2002(c)(3). Here, Debtor did not provide the requisite notice. However, because Comptroller and DCR were able to file objections that the Court considered at the Hearing, the Court is not denying issuance of the Conditional Injunction or denying confirmation because notice was deficient.
See Fed. R. Bankr. P. 2002(b), (c)(3).
Debtor did not serve a separate document providing notice of the Conditional Injunction. The Initial Plan was served on the entire creditor matrix, including Comptroller and DCR (although the address for DCR on the mailing matrix appears to be incomplete and may not have been properly served), but did not contain any provision for a conditional injunction in favor of Mr. Benigno. The Plan Modification, which Debtor served on Comptroller but not DCR, includes a provision for the Conditional Injunction. While the Plan provides for the Conditional Injunction, it was filed on April 22, 2024, a date after the deadline to file objections. Debtor did not attach a mailing matrix to the Plan and failed to file a proof of service of the Plan.
Having considered the Plan, the Modifications, the Objections, and arguments of the parties at the Hearing, the Court finds the Plan is not confirmable. Accordingly, it is
ORDERED:
1. The Plan (Doc. No. 71) is disapproved, and confirmation is DENIED.
2. A status conference is scheduled for 11:00 a.m. on July 11, 2024 at the George C. Young Federal Courthouse, 400 West Washington Street, Sixth Floor, Courtroom D, Orlando, Florida 32801.
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Attorney Daniel A. Velasquez is directed to serve a copy of this Order on interested parties who do not receive service by CM/ECF and file a proof of service within 3 days of entry of the Order.