Solidus Networks v. Excel Innovations ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: EXCEL INNOVATIONS, INC., 
Debtor,
No. 06-17288
SOLIDUS NETWORKS, INC.; INDIVOS
BAP No.
CORPORATION,
Appellants,  NC-05-01510-
MaSAl
v.
OPINION
EXCEL INNOVATIONS, INC.; NED
HOFFMAN,
Appellees.

Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Alley, Smith, and Marlar, Bankruptcy Judges, Presiding
Argued and Submitted
June 11, 2007—San Francisco, California
Filed September 7, 2007
Before: Alfred T. Goodwin, Jay S. Bybee, and
Milan D. Smith, Circuit Judges.
Opinion by Senior Circuit Judge Goodwin
11853
IN RE EXCEL INNOVATIONS, INC. 11855
COUNSEL
Kristen A. Palumbo, Alfred C. Pfeiffer, Jr., Bingham McCut-
chen LLP, San Francisco, California, for the appellants.
Scott L. Goodsell, Campeau Goodsell Smith, San Jose, Cali-
fornia, for appellee Excel Innovations; John T. Hansen, Nos-
saman, Guthner, Knox & Elliott, San Francisco, California,
for appellee Hoffman.
11856 IN RE EXCEL INNOVATIONS, INC.
OPINION
GOODWIN, Senior Circuit Judge:
Debtor Excel Innovations, Inc. (“Excel”) applied for a pre-
liminary injunction staying arbitration proceedings between
two non-bankrupt parties, Indivos Corporation (“Indivos”)
and former Excel CEO Ned Hoffman (“Hoffman”). The bank-
ruptcy court granted the injunction, finding a reasonable prob-
ability that the arbitration could conceivably affect the debtor
and the bankruptcy estate. The Bankruptcy Appellate Panel
(“BAP”) affirmed. The present appeal followed.
We hold that when a debtor applies for a 11 U.S.C.
§ 105(a) preliminary injunction to stay a proceeding in which
the debtor is not a party, the bankruptcy court must balance
the debtor’s likelihood of success in reorganization against the
relative hardship of the parties, as well as consider the public
interest if warranted. Because the bankruptcy court misappre-
hended the operative legal standard, we reverse and remand
for further proceedings.
I. BACKGROUND
Hoffman is the founder and a major shareholder of both
Indivos and Excel. In 2000, Hoffman entered into a series of
agreements (“Settlement Contracts”) with Indivos. These
included the Settlement Agreement and General Release, the
Voting Trust and Standstill Agreement, the Pledge Agree-
ment, and the Proprietary Information and Inventions Agree-
ment. One of the main purposes of these agreements was to
separate Hoffman from the management of Indivos. Excel,
which was controlled by Hoffman and separately owned
Indivos shares, was not a party to the Settlement Agreement
or the Pledge Agreement. However, Excel was a party to the
Voting Trust and Standstill Agreement, which required Hoff-
man and Excel to place their Indivos shares in a voting trust
as collateral for their obligations under the Settlement Con-
IN RE EXCEL INNOVATIONS, INC. 11857
tracts. Section 9(a) of the Voting Trust and Standstill Agree-
ment, which applied to Hoffman only, prohibited him from
“individually or with others, directly or indirectly,” taking any
action to “control, disrupt, or unduly influence the manage-
ment or policies of [Indivos].” The parties agreed to submit
any dispute arising from the Settlement Contracts to binding
arbitration with the American Arbitration Association
(“AAA”).
In June 2003, Indivos initiated AAA arbitration proceed-
ings against Hoffman and Excel. Indivos alleged that Hoff-
man and Excel attempted to disrupt a merger between Indivos
and Solidus Networks, Inc. (“Solidus”) by, inter alia, filing
multiple shareholder derivative actions, initiating a proxy con-
test, and attempting to gain a seat on the Indivos board.
