No Third-Party Stay Where Indemnification Not Certain

By Alexander Beeby posted 03-13-2023 02:09 PM


Bankruptcy Bulletin

Contributing Editor: Alexander J. Beeby, Sapientia Law Group, PLLC

In Jama v. Wright County, No. 22-CV-438 (PJS/JFD), 2023 WL 2238803 (D. Minn. Feb. 27, 2023), Magistrate Judge Docherty declined to extend the automatic stay to a debtor’s employee. In doing so, he weighed in on (1) who has authority to determine the extent of an automatic stay, (2) whether the stay extends to a third party potentially indemnified by a debtor, and (3) the distinction between an automatic bankruptcy stay and a court’s discretionary stay.

The plaintiff sued multiple defendants over injuries sustained while incarcerated. One of the defendants subsequently filed for bankruptcy. See In re MEnD Correctional Care, PLLC, No. 22-60407 (Bankr. D. Minn.) (Ridgway, J.) (ch. 11 filed Nov. 20, 2022, converted to ch. 7 eff. Feb. 21, 2023). The plaintiff brought a motion to stay the litigation pending the debtor’s bankruptcy or, in the alternative, for 90 days. While everyone agreed that the bankruptcy stay applied to the debtor, the motion centered around the effect of the stay on one of the debtor’s employees and, therefore, the litigation as a whole.

Before analyzing the extent of the bankruptcy stay, Judge Docherty considered whether he even had the authority to make such a determination. Observing that the Eighth Circuit has yet to weigh in on the question, the court cited interests in comity in “declin[ing] the invitation to extend its reach into bankruptcy matters.” Jama, 2023 WL 2238803, at *3.

Despite this, Judge Docherty went on to opine that the automatic stay likely did not extend to the employee. The court observed that the Eighth Circuit applies a strict standard, extending a bankruptcy stay to non-debtors “only if a claim against the non-debtor will have an immediate adverse economic consequence for the debtor’s estate.” Id. (ultimately quoting Ritchie Capital Mgmt. L.L.C. v. Jeffries, 653 F.3d 755, 762 (8th Cir. 2011)). The court then found that any requirement that the employee be indemnified by the debtor or its insurance was not certain (for example, if the employee were to be found personally liable for the alleged intentional misconduct). Judge Docherty concluded that such circumstances did not rise to an immediate adverse economic consequence for the debtor’s estate.

Having decided not to apply the bankruptcy stay to non-debtor defendants, the court then distinguished between the automatic stay and the court’s inherent discretionary authority to stay proceedings. Acknowledging the challenges posed by the bankruptcy stay, Judge Docherty agreed to stay the proceedings for 90 days to account for those challenges.

This decision highlights the narrow scope of the automatic stay as to third parties in this circuit. It is hard to imagine a situation where an indemnification provision is unlimited. Accordingly, it seems unlikely that this circuit will be seen as friendly to venue-shopping mass-tort debtors looking to protect their officers and affiliates with a bankruptcy stay.

To read the full opinion, click here.


C.J. Harayda, Stinson LLP
David M. TanabeWinthrop & Weinstine, P.A.

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