Saxbys Coffee Worldwide, LLC v. Larson et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF PENNSYLVANIA
IN RE: SAXBY’S COFFEE WORLDWIDE, LLC : Chapter 11
:
Debtor(s) : Bky. No. 09-15898 ELF
:
:
SAXBY’S COFFEE WORLDWIDE, LLC :
:
Plaintiff(s) :
:
v. :
:
: Adv. No. 09-0340
JOHN LARSON, et al. :
:
Defendants :
:
M E M O R A N D U M
I.
Saxby’s Coffee Worldwide, LLC (“the Debtor”) filed a chapter 11 bankruptcy petition in
this court on August 5, 2009. On November 2, 2009, the Debtor initiated this adversary
proceeding by filing a complaint (“the Complaint”) against thirteen (13) Defendants
(collectively, “the Defendants”). On the same day, the Debtor filed a motion for preliminary
injunction (“the Motion”) and a request for an expedited hearing on the Motion.
In the Complaint and the Motion, the Debtor identifies eight (8) lawsuits (collectively,
“the Non-Bankruptcy Cases”) filed by the Defendants. When the Debtor filed this bankruptcy
case, the Non-Bankruptcy Cases were pending against the Debtor and, inter alia, six (6) particular
non-debtor parties (collectively, “the Related Non-Debtors”). The Related Non-Debtors are
three (3) natural persons, who are insiders and three (3) entities owned and controlled by one of
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the insiders.
The Debtor seeks an injunction under 11 U.S.C. §105(a) to restrain the Defendants from
proceeding against the Related Non-Debtors in the Non-Bankruptcy Cases. The Debtor also1
requests that the Defendants be restrained from proceeding against the Related Non-Debtors in
any pending litigation not identified in the Complaint or any litigation that the Defendants may
intend to initiate.
Some, but not all, of the Defendants responded to the Complaint and the Motion. The
responding parties are the plaintiffs in five (5) of the eight (8) Non-Bankruptcy Cases identified
in the Complaint.
The responding Defendants in four (4) of the Non-Bankruptcy Cases appeared at the
hearing, either pro se or through counsel, and opposed the Motion. The answering Defendants
who are the plaintiffs in one (1) of the Non-Bankruptcy Cases appeared through counsel at the
preliminary injunction hearing and consented to the relief requested by the Debtor.
The court held an evidentiary hearing on the Motion on November 18, 2009. At the
conclusion of the hearing, the court took the matter under advisement. None of the parties
requested the opportunity to file a post-hearing memorandum.
For the reasons set forth below, the Motion will be granted in part and denied in part. The
The Debtor is a defendant in seven (7) of the eight (8) lawsuits. There is no dispute that1
the seven (7) lawsuits have been stayed as to the Debtor as a result of the bankruptcy filing. See 11
U.S.C. §362(a).
I also note that the Debtor’s President, Nicholas Bayer, testified that there were eighteen
(18) lawsuits pending against the Debtor when the bankruptcy case was filed. Mr. Bayer provided no
further details regarding the ten (10) lawsuits that were not identified in the Complaint. I infer that the
Related Non-Debtors were not named as defendants in those ten (10) cases, that all activity has been
stayed and that the Debtor saw no need to seek any further relief from this court in connection with those
cases.
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injunction will be granted with respect to the three (3) Non-Debtor Parties who are natural
persons and will be denied as to the three (3) Non-Debtor Parties that are artificial entities.
Further, the preliminary injunction restraining the Defendants will be subject to certain
conditions and its term will be circumscribed as detailed below.
II.
A.
The Debtor was formed as a business entity in the form of a limited liability company
(“LLC”) in July 2007. It has two (2) members: Joseph Grasso (70% interest) and Kevin Meakim
(30% interest). Grasso and Meakim created the Debtor as the vehicle for purchasing the assets of
an entity called Saxby’s Coffee Inc. (“SCI”). The Debtor purchased the assets of SCI in July
2007. Grasso and Meakim had no prior relationship with SCI or its principals prior to the
transaction.
SCI is a corporation formed by Nick Bayer (“N. Bayer”) and John Larson in 2005. Prior
to the sale of its assets to the Debtor, SCI was a coffee house franchisor. In July 2007, it had
approximately twenty (20) shareholders and approximately twenty (20) active franchise
locations. N. Bayer, who was both an officer and shareholder of SCI, acted on SCI’s behalf in
negotiating the terms of the asset sale transaction between SCI and the Debtor. After
consummation of the transaction, N. Bayer became the President and CEO of the Debtor. He is
not a member of the Debtor LLC and has no ownership interest in the entity.
Since its inception and purchase of SCI’s assets, the Debtor also has been a coffee house
franchisor. This business involves the marketing, selling and administering of franchise
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agreements for the operation of retail coffee shops. The Debtor generates revenue from franchise
fees paid by new franchisees at the inception of the franchise relationship, as well as by ongoing
franchise fees paid to the Debtor by operating franchisees.
As a result of the July 2007 SCI-Debtor transaction, the Debtor obtained SCI’s twenty
(20) franchise agreements. Since then, the Debtor closed eleven of those locations, but opened
thirty (30) to thirty-five (35) new locations. Presently, the Debtor has more than forty (40)
franchise locations in operation. Most are owned by independent franchisees. Several are
operated either by the Debtor or by insider franchisees.
The Debtor attributes its expansion since 2007, in part, to the capital infusions it has
received from Grasso and from an institutional lender. The Debtor credits Grasso for its ability
to obtain institutional financing.2
The Debtor LLC is governed by a Limited Liability Company Operating Agreement (“the
Operating Agreement”). (Ex. D-4). The Operating Agreement was executed on July 20, 2007 by
the Debtor’s two (2) members, Grasso and Meakim. It states that the purpose of the Debtor, inter
alia, is to “purchase, own, manage, develop and lease retail locations that sell coffee, beverages
made with coffee, and related items . . . .” (Id. ¶3). It also provides, in pertinent part:
Grasso’s testimony suggests that he considers himself the financial backbone of the2
Debtor – he has invested more than $1 million in the company and personally guaranteed the Debtor’s
bank loans. Grasso implied that the Debtor’s past ability to obtain bank financing was based on his
financial wherewithal. He described himself as being in the business of “developing businesses.” He
testified that he has owned in the past and continues to own numerous businesses, including various real
estate holdings, a shopping center, a bowling alley and a restaurant. Grasso provided little specificity
regarding his business assets, other than mentioning that he owns a restaurant called the “Union Trust,”
and he did not quantify the value of his holdings. Nonetheless, I have no reason to question the benefit
the Debtor has derived from Grasso’s involvement and his personal wealth. Grasso also testified that he
intends to invest more money in the company to assist in its reorganization, although he did not know
how much that would be and stated candidly that it would be “as little as possible.”