Indivos also alleged that Excel and Hoffman filed a patent
infringement action against Indivos in the Northern District of
California in violation of the Proprietary Information and
Inventions Agreement. Indivos claimed that it, not Excel,
owned the patents at issue. Indivos pled seven claims for
relief, including breach of the Settlement Contracts, unfair
business practices, and breach of fiduciary duty by Hoffman.
Indivos also sought to hold Excel liable as Hoffman’s alter
ego.
On May 14, 2004, the arbitrator granted partial summary
judgment for Indivos, finding Hoffman liable for breach of
contract because he filed lawsuits to disrupt the merger, urged
shareholders to vote against the merger, and tried to get on the
Indivos board. The arbitrator found Excel liable as Hoffman’s
alter ego for some of the lawsuits Excel filed under Hoff-
man’s direction, but denied summary judgment as to other
lawsuits filed by Excel. The arbitrator further denied sum-
mary judgment with respect to merger-disrupting actions
undertaken by two alleged surrogates of Hoffman. The arbi-
trator postponed any determination of the parties’ patent
rights, including whether their positions on patent ownership
were taken in good faith, until resolution of the patent litiga-
11858 IN RE EXCEL INNOVATIONS, INC.
tion in federal district court. The arbitrator also dismissed
without prejudice Indivos’ unfair business practices claim.1
Less than a week later, the arbitrator began hearings on the
remaining claims and damages.
In late May 2004, Excel and Hoffman suffered a significant
setback in their patent infringement action against Indivos.
Judge Chesney of the Northern District of California granted
partial summary judgment for Indivos, ruling that all of the
patents Excel accused Indivos of infringing were actually
owned by Indivos.
In June 2004, Hoffman and Excel filed bankruptcy peti-
tions under Chapter 13 and Chapter 11, respectively. The
bankruptcy filings automatically stayed the arbitration against
Hoffman and Excel, as well as the patent litigation. See 11
U.S.C. § 362(a). At that point in the arbitration, Indivos and
Solidus had concluded their affirmative case, Hoffman and
Excel had presented a substantial part of their defense, and the
parties were attempting to schedule additional hearing dates
to finish the proceeding. Hoffman’s bankruptcy petition was
dismissed in September 2004. In December 2004, Hoffman
resigned as an officer and director of Excel.
In February 2005, Indivos recommenced arbitration against
Hoffman, on the ground that the stay established by Hoff-
man’s bankruptcy petition had been lifted. Hoffman argued to
the arbitrator that the stay established by Excel’s bankruptcy
petition applied to Indivos’ claims against him because those
claims were intertwined with Indivos’ claims against Excel.
The arbitrator disagreed. The arbitrator stated that any claims
1
The alleged unfair business practice was that Hoffman attempted to
disrupt the merger by arguing to Indivos shareholders that Indivos was not
getting a satisfactory price for its patents, but then suing Indivos on the
ground that those same patents were owned by Excel. Indivos sought to
condition the release of the merger proceeds for Indivos shares held by
Excel and Hoffman on their cessation of the patent litigation.
IN RE EXCEL INNOVATIONS, INC. 11859
that alleged direct or alter ego liability for Excel remained
subject to the stay, but claims involving only Hoffman could
proceed. The arbitrator did not schedule further evidentiary
hearings and asked Hoffman and Indivos to submit closing
briefs by July 29, 2005.
In July 2005, Excel initiated adversary proceedings in
bankruptcy court against Indivos, Solidus, Hoffman, AAA,
and the arbitrator. Excel sought declaratory and injunctive
relief on the ground that the arbitration violated the automatic
stay in Excel’s bankruptcy case. According to Excel, Hoffman
might argue that he acted as Excel’s agent, leading to new lia-
bilities for Excel and the bankruptcy estate. On the same day,
Excel applied for a temporary restraining order (“TRO”) to
stop the arbitration. To reassure the court that the arbitration
would not affect Excel, Indivos and Solidus stipulated that the
arbitration would have no preclusive effect on Excel; that
damages against Hoffman would not be offset against the
Indivos shares Excel had pledged to the voting trust; and that
to avoid privilege issues, no further evidence would be pre-
sented in the arbitration proceeding. The bankruptcy court
denied the TRO on the basis of these representations.
