In Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024) (“Purdue”), the Supreme Court held that the Bankruptcy Code does not authorize nonconsensual releases of nondebtors as part of a chapter 11 plan. The Court narrowly read the Code’s language, providing that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title,” 11 U.S.C. § 1123(b), understanding that language in light of its context to not extend to nonconsensual releases of parties who had not themselves become debtors. Such plans are not the only context in which a bankruptcy court may be asked to bar a suit against a nondebtor affiliate or insider of the debtor. For example, bankruptcy courts sometimes stay litigation against nondebtors where the litigation could undermine the debtor’s reorganization. Does the authority to stay such litigation survive Purdue? In In re Parlement Technologies, Inc., Case No. 24-10755 (CTG) (Bankr. D. Del. Jul. 15, 2024) (“Parlement”), a Delaware bankruptcy court held that it did, though it denied the debtor’s request for a stay on other grounds.

Parlement Technologies, Inc. (the “Debtor”) used to operate the political social media site Parler. In March 2021, a former senior executive sued the company and certain of its owners and former executives in Nevada (the “Nevada Suit”). Several of the individual defendants have cross-claimed for indemnification against the Debtor. The Debtor filed for bankruptcy in April 2024. Shortly thereafter, the Debtor removed the Nevada Suit to federal court and sought to transfer it to the United States District Court for the District of Delaware, where the bankruptcy case was filed.

The Bankruptcy Code provides for an automatic stay of most litigation against the debtor upon the filing of a bankruptcy petition. See 11 U.S.C. § 362(a). The automatic stay does not apply to suits against nondebtors. On June 14, the Debtor moved to “extend” the automatic stay to cover its co-defendants in the Nevada Suit until August 30. The Debtor argued that, because of its indemnification obligations to its co-defendants, the Nevada Suit is in substance an action against the Debtor.

The court considered the debtor’s motion in two parts. First, the court considered whether Purdue undermines prior authority holding that bankruptcy courts could grant a preliminary injunction barring suits against nondebtors. The court explained that a preliminary injunction in this context is governed by the traditional four-factor test governing preliminary injunctions, including likelihood of success on the merits. In the normal case, likelihood of success on the merits means the likelihood that the party seeking the preliminary injunction would ultimately be entitled to a permanent injunction. In the context of staying litigation against nondebtors, however, courts have held that the likelihood-of-success prong is about whether the litigation would interfere with the debtor’s reorganization, which is consistent with the litigation ultimately being consensually resolved or proceeding after the debtor emerges from bankruptcy. Granting a preliminary injunction barring litigation against nondebtors, the court reasoned, is therefore not predicated on the possibility of a permanent injunction barring such litigation. And because Purdue’s holding is limited to such permanent injunctions, it does not preclude granting a preliminary injunction.

Second, the court considered whether a preliminary injunction against the Nevada Suit proceeding against the nondebtor defendants was appropriate in this case, and held that it was not. The court emphasized that a preliminary injunction is an extraordinary remedy, and found that the Debtor’s arguments for staying the litigation swept too broadly. The Debtor invoked its obligation to indemnify its former officers, but the court reasoned that standard indemnification obligations, without more, are not sufficient for a preliminary injunction. The Debtor also argued that it could not pay discovery expenses under the terms of its debtor-in-possession financing, but the court noted that one of the Debtor’s lenders was itself a defendant in the Nevada Suit and that invoking the financing terms to benefit that same defendant was an impermissible form of bootstrapping. The court further rejected the Debtor’s argument that the litigation would be a distraction on the basis that the other defendants were former officers of the Debtor, and held that the risk of any collateral estoppel effect on the Debtor from a judgment in the Nevada Suit was too distant in time to justify a 60-day stay. Thus, notwithstanding its holding that Purdue permits preliminary injunctions barring suits against nondebtor insiders, the court rejected the Debtor’s motion.