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13. Management. . . . [M]anagement of the Company will be vested in the
Managing Member. The Manging Member will have the power to do any and all
acts necessary, convenient or incidental to or for the furtherance of the purposes
described herein . . . . The Managing Member may delegate his management
powers to a manager or managers. Kevin Meakim will serve as the initial
Managing Member . . . .
14. Exculpation and Indemnification. No Member will be liable to the
Company, or any other person or entity who has an interest in the Company for
any loss, damage or claim incurred by reason of any act or omission performed or
omitted by such Member in good faith on behalf of the Company and in a manner
reasonably believed to be within the scope of the authority conferred on such
Member by this Agreement, except that a Member will be liable for any such loss,
damage or claim incurred by reason of such Member’s willful misconduct. To the
fullest extent permitted by applicable law, a Member will be entitled to
indemnification from the Company for any loss, damage or claim incurred by such
Member by reasons of any act or omission performed or omitted by such Member
in good faith on behalf of the Company and in a manner reasonably believed to be
within the scope of the authority conferred on such Member by this agreement,
except that no Member will be entitled to be indemnified in respect of any loss,
damage or claim incurred by such Member by reason of willful misconduct with
respect to such acts or omissions . . . .
(Id. ¶14) (emphasis added).
There is no written employment contract between the Debtor and its CEO, N. Bayer.
There is no written indemnity agreement between the Debtor and N. Bayer. Nonetheless, before
the bankruptcy case was filed, the Debtor was paying the legal expenses incurred by N. Bayer in
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the Non-Bankruptcy Cases, as well as the legal expensess of the other Non-Debtor Parties.3 4
From the evidence presented, it appears that N. Bayer, Grasso and Meakim are all active
in the management of the Debtor, with duties that substantially overlap. The amount of time N.5
Bayer, Grasso and Meakim each devote to management of the Debtor was not quantified with
any precision.6
With respect to N. Bayer, who is not a member of the LLC and therefore, not covered by3
¶14 of the Operating Agreement, Grasso testified that, at some point during the negotiations that result in
the SCI asset sale to the Debtor and the Debtor’s retention of N. Bayer as President and CEO, he agreed
to indemnify N. Bayer from claims arising from the transaction. Grasso’s testimony was vague on this
point. For example, it was not entirely clear from his testimony whether he made the oral agreement on
behalf of the Debtor or himself. In any event, as explained in Part V., infra, I need not decide whether
the Debtor is legally obligated to indemnify N. Bayer.
The Debtor has paid some, but not all, of the legal expenses incurred by the Related4
Non-Debtors and by the Debtor itself. N. Bayer testified that the legal expenses arising from the Non-
Bankruptcy Cases exceeded $1 million and the Debtor actually paid amounts totaling “in the six (6)
figures.”
In his testimony, N. Bayer described himself as the “CEO” and described his primary5
duties as the development of new franchises and the stabilization of existing franchises. N. Bayer
described Meakim as playing an important role in retail site selection, marketing and day-to-day
operations. The thrust of Grasso’s testimony was that while the Debtor is only one business among his
many, it takes up a disproportionate amount of his time and attention due to its legal and financial
difficulties (although he was unable to quantify the amount of time he regularly spends in connection
with the Debtor’s affairs). He depicted himself, not as a passive investor, but rather, as an owner who
plays a significant role in management of the Debtor’s operations – in particular, drawing on his
restaurant background in developing menu selections for distribution to the franchisees.
The testimony regarding the management of the Debtor was not as precise as might be
ideal. However, I attribute the lack of detail to the nature of the proceeding – an expedited preliminary
injunction hearing lasting one-half day. In these circumstances, I found the evidence sufficient to
convince me that N. Bayer, Grasso and Meakim all play significant roles in the management of the
Debtor.
I infer from N. Bayer’s testimony as a whole that he works full-time for the Debtor and I6
find this credible. Grasso was unable to quantify the amount of time that he spends assisting in the
management of the Debtor, but contended that it was substantial. In light of his role in the company
(continued...)
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B.
1.
Several of the Non-Bankruptcy Cases are rooted, in one way or another, in the asset
purchase agreement between the Debtor and SCI. The plaintiffs in several of those cases
(Defendants in this adversary proceeding) are shareholders of SCI who contend that the asset sale
transaction constituted a fraudulent transfer of SCI’s assets. Another of the Non-Bankruptcy
Cases involves the claim of a law firm for payment of the counsel fees incurred in defending the
Debtor and certain Non-Debtor Parties in one of the “fraudulent transfer-based” Non-
Bankruptcy Cases.
Other Non-Bankruptcy Cases are unconnected to the asset sale transaction and, instead,
are based on alleged breaches of lease guaranties or other contracts between the plaintiffs and
SCI. In these lawsuits, the Debtor and certain of the Related Non-Debtors were named as
defendants based on “alter ego” or other legal theories.
2.
The state and federal court lawsuits identified by the Debtor in the Complaint, the Motion
and at the hearing are set out below:
1. John Larson and Greg Bayer v. Saxby’s Coffee, Inc. and Nicholas Bayer, No.7
07CH17258 (Cir. Ct., Cook Cty., Ill.) (“the John Larson Case”);
(...continued)6
(both financially and operationally), I credit that testimony as well. As for Meakim, there was no
evidence quantifying the amount of time he spends in managing the Debtor.
Greg Bayer is N. Bayer’s uncle.7
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2. Douglas Fabschutz, Simon Fabschutz, Irene Fabschutz, Andrew Field and
Gary Fabschutz v. Saxby’s Coffee, Inc., Nick Bayer, John D. Larson, Proven
Record, Inc., Saxby’s Coffee Worldwide, LLC, Walnut Street Capital, LLC
and Walnut Street Management Group, LLC, No. 07-CV-0222 (D. Colo.)
