In Levitan v. Maclean, Case No. 23-12439 (E.D. Mich. Dec. 4, 2024), a magistrate judge of United States District Court for the Eastern District of Michigan refused to enforce an automatic stay order of the Bankruptcy Court for the Southern District of Texas because it extended the stay to non-debtors. Under section 362 of the Bankruptcy Code, the filing of a debtor’s bankruptcy petition automatically stays all actions against the debtor and further operates as an injunction barring new lawsuits against the debtor. A person who violates the automatic stay may be ordered to pay the debtor’s damages or sanctioned.
In Levitan, the plaintiff filed a civil rights action against an employee of the debtor company that was in bankruptcy in Texas. The Texas bankruptcy court’s automatic stay order stated that it applied to non-debtor defendants under section 362 of the Bankruptcy Code. The employee of the debtor sought dismissal of the case against him in Michigan on the ground that the Texas bankruptcy court’s order barred the action.
Some bankruptcy courts have adopted the “unusual circumstances test,” which extends the automatic stay to non-debtors in unusual circumstances, such as where the debtor and the nonbankrupt party are closely related or the stay contributes to the debtor’s reorganization. The Sixth Circuit, however, has cautioned against extending the automatic stay to non-debtors and held that such extensions must be done through a preliminary injunction. Unlike the automatic stay, a preliminary injunction is issued pursuant to a bankruptcy court’s equitable powers under Bankruptcy Code section 105(a). Before issuing a preliminary injunction, a court must consider four factors: (1) the likelihood of success on the merits, (2) the danger of irreparable injury, (3) whether the potential irreparable injury outweighs the harm to the non-debtors, and (4) the public interest.
The Michigan district court held that, because the Texas bankruptcy court’s order was not a preliminary injunction (and did not consider the factors required for issuing one), it did not operate as a stay against the non-debtor defendant. Accordingly, the Michigan district court permitted the lawsuit to proceed against the employee despite the automatic stay remaining in effect against his employer.
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