Hoffman then wrote to AAA to request changes to the
briefing schedule so he could present additional evidence. The
arbitrator agreed. Hoffman immediately filed an ex parte
application to reopen Excel’s motion for a TRO and prelimi-
nary injunction. Counsel argued that, because the arbitrator
now planned to take additional evidence, one of the bases for
denying the injunction — Indivos’ agreement not to present
additional evidence — was no longer present. The bankruptcy
court entered a TRO. The court expressed concern that infor-
mation subject to Excel’s attorney-client privilege could be
revealed by Hoffman in the arbitration proceeding.
In September 2005, Excel filed a motion for a preliminary
injunction. The motion was supported by an affidavit from
Hoffman. He had served as Excel’s CEO during the events
11860 IN RE EXCEL INNOVATIONS, INC.
that gave rise to Indivos’ claims, but at this time was only a
consultant for Excel. In the affidavit, Hoffman offered three
reasons why permitting arbitration against him would
adversely impact Excel. First, he planned to demand indemni-
fication from Excel on the ground that he was acting as an
officer and agent of Excel when he challenged the Solidus-
Indivos merger. Thus, arbitration could lead to new liabilities
for Excel. Second, his defense would focus on his own inter-
ests and not those of Excel. Third, he would be “compelled
to reveal the substance of critical privileged communications
between myself and attorneys for the Debtor,” because he
acted “in accordance with legal advice from attorneys for the
Debtor.” He also intended to call Excel employees as wit-
nesses.
The bankruptcy court granted an injunction staying arbitra-
tion until confirmation of Excel’s reorganization plan. The
court stated that a § 105(a) injunction is proper if arbitration
“could conceivably have any effect on the administration of
the bankruptcy estate.” The court decided that Excel estab-
lished a “reasonable probability” of possible negative impacts
on the estate. Moreover, the court found that Excel’s motion
also satisfied the traditional, non-bankruptcy test for a prelim-
inary injunction, which “balances the plaintiff’s likelihood of
success [on the merits] against the relative hardship to the par-
ties.” See Clear Channel Outdoor Inc. v. City of Los Angeles,
340 F.3d 810, 813 (9th Cir. 2003). The bankruptcy court
made no findings on plaintiff’s likelihood of success, but con-
cluded that a stay would protect Excel from possible injury
while causing no harm to Indivos and Solidus.
Indivos and Solidus appealed to the BAP, contending that
the bankruptcy court applied the wrong legal standard to the
motion for a preliminary injunction. The BAP affirmed. The
BAP noted that the Ninth Circuit has not established a stan-
dard for a § 105(a) motion to enjoin an action against a non-
debtor. Citing a series of Fourth Circuit opinions, the BAP
stated that a § 105(a) injunction is appropriate when the
IN RE EXCEL INNOVATIONS, INC. 11861
debtor and nondebtor’s interests are so intertwined that an
action against the nondebtor is in effect a claim against the
debtor. See, e.g., A.H. Robins Co. v. Piccinin, 788 F.2d 994(4th Cir. 1986); Oberg v. Aetna Cas. & Sur. Co. (In re A.H.
Robins Co.), 828 F.2d 1023 (4th Cir. 1987). The BAP con-
cluded that “to the extent that § 105 is recognized as authority
for granting injunctive relief in matters that are related to the
bankruptcy case, we hold that the bankruptcy court correctly
asserted its § 105(a) authority in enjoining Appellants’ arbi-
tration proceeding.” Alternatively, the BAP found that Excel
had also satisfied the traditional standard for a preliminary
injunction. The BAP explained that Excel had shown likeli-
hood of success on the merits because the reorganization plan
had a “fair chance” of success. The BAP further noted that
permitting arbitration to proceed would cause irreparable
harm to Excel. Appellants filed a timely notice of appeal.