(“the Fabschutz Case”);
3. Marshall J. Katz v. Joseph Grasso, Kevin Meakim, Robert D. Carroll,
Nicholas Bayer, Walnut Street Capital, LLC, Saxby’s Coffee, Inc, and Saxby’s
Coffee Worldwide LLC, No. CH24116 (Cir. Ct., Cook Cty., Ill.) (“the Katz
Case”);
4. Segal McCambridge Singer & Mahoney, Ltd. v. Nicholas Bayer, Kevin
Meakim, Joseph Grasso, Saxby’s Coffee, Inc., Saxby’s Coffee Worldwide,
LLC, Walnut Street Capital, LLC, and Walnut Street Capital Management
Group, LLC, No. 2008-L-12521 (Cir. Ct., Cook Cty., Ill.) (“the Segal
McCambridge Case”);
5. Kamros Holdings, LLC v. Saxby’s Coffee, Inc., Saxby’s Coffee Worldwide,
LLC, Nick Bayer, Doe Defendants I-X, and Roe Corporate Defendants
XI-XX, No. A572282 (Dist. Ct., Clark Cty, Nev.) (“the Kamros Case”);
6. The Exchange Ontario Center, Inc. v. Saxby’s Coffee, Saxby’s Coffee
Worldwide, Nick Bayer and Does 1-10, No. CIVRS809627 (Super. Ct., San
Bernardino Cty., Cal.) (“the Exchange Ontario Case”);
7. Jennifer Larson v. Saxby’s Coffee, Inc., Nick Bayer, and Saxby’s Coffee
Worldwide, LLC, No. 79D04-0808-SC-03900 (Super. Ct., Tippecanoe Cty.,
Ind.) (“the Jennifer Larson Case”);
8. Goodwill Investments, LLC v. Saxby’s Coffee, Inc.,Walnut Street Capital
Management, LLC; Saxby’s Coffee Worldwide, LLC; No. 09CH16343 (Cir.
Ct., Cook Cty., Ill.) (“the Goodwill Case”).
The John Larson Case, the Fabschutz Case, the Katz Case, the Segal
McCambridge Case and the Jennifer Larson Case appear related to the SCI-Debtor asset sale
transaction. The Exchange Ontario Case, the Kamros Case and the Goodwill Case appear related
to contracts entered into by SCI.
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3.
The Related Non-Debtors whom the Debtor seeks to “protect” through the requested
§105 injunction are:
1. N. Bayer;
2. Grasso;
3. Meakim;
4. Walnut Street Capital, LLC (“WSC”), an entity owned and controlled by
Grasso;
5. Walnut Street Capital Management Group, LLC (“WSCMG”), an entity the
Debtor alleged in the Complaint and Motion is owned and controlled by
Grasso; and
6. Coffee Shops International, Inc. (“CSI”), an entity owned and controlled by8
Grasso and Meakim.
Set forth below is a table that sets out which Non-Debtor Parties are defendants in each
Non-Bankruptcy Case identified in the Complaint:
CSI is an entity created by Grasso and Meakim to purchase a company called “Bucks8
County Coffee” (“BCC”). BCC also operated retail coffee shops. Another part of BCC’s business was
to buy and roast coffee beans. After purchasing BCC, CSI became a supplier of coffee to the Debtor’s
franchisees. Grasso also testified that the Bucks County Coffee retail locations became franchise
locations of the Debtor. He did not explain how this occurred.
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N. Bayer Grasso Meakim WSC WSCMG CSI
John Larson Case T
Fabschutz Case T T T
Katz Case T T T T T
Segal McCambridge Case T T T T T
Kamros Case T
Exchange Ontario Case T
Jennifer Larson Case T
Goodwill Case T
4.
The Defendants who responded to the Motion are the plaintiffs in the John Larson Case,
the Fabschutz Case, the Katz Case, Segal McCambridge Case and the Exchange Ontario Case.
All of the responding parties, except the Fabschutz plaintiffs, oppose the relief requested by the
Debtor.
In three (3) of the Non-Bankruptcy Cases, judgments have been entered against certain
Non-Debtor Parties as follows:
• N. Bayer in the Katz Case, the Segal McCambridge Case and the Exchange
Ontario Case;
• Grasso in the Katz Case;
• Meakim in the Katz Case and the Segal McCambridge Case.9
The orders against Grasso, Meakim and WSC in the Katz Case were entered after the9
Motion in this court was filed and before the November 18, 2009 hearing.
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III.
Briefly put, the Debtor contends that the court should enjoin the Defendants from
proceeding in the Non-Bankruptcy Cases against the Related Non-Debtors because the litigation
“will cause significant interference with, and impairment of, the Debtor’s efforts to reorganize.”
(Motion ¶9).
More specifically, the Debtor contends that permitting the Non-Bankruptcy Cases to
proceed will distract the Debtor’s key individuals from devoting the necessary time, energy (and
in the case of Grasso, assets) to the Debtor’s reorganization. The Debtor also suggests that, due
to the existence of the Related Non-Debtors’ indemnification rights against the Debtor, the entry
of judgments against at least some of the Related Non-Debtors effectively would establish claims
against the Debtor outside of the bankruptcy claims allowance process. Finally, the Debtor
emphasizes that it seeks an injunction for only a limited time because it expects to file its plan of
reorganization during the first quarter of 2010.
The responding Defendants who contest the Motion assert that the Debtor has not met its
burden of proof for the grant of an injunction under 11 U.S.C. §105. They contend that the
evidence is insufficient to support a finding that the Non-Bankruptcy Cases will interfere with
the Related Non-Debtors’ efforts to assist the Debtor’s reorganization. With respect to N. Bayer,
they contend that the evidence does not support the conclusion that the Debtor is under any
obligation to indemnify him. To the extent that the Debtor does have an indemnification
obligation, certain Defendants suggest that the damage is already done insofar as judgments have
already been entered against N. Bayer in three (3) of the Non-Bankruptcy Cases, against Meakim
in two (2) of the Non-Bankruptcy Cases and against Grasso in one (1) of the Non-Bankruptcy
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Cases.10
IV.
The automatic stay of the Bankruptcy Code, 11 U.S.C. §362(a), applies only to a “debtor”
and “may not be invoked by entities such as sureties, guarantors, co-obligors, or others with a
similar legal or factual nexus to the . . . debtor.” McCartney v. Integra Nat’l. Bank North, 106
F.3d 506, 509-10 (3d Cir. 1997). However, “[t]he law is clear that in some circumstances
One of the Defendants, Katz, questions the good faith of the Debtor and the Related10
Non-Debtors. He points out that his judgment was obtained by default after the state court had permitted
three (3) separate law firms to withdraw from the representation of the Related Non-Debtors, all three (3)
law firms having contended in their respective motions that the Related Non-Debtors had been
uncooperative. (See Exs. Katz-2 through Katz-4; Ex. D-1). Katz suggests that granting the Motion
would benefit those same “uncooperative” parties, whom Katz contends were dilatory and acted in bad
faith throughout the litigation of his action against them, would reward their gamesmanship and would be
an unjust “end run” around the state court’s default judgment.
