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  • Writer's pictureKirk Hartley

More on Bankuptcy Court Powers and Cutting Off Claims in Tort Cases

Today, more on the amazing world of bankruptcy where some say bankruptcy code section 105 may be used to issue an injunction to solve pretty much any and all problems of a debtor parent,including issuing injunctions to protect solvent subsidiaries.

Courtesy of LAW360, here’s the link to an amazing adversary complaint filed in the Lyondell bankruptcy. There, the debtor seeks to enjoin creditors from suing 94 affiliated entities not yet in bankruptcy regarding a paltry $ 650 million. So, rather like the Tribune seeking to give the Cubs the benefit of bankruptcy without all the annoying hassles of being bankrupt, we now see yet another debtor seeking the benefits of bankruptcy without having to undergo the hassles of bankruptcy, all on the theory that issuing an injunction would in some way help the debtor. (Actually, Lyondell has done much the same thing before – this is just a new example.) I used to be impressed by the awesome power of federal district judges, but they may be pikers next to a bankruptcy judges wielding bankruptcy code section 105 powers.

Think about how this same principle could play out in the context of product laibility or other tort claims against uninsured subsidiaries of a debtor. For example,the next case may be a debtor asking the court to enjoin inconvenient things like co-defendants in tort suits bringing cross-claims against debtor entities not in bankruptcy. Thus, Parent Co. could file for chapter 11 but not put sits ubsidiaries into chapter 11. Parent Co. could then go to bankruptcy court to ask for an injunction barring cross-claims or tort claims against subsidiaries on the grounds it could be inconvenient to Parent Co.

Bad policy? Giving debtors that kind of power surely gets rids of some of the incentives to do responsible things like buying adequate insurance, carefully manufacturing well-designed products or otherwise acting responsibly. That outcome is bad news for responsible entities left as targets in the tort system. And, how do good lawyers craft meaningful warranty and indemnification agreements for sales of products between entities if tort and contract risks and obligations can all be terminated just by filing a petition for a parent entity.

Can you imagine the howls of “unfairness” and “bad policy” if a Chinese bankruptcy court issued such an order to protect non-bankrupt subsidiaries of a Parent Co. maker of defective cars that killed or maimed many people ?

__________________________________________________________________ Here’s a key quote from the complaint:

NATURE OF ACTION 1. This is an adversary proceeding brought pursuant to Rules 7001 and 7003 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).

2. The Plaintiff-Debtors assert this complaint for a preliminary injunction pursuant to section 105(a) of title 11 of the United States Code (the “Bankruptcy Code”), Rule 65 of the Federal Rules of Civil Procedure, and Rules 7001(7) and 7065 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) to enjoin until at least January 31, 2010 any attempts to enforce any rights or exercise any remedy under the $615,000,000 and €00,000,000 8.375% senior notes due August 15, 2015 (collectively, the “2015 Notes”) against guarantors of the 2015 Notes that have not filed a petition for chapter 11 protection (the “Non- Debtor-Guarantors”).

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