While Katz makes a plausible argument, he offered no evidence to support his contention
that the Related Non-Debtors’ failure to obtain new counsel was part of a pattern of dilatory,
inequitable conduct. Nor is it obvious to me why the failure of an party who is a natural person (and who
has a right to proceed pro se) to obtain counsel is grounds for the entry of a default judgment. I am not
prepared to draw the inference that the Debtor and the Related Non-Debtors have acted in bad faith on
the meager record presented: three (3) hearsay documents and a court order that entered a default
judgment against the Related Non-Debtors (apparently without a hearing) because they did not obtain
counsel within twenty-one (21) days of the order granting their prior counsel leave to withdraw.
Notwithstanding the boilerplate allegations of the Related Non-Debtors’ state court
counsel regarding lack of cooperation, it is likely that each counsel’s prime motivation for seeking leave
to withdraw was the lack of payment of fees. Significantly, two (2) of the three (3) motions for leave to
withdraw were filed after the Debtor’s chapter 11 bankruptcy case was filed, making it likely that the
Debtor was financially unable (and perhaps legally unable) to pay the counsel fees incurred by the
Related Non-Debtors. (That said, I do find it puzzling that Grasso would permit a default judgment to be
entered against him, thereby exposing the substantial personal assets that he described in his testimony).
To be clear, I make no value judgment regarding the propriety of the Related Non-
Debtors’ conduct in the Katz case. I conclude only that the evidence of bad faith on the part of the
Debtor and the Related Non-Debtors was inadequate to bar the grant of §105 injunction if the Debtor has
otherwise satisfied the requirements for obtaining one.
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discretionary stays, beyond the scope of section 362, are appropriate and that a court's power to
issue such injunctions stems from section 105 of the Code.” In re Philadelphia Newspapers11
LLC, 410 B.R. 404, 412 (Bankr. E.D. Pa. 2009).
The issuance of an injunction that restrains creditors from enforcing their claims against
nondebtors in non-bankruptcy fora is an exception to the general principle that “to enjoy the
benefits of bankruptcy a recipient needs to suffer the burdens.” In re M.J.H. Leasing, Inc., 328
B.R. 363, 366 (Bankr. D. Mass. 2005); see also In re Juneau's Builders Ctr., Inc., 57 B.R. 254,
256 (Bankr. M.D. La. 1986) (“the stay must, in some sense, be ‘earned’ by the beneficiary of the
stay submitting to the invasive authority of the bankruptcy court into his private financial life. . .
[thus] assur[ing] a comprehensive commitment of the beneficiary's assets to the satisfaction of
his obligations, a fundamental aspect of the debtor/creditor readjustment process that justifies the
extraordinary effect of a stay of creditor pursuit of self-interest”); In re Venture Properties, Inc.,
37 B.R. 175, 177 (Bankr. D.N.H. 1984) (“It has been a cardinal principle of bankruptcy law from
the beginning that its effects do not normally benefit those who have not themselves ‘come into’
the bankruptcy court with their liabilities and all their assets”) (emphasis in original). A routine
expansion of the automatic stay to cover nondebtors who are related to the debtor would effect “a
wholesale restructuring of the expectations of those involved in commercial transactions without
any indication from Congress that such profound change was intended.” M.J.H. Leasing, 328
B.R. at 366 (quoting Venture Properties, Inc., 37 B.R. at 177).
Section 105 of the Bankruptcy Code states, in relevant portion, “[t]he court may issue11
any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
11 U.S.C. § 105(a).
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The entry of an injunction restraining one set of nondebtors from proceeding against
another set of nondebtors is appropriate only in “unusual circumstances,” McCartney, 106 F.3d
at 510, and should “not be granted lightly,” In re Excel Innovations, Inc., 502 F.3d 1086, 1095
(9 Cir. 2007).th
In general terms, a §105 injunction restraining creditors from proceeding against non-
debtors is justified only if the creditors actions would “interfere with, deplete or adversely affect
property of the [bankruptcy estate] or . . . would frustrate the statutory scheme embodied in
Chapter 11 or diminish [the debtor’s] ability to formulate a plan of reorganization.” In re
Lazarus Burman Assocs., 161 B.R. 891, 898 (Bankr. E.D.N.Y. 1993).
Courts have recognized three (3) circumstances in which the entry of a §105 injunction
restraining creditors from proceeding against non-debtors may be appropriate:
1. when the non-debtor owns assets which will either be a source of funds for the
debtor or when the preservation of the non-debtor's credit standing will play a
significant role in the debtor's attempt to reorganize;
2. upon a showing that the non-debtor's time, energy and commitment to the
debtor are necessary for the formulation of a reorganization plan;
3. where the relationship between the non-debtor and debtor is such that a
finding of liability against the non-debtor would effectively be imputed to the
debtor, to the detriment of the estate.
See, e.g., McCartney, 106 F.3d at 510; Lazarus Burman Assocs., 161 B.R. at 897-900; In re
Monroe Well Service, Inc., 67 B.R. 746, 751-52 (Bankr. E.D. Pa. 1986).
More than twenty (20) years ago, the court in Monroe Well Service, outlined the
following test for the issuance of a §105 injunction restraining actions against nondebtors:
1. there must be the danger of imminent, irreparable harm to the estate or the
debtor's ability to reorganize;
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2. there must be a reasonable likelihood of a successful reorganization;
3. the court must balance the relative harm as between the debtor and the creditor
who would be restrained;
4. the court must consider the public interest, which requires a balancing of the
public interest in successful bankruptcy reorganizations with other competing
societal interests.
Monroe Well Service, 67 B.R. at 752-53.
The Monroe Well Service test, which slightly restates the traditional standards for the
issuance of a preliminary injunction, has been accepted and employed by other courts. See, e.g.,
In re PTI Holding Corp., 346 B.R. 820, 826 (Bankr. D. Nev. 2006); In re Labrum & Doak, LLP,
237 B.R. 275, 306 (Bankr. E.D. Pa. 1999); In re United Health Care Org., 210 B.R. 228, 233
(S.D.N.Y. 1997), appeal dismissed, 147 F.3d 179 (2d Cir. 1998); In re Fowler Floor & Wall
Covering Co., Inc., 93 B.R. 55, 57 (Bankr. M.D. Pa. 1988); In re University Medical Ctr., 82
B.R. 754 (Bankr. E.D. Pa. 1988); see also Excel Innovations, 502 F.3d at 1095-96.
The determination whether to grant or deny a §105 injunction is intensely fact driven.
Thus, it is not surprising that there is a multitude of reported cases both granting and denying
§105 injunctions in cases in which a debtor seeks to restrain one set of non-debtors from
enforcing their claims against other non-debtors. See, e.g., M.J.H. Leasing, 328 B.R. at 365-69
(collecting cases); Lazarus Berman Assocs., 161 B.R. at 898-99 (same); In re Steven P. Nelson,
D.C., P.A., 140 B.R. 814, 816-17 (Bankr. M.D. Fla.1992) (same); Monroe Well Service, 67 B.R.
at 751-52 (same). As with any request for the entry of a traditional injunction, the outcome
tends to be driven by the debtor’s ability or inability to marshal facts demonstrating that the
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pending nonbankruptcy proceedings against the nondebtors pose a serious risk to its
reorganization and the court’s assessment of the relative harms each side may suffer from the
grant or denial of the injunction request.
With these principles in mind, I return to the case sub judice.
V.
As stated at the outset, the Debtor seeks to restrain the Defendants from prosecuting their
claims against six (6) Non-Debtor Parties. One (1) of the Related Non-Debtors is an officer of
the Debtor, two (2) are both owners and managers of the Debtor and three (3) are entities owned
and controlled by one (1) of the owner/managers of the Debtor. The pending cases the Debtor
seeks to restrain also sit in differing procedural postures. Notably, in several cases, judgments
have already been entered against certain Non-Debtor Parties.
In light of the factual mosaic presented, I find it most efficient to distinguish among the
Related Non-Debtors in evaluating the Debtor’s injunction request.
A. N. Bayer, Grasso and Meakim
1.
N. Bayer has no ownership interest in the Debtor. No evidence was presented suggesting
that he will contribute his personal assets to the Debtor’s reorganization or that those assets are
essential to the effort. The Debtor’s request that his creditors be enjoined from proceeding
against him is based primarily on the conventional rationale that N. Bayer plays a key role in the
management of the Debtor and that the Debtor’s operations and reorganization require his full
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time and attention. As stated in Part II.A., supra, I credit the evidence suggesting that N. Bayer’s
efforts are critical to the reorganization of the Debtor. See nn.5-6, supra.
Similarly, I conclude that diversion of Grasso’s time, energy and attention to defense of
the Non-Bankruptcy Cases poses a meaningful threat to the Debtor’s reorganization. Whatever
the evidence lacked in the way of specificity regarding the precise amount of time he expends in
managing the Debtor, see n.5, supra, is more than made up by his role as the Debtor’s primary
investor. After hearing his testimony, I have little doubt that his active participation is integral to
the Debtor’s reorganization and that he will need to devote a substantial amount of his time in the
immediate weeks ahead to the formulation and implementation of the Debtor’s reorganization
strategy. Requiring him to spend a substantial amount of time addressing the Non-Bankruptcy
Cases poses a meaningful threat to the Debtor’s successful reorganization.
The evidence regarding Kevin Meakim was the least fulsome of the three individual Non-
Debtor Parties. Nonetheless, I credit N. Bayer’s testimony that Meakim is substantially involved
in the Debtor’s operations. I note that Meakim is the managing member of the Debtor LLC and
is the representative who signed the bankruptcy petition and the monthly operating reports on
behalf of the Debtor.
Therefore, with respect to N. Bayer, Grasso and Meakim, I am satisfied that the first
prong of the Monroe Well Service test is met.12
For this reason, I need not determine whether the Debtor is bound by an indemnity12
agreement with N. Bayer such that the entry of a judgment against him would be tantamount to the entry
of a judgment against the Debtor. See n.3, supra. I note also that with respect to those Defendants who
have not obtained default judgments against Grasso and Meakim, there appears to be a significant risk
that the indemnification provision of the Operating Agreement would cause Grasso’s and Meakim’s
liability to be imputed to the Debtor. Such a result may be materially detrimental to the Debtor’s
(continued...)
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2.
Turning next to the second prong of the test, I observe that both the Debtor and the
responding Defendants parties paid little, if any, attention at the hearing to the issue whether
there is a reasonable likelihood that the Debtor will successfully reorganize. Perhaps this reflects
an implied concession by some of the Defendants – i.e., those asserting that the Debtor was the
recipient of a fraudulent transfer – that the Debtor’s business is valuable and therefore, is a
“good candidate for reorganization.” PTI Holding Corp., 346 B.R. at 831.
In any event, at this early stage of the case, there are sufficient indicia that the Debtor has
a reasonable prospect of reorganizing. After commencement of this case, the Debtor negotiated
consensual cash collateral agreements with its primary secured lender. As a result, it has
continued to operate its business and has more than forty (40) franchisees operating in different
locations. It has committed itself to the prompt filing of its reorganization plan. It has filed
monthly operating reports that suggest that the Debtor is operating at or near a break-even level
and is not hemorrhaging cash. It appears that this case, like PTI Holding Corp., “is not a ‘file13
and flush’ case in which a debtor files, seeks a sale under Section 363 of the debtor's best assets,
and then converts to a chapter 7 after the sale so that someone else – a chapter 7 trustee – can
clean up the resulting mess.” Id. Like the court in PTI Holding Corp., I conclude that the
(...continued)12
reorganization because these are potentially large claims that the Debtor disputes. Thus, the Debtor’s
indemnification obligation provides an independent basis for concluding that the first prong of the
Monroe Well Service test has been satisfied with respect to Grasso and Meakim.
See Debtor’s Monthly Operating Reports for August and September 2009 (Docket Entry13
Nos. 93, 117).
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Debtor is entitled to some additional time to develop its reorganization plan.
3.
The third prong of the Monroe Well Service test requires that the court balance the
relative harms as between the Debtor and the Defendants. This is “arguably, the most critical
element” in the analysis. 2 Collier on Bankruptcy ¶105.03[1], at 105-41 (Alan N. Resnick, Henry
J. Sommer eds., 16 ed. 2009) (“Collier”). This element “overtly and consciously acknowledgesth
that each party to the litigation has rights to be considered, and overly and consciously attempts
to determine which of those rights is paramount.” PTI Holding Corp., 346 B.R. at 831. It is also
significant, however, that in making this choice, “the bankruptcy court has broad powers to shape
the injunction so as to minimize the harm to the creditor.” 2 Collier ¶105.03[1], at 105-41.
Thus, it would be somewhat inaccurate to perceive a court’s decision whether to grant or deny an
injunction will always be an “all or nothing” choice between the rights of the Debtor and the
nondebtor parties. In at least some cases, the court may be able to accommodate the critical
needs of all the parties.
In this case, the potential harm to the Debtor is manifest: the distraction of the Non-
Bankruptcy Cases threatens the Debtor’s ability to reorganize. I must weigh this risk against the
potential harm to the Defendants.
In general terms, the potential harm to the Defendants should not be minimized. The
Defendants have a substantial interest in “the enforcement of bargained-for rights.” PTI Holding
Corp., 346 B.R. at 831; see also K-Mart Corp. v. Oriental Plaza, Inc., 875 F.2d 907, 916 (1st Cir.
1989) (“there is a strong public interest in fair dealing and the solemnity of contracts; if
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commerce is to function in our capitalistic system, entrepreneurs must play by the rules”).
Further, litigants always face some risk to their ability to succeed in their litigation when delayed
from obtaining a prompt judicial resolution of his or her claims. See Shearin v. Doe 1 through
10, 2007 WL 4365621, at *2 (D. Del. Dec. 11, 2007) (a lengthy delay creates risk of loss of
evidence, including the fading of the memory of witnesses); In re Genesis Health Ventures, Inc.,
367 B.R. 516, 522 (Bankr. D. Del. 2007) (same). In cases involving commonplace requests for
the entry of money judgments, litigants also face potentially increased risks with respect to the
collectibility of any judgment entered.
At the same time, however, the Defendants have not identified any particularized harm
they are likely to suffer if delayed for a short period of time from enforcing their remedies against
N. Bayer, Grasso and Meakim. The Debtor has been careful to tailor the Motion to limit the time
period of the injunction requested to approximately seven (7) months, a relatively modest, finite14
period of time. There is little risk of a loss of evidence during that time period. Nor has there15
been any showing that there is a known risk of dissipation of assets by N. Bayer, Grasso or
Meakim. Indeed, other than Grasso’s generalized testimony regarding his interests in numerous
businesses, there is nothing in the record regarding the nature or extent of N. Bayer’s, Grasso’s or
Meakim’s assets.
I calculate the seven (7) month period by taking the Debtor’s statement that it will file its14
chapter 11 plan in the “first quarter of 2010” (i.e., by March 31, 2009) and adding approximately ninety
(90) days for the confirmation process.
This is not to say that I will enter an injunction of seven (7) months’ duration. See Part15
VI., infra. My point is only that the Debtor has recognized that the duration of any injunction must be
limited.
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In considering the consequences of the requested injunction on the Defendants, it is also
relevant that the Defendants are substantial creditors of the Debtor. Thus, a successful16
reorganization may be in the interest of the Defendants in two (2) ways, in that it preserves: (1)
the value of an entity (the Debtor) that may be obligated to the Defendants and (2) the value of an
asset (i.e., the ownership interest in the Debtor) that may be available to satisfy the personal debts
of Grasso and Meakim.
Further, the Debtor necessarily will address the Defendants’ disputed claims in its
proposed plan in some fashion. Ideally, the plan confirmation process will engender fruitful,
substantive negotiations among the parties with a view toward a global settlement and a
consensual plan. Or, perhaps and alternatively, the success of the reorganization will depend on
the outcome of litigation, with the Debtor vigorously prosecuting objections to the Defendants’
and perhaps initiating other litigation. Whatever direction this case takes, it is unlikely that the
Defendants’ claims will lie dormant during any period in which an injunction is in force.
Movement toward resolution of those claims, at least in some fashion, will take place.
In my best judgment in balancing the competing interests of the parties under the third
prong of the Monroe Well Service test, I conclude that, if appropriately circumscribed, the
benefits to the Debtor of an injunction restraining the prosecution of the Non-Bankruptcy Cases
I am aware that the Debtor disputes its liability to some or all of the Defendants. In16
using the term “creditor,” I do not suggest the Defendants’ claims against the Debtor are valid and
allowable. I use the term as a term of art, referring to entities that have a prepetition “claim” against the
Debtor. The term “claim” includes asserted rights to payment that are “disputed.” See 11 U.S.C.
§101(5), (10).
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against N. Bayer, Grasso and Meakim outweigh the detriment to the Defendants.17
4.
The last prong of the Monroe Well Service test is whether the issuance of the injunction
is in the public interest. Here, the issuance of the injunction will serve the public interest in
several ways.18
To the extent that the injunction is necessary to and will foster the Debtor’s
reorganization it serves “one of the most important public interests.” In re Integrated Health
Services, Inc., 281 B.R. 231, 239 (Bankr. D. Del. 2002); accord PTI Holding Corp., 346 B.R. at
832. In this regard, I have considered the potentially negative consequences that the failure of the
Debtor’s reorganization effort and the liquidation of its business would have on its own staff of
nine (9) employees as well as on its more than forty (40) franchisees. The franchisees are
separate businesses with their own owners and employees. Thus, the Debtor’s failure is likely to
have a negative ripple effect beyond the consequences to its owners and management (N. Bayer,
Grasso and Meakim) that is not in the public interest.19
Further, the bankruptcy system also has an interest in protecting its claim resolution
The details of the appropriate limitations on the injunction are set forth in Part VI., infra.17
I observe and acknowledge that there is some analytic overlap between the “balancing of18
harms” and “public interest” components of the §105 injunction test. In balancing the benefits and the
harms of the affected parties, courts necessarily take public policy considerations into account.
This is not to say that the public interest requires that Debtor be permitted to reorganize19
without satisfying all of the Bankruptcy Code’s requirements for confirmation of a chapter 11 plan. See
11 U.S.C. §1129. Rather, I suggest only that there is some public interest served by the Debtor’s
reorganization and that this a factor favoring the issuance of the injunction it seeks.
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process. The issuance of an injunction would prevent the entry of judgments in the Non-
Bankruptcy Cases against Grasso and Meakim which could effectively determinethe Debtor’s
rights and obligations. Id. at 833 (“[a]n injunction here protects that core process, and allows it
to function in the manner anticipated by Congress”).
Finally, the issuance of the injunction may lead to the concentration of litigation in the
bankruptcy court with the concomitant beneficial effect of promoting judicial economy,
particularly if the bankruptcy reorganization process as a whole results in some type of
comprehensive resolution of some or all of the Defendants’ claims against the Debtor and the
Related Non-Debtors.
I perceive no particular countervailing public policy considerations – other than the
appropriate reluctance with which a bankruptcy court should issue a stay restraining the rights of
creditors against nondebtors. To the extent that there are competing public policy interests here,
I conclude that the public interest is better served by the issuance of the injunction.
B. CSI
CSI is an entity owned by Grasso and Meakim. It is in the business of roasting coffee
beans and supplies product to the Debtor’s franchisees. The record suggests that it has been
named as a defendant in only one of the Non-Bankruptcy Cases, the Katz Case. No judgment has
been entered against CSI in that litigation. The Debtor has no duty to indemnify CSI for any
liability that it may be determined to have in the Katz Case.
From the meager evidence offered with respect to CSI, it is possible to infer that CSI
plays a significant role in the operation of the Debtor’s franchisees. It does, after all, supply
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coffee to businesses that hold themselves out as coffee houses. The successful operation of the
franchisees, in turn, is important to the Debtor because the Debtor derives revenue from ongoing
payments it receives from the franchisees. However, I conclude that the Debtor did not meet the
burden of proof necessary to justify the issuance of an injunction.
It is neither obvious nor intuitive that one (1) lawsuit against a party that supplies product
to entities that have a franchise relationship with the Debtor – even a party that may be a
substantial supplier of product to the Debtor’s franchisees (and there is nothing in the record to
support that last assumption) – poses a material threat to the Debtor’s reorganization. The
Debtor did not generate a record that would permit me to conclude that: (a) allowing the Katz
Case to proceed against CSI, would so disrupt CSI that (b) CSI’s ability to service its customers
(the Debtor’s franchisees) would be impaired and (c) the franchisees would be unable to obtain
the products they need from alternative suppliers, and (d) the negative effect on the franchisees
would be materially detrimental to the Debtor. The connection between the litigation against CSI
and the Debtor is too attenuated to justify the intervention of this court to restrain this one non-
debtor from proceeding in its lawsuit against this particular, other non-debtor. For this reason, the
request for an injunction to restrain the Katz Case against SCI fails to satisfy the requirement that
there be danger of imminent, irreparable harm to the estate or the debtor's ability to reorganize.
In concluding that the Debtor’s request with respect to CSI does not meet the first prong
of the Monroe Well Service test, I am cognizant that the Katz Case against CSI is one of a
number of lawsuits in which Grasso and entities he controls have been targeted. I have
considered the possibility that the litigation against CSI might materially distract its principal,
Grasso (as well as its other principal, Meakim), from carrying out their duties to the Debtor
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during the next critical months in the reorganization process. But I am not convinced that this is
the case.
I understand the Debtor to contend that Grasso’s and Meakim’s formation of CSI and the
purchase of the Bucks County Coffee assets was subsequent to and unconnected with the SCI-
Debtor asset sale transaction that is the focus of the plaintiff’s allegations in the Katz Case.
Grasso’s testimony suggested that CSI is a separate business interest, albeit one that itself has a
business relationship with the Debtor’s franchisees as a vendor. As a result, the legal and factual
issues central to CSI’s defense in the Katz Case strike me as distinct and most likely more
limited than the factual issues surrounding the propriety of the SCI-Debtor asset sale transaction.
It is not apparent to me that the time Grasso and Meakim will have to spend defending this
particular action will be especially time consuming or burdensome. Further, Grasso testified that
he does not work 100% of the time on the Debtor’s affairs; he has other businesses. I have no
way to distinguish between the time Grasso spends generally on those other businesses from the
time he would have to devote to CSI’s in the Katz case. On the present record, the Debtor has
not established that Grasso’s and Meakim’s participation in the defense of CSI would impair his
ability to work diligently to accomplish the Debtor’s reorganization.20
For all of these reasons, no §105 injunction will issue to restrain litigation against CSI.
I recognize that there is some tension between the decision to enjoin the Defendants from20
proceeding against Grasso and Meakim and permitting litigation to proceed against CSI. Defendant Katz
should not take the denial of the injunction as to CSI as an invitation to do an “end run” around the
injunction. If further litigation efforts directed against CSI are so broad based as to constitute indirect
collection activity against Grasso or Meakim or if the litigation otherwise imposes an unduly heavy
burden on Grasso or Meakim, upon request of the Debtor I am prepared to revisit the issue.
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C. WSC and WSCMG
The case for an injunction to restrain the Defendants’ litigation against WSC and
WSCMG is virtually nonexistent.
Grasso testified that WSC is a corporation that he formed four (4) years ago that presently
has no assets. On cross-examination, Grasso mentioned in passing that WSC would somehow be
a vehicle through which Grasso would infuse a further capital contribution into the Debtor as part
of the reorganization. However, he provided no detail regarding the role WSC would play in the
process, whether WSC’s unblemished credit position was somehow essential to the unquantified
financing to be provided or whether Grasso’s financial contribution could be provided to the
Debtor by Grasso directly or through some other entity that he has or could create.
As for WSCMG, Grasso stated that he did not know anything about that entity and even
expressed doubt whether such an entity even exists. There is nothing further in the evidentiary
record regarding WSCMG.
On this record, there is no basis for a finding that the Defendants’ litigation against WSC
and WSCMG poses any threat to the Debtor’s reorganization or that the issuance of a §105
injunction is appropriate.
VI.
Finally, I address the contours of the injunction to be issued.
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A.
As stated earlier, I have concluded that a §105 injunction restraining the Defendants from
litigating their claims against N. Bayer, Grasso and Meakim is warranted. Like Judge Fox in
Monroe Well Service, I exercise the court’s equitable powers to restrain the conduct of one set of
non-debtors against another set of non-debtors “very reluctantly.” 67 B.R. at 747. It is therefore
imperative to tailor the injunction to be as narrow as possible, yet adequate to accomplish the
purpose that it serves.
Here, the purpose of the injunction is to provide the Debtor’s key management personnel
the freedom from personal distraction so that they can devote their unfettered efforts to the
Debtor’s reorganization, thereby giving the Debtor an opportunity to formulate and attempt to
confirm its plan of reorganization. Interestingly, courts that have rejected this generally accepted
rationale for the issuance of a §105 injunction have reasoned that denial of the injunction could
have the same effect:
We are unpersuaded that the defendants' lawsuit will so destroy [debtor’s
principal’s] incentive or so affect him psychologically that he will lose the desire
or ability to lead the [d]ebtor through reorganization. One could just as easily
surmise that such pressure upon a debtor's principal will galvanize him into
exerting his best efforts to bring about an early Chapter 11 plan for the payment of
all creditors, including in particular the creditor hounding him . . . .
In re Apollo Molded Products, Inc., 83 B.R. 189, 192-94 (Bankr. D. Mass. 1988).
Whether or not one accepts the ultimate conclusion of the court in Apollo Molded
Products, the implicit concern it expresses is valid. The §105 injunction should not provide
nondebtors with a comfortable, “free ride” on the coattails of the debtor. The issuance of a §105
injunction should not eliminate the keen sense of urgency that insider nondebtors would
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otherwise have to resolve, as promptly as possible, the outstanding legal and monetary disputes
that gave rise to the bankruptcy case. Stated another way, the nondebtors should continue to feel
pressure to expedite the reorganization process so that the injunction may be lifted as soon as
possible and the ordinary legal relationships among the nondebtors restored.
For these reasons, I do not accept the Debtors’ implicit assumption that a preliminary
injunction for a fixed time period of approximately seven (7) months, see n.15, supra, is
appropriate in this case. The Debtor has not developed a record that provides a specific
explanation why it may need until March 31, 2009 to file a proposed plan of reorganization.
In this case, the filing of a plan by March 31, 2010 would be within six (6) months after
the commencement of the case. I acknowledge that the filing of a chapter 11 plan in a business
case within six (6) months after its commencement is not uncommon, raises no obvious red flags
suggesting dilatoriness and, in some circles, may even be considered prompt. However, the
Debtor is a small business. It does not have a particularly large number of creditors or an21
amount of debt that appears disproportionate to its income and assets. It does not seem to have a
particularly complicated set of business relationships, although it does have a group of motivated,
apparently hostile creditors (which may hinder the Debtor’s reorganization). Without some
further explanation from the Debtor and based on the limited information available, I surmise
that there are only a relatively few number of reorganization approaches that the Debtor may
Here, I do not use the term “small business” as a term of art. The Debtor is not a “small21
business debtor” as defined in 11 U.S.C. §101(51)(D), apparently because its aggregate noncontingent
liquidated secured and unsecured debt as of the date of the petition was not more than $2 million. (See
Debtor’s Schedules D, E, F, Docket Entry No. 47 (disclosing debts in excess of $2 million)). However,
the Debtor is a small business as that term is used in common parlance. It has nine (9) employees and its
annual gross receipts run approximately $1 million.
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attempt in this case. Once the Debtor chooses its strategy and takes concrete steps down the plan
confirmation path, I can foresee obstacles that may slow down the process, but at this point, I do
not know why the process cannot begin sooner rather than later.
Put a little differently, absent the Debtor’s invocation of the equitable powers of the court,
I might otherwise be prepared to grant the Debtor more time to deliberate before it filed its
chapter 11 plan. But where the Debtor seeks and obtains the extraordinary remedy of a
preliminary injunction, restraining some of its creditors from proceeding against nondebtors, an
adjustment must be made in the ordinary reorganization process to fairly accommodate the
competing interests of the debtor and its creditors.22
In this case, the appropriate adjustment required after the issuance of the §105 injunction
is closer judicial oversight of this reorganization case with an insistence that the Debtor propel
the plan confirmation process as efficiently and expeditiously as possible. Succinctly put,
equitable relief must be coupled with rigorous case management.
This reasoning leads me to restrict the term of the preliminary injunction that will issue so
that, by its own terms, it terminate naturally within a relatively short period of time. The §105
injunction that I will enter to restrain the Defendants from prosecuting or initiating litigation
against N. Bayer, Grasso and Meakim will expire on February 15, 2009, unless extended by
further court order. I will hold a hearing on February 12, 2009 to determine whether the
injunction should be extended. By that date, I expect the Debtor will have either filed a proposed
To restate this in pseudoscientific terms, the grant of extraordinary relief to the Debtor22
tends to upset the delicate balance of the bankruptcy ecosystem, requiring some further action to restore
that balance. Also, I do not mean to suggest that a §105 injunction is the only reason why a bankruptcy
case might increase its oversight of a chapter 11 reorganization. Requests by creditors for relief may
have the same effect. See, e.g.,11 U.S.C. §362(d), §1112(b)).
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chapter 11 plan that has a reasonable prospect of being confirmed or will otherwise demonstrate
that it has made substantial progress toward achieving a confirmable plan. The extension of the
preliminary injunction will depend on whether the Debtor can demonstrate that it has made
suitable progress in the reorganization process.
B.
One further issue must be addressed. I have not lost sight of the fact that several of the
Defendants already have judgments against N. Bayer, Grasso and Meakim. As explained below,
the entry of those judgments makes it appropriate to impose a condition on the preliminary
injunction.
In one sense, the entry of the judgments does not alter the need for the injunction. While
the judgments eliminate the time and energy that N. Bayer, Grasso and Meakim would spend in
defending the Non-Bankruptcy Cases (unless they were to initiate appropriate proceedings relief
from the judgments), arguably, they would spend an equivalent amount of time dealing with the
disruptions in their personal life that execution against their personal assets would likely create.
Thus, the need for an injunction in order to protect the reorganization process is as great, if not
greater, with respect to the Defendants who hold judgments against N. Bayer, Grasso and
Meakim.
At the same time, however, the entry of the judgments creates a greater risk that the
Defendants holding the judgments could be subjected to mischief, such as the transfer of assets
by N. Bayer, Grasso and Meakim. In pointing this out, I do not suggest that there is any basis to
believe that N. Bayer, Grasso and Meakim have done so or intend to do so. But it is a concern
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that arises naturally in the mind of any judgment creditor.
In these circumstances, an appropriate quid pro quo for the benefits N. Bayer, Grasso and
Meakim will receive under the §105 injunction is that they provide their judgment creditors with
a financial disclosure. While I am unconcerned about the precise form of the disclosure, the
financial disclosure should contain the same substantive content as is found in Schedules A-G of
the bankruptcy schedules. See Fed. R. Bankr. P.1007(b). This is information that the judgment
creditors would be entitled to discover, absent a bankruptcy court injunction, in order in order to
ascertain what assets are available for satisfaction of the judgment. Here, the judgment creditors
will receive this information, but will not be permitted to issue execution against the disclosed
assets pursuant to applicable nonbankruptcy law so long as the injunction is in place.
The required financial disclosure imposes only a modest burden on N. Bayer, Grasso and
Meakim, while restricting the rights of the judgment creditors only so far as necessary to protect
the Debtor’s interest in reorganizing. Also, in the event that issues arise in the future regarding
asserted fraudulent transfers by N. Bayer, Grasso and Meakim, the disclosure provides the
judgment creditors with an appropriate financial baseline prepared contemporaneously rather
than retrospectively.
In my view, this disclosure requirement fairly accommodates the competing interests of
the Debtor, N. Bayer, Grasso and Meakim on the one hand, and the judgment creditors on the
other.23
In light of the short duration of the preliminary injunction and the financial disclosure23
condition, the risk of harm to the Defendants that hold judgments (or to any of the Defendants for that
matter) is sufficiently minimized to warrant the exercise of my discretion to waive the requirement under
Fed. R. Bankr. P.7065 and Fed. R. Civ. P. 65(c) that the Debtor post security. See Elliott v. Kiesewetter,
(continued...)
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VII.
For the reasons and in the manner set forth above, the Motion will be granted in part and
denied in part.
Date: December 4, 2009
ERIC L. FRANK
U.S. BANKRUPTCY JUDGE
(...continued)23
98 F.3d 47, 59-60 (3d Cir. 1996); Bella Vista United v. City of Philadelphia, 2004 WL 825311, at *10
n.11 (E.D. Pa. Apr. 15, 2004).
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