II. JURISDICTION
Although parties do not challenge our jurisdiction over this
appeal, we have an independent obligation to inquire into the
presence or absence of subject matter jurisdiction. Moldo v.
Ash (In re Thomas), 428 F.3d 1266, 1268 (9th Cir. 2005).
Under 28 U.S.C. § 158(d), we have jurisdiction to hear
appeals from “final decisions” of the BAP. We look to the
underlying bankruptcy court order reviewed by the BAP to
determine whether the BAP decision is final. Livesay v. W.
Fin. Sav. Bank (In re Livesay), 118 F.3d 661, 662 (9th Cir.
1997). “If the underlying bankruptcy court decision is inter-
locutory, the BAP order affirming or reversing it is also inter-
locutory.” Id.
We hold that the injunction granted by the bankruptcy court
constitutes an appealable final decision. The injunction is in
effect an extension of the automatic stay, halting another pro-
ceeding to avoid disruption of the debtor’s reorganization. We
have held that a decision granting or denying relief from a
§ 362(a) automatic stay constitutes a final order for purposes
11862 IN RE EXCEL INNOVATIONS, INC.
of appellate jurisdiction. Crocker Nat’l Bank v. Am. Mariner
Indus., Inc. (In re Am. Mariner Indus., Inc.), 734 F.2d 426,
429 (9th Cir. 1984), overruled on other grounds by United
Sav. Ass’n v. Timbers of Inwood Forest Assocs., Ltd., 484
U.S. 365 (1988). We see no reason to treat the instant injunc-
tion differently. See Gruntz v. County of Los Angeles (In re
Gruntz), 202 F.3d 1074, 1082 (9th Cir. 2000) (en banc) (“The
automatic stay is an injunction issuing from the authority of
the bankruptcy court.”). Moreover, although the parties and
the bankruptcy court labeled the injunction “preliminary,”
nothing in the record indicates that the bankruptcy court con-
templated further proceedings on the injunction. See Shugrue
v. Air Line Pilots Ass’n, Int’l (In re Ionosphere Clubs, Inc.),
139 B.R. 772, 778 (S.D.N.Y. 1992) (“[W]here the bankruptcy
court issues a ‘preliminary’ injunction, but contemplates no
further hearings on the merits of the injunction, apart from the
outcome of the reorganization, the injunction is a final,
appealable order.”).
III. STANDARD OF REVIEW
The decision of the BAP is reviewed de novo. Contractors’
State License Bd. of Cal. v. Dunbar (In re Dunbar), 245 F.3d
1058, 1061 (9th Cir. 2001). “On appeal from the BAP, this
court independently reviews bankruptcy courts’ rulings.” Id.
The injunction will be reversed only if the bankruptcy court
abused its discretion by basing its decision on an incorrect
legal standard or on clearly erroneous findings of fact. See id.;
see also Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.
1986).
IV. DISCUSSION
A. Preliminary Injunction Standard
[1] Under 11 U.S.C. § 105(a), a bankruptcy court “may
issue any order, process, or judgment that is necessary or
appropriate to carry out the provisions of this title.” Section
IN RE EXCEL INNOVATIONS, INC. 11863
105(a) gives the bankruptcy courts the power to stay actions
that are not subject to the 11 U.S.C. § 362(a) automatic stay2
but “threaten the integrity of a bankrupt’s estate.” Canter v.
Canter (In re Canter), 299 F.3d 1150, 1155 (9th Cir. 2002)
(citation and quotation marks omitted); Ingersoll-Rand Fin.
Corp. v. Miller Mining Co., 817 F.2d 1424, 1427 (9th Cir.
1987). The proper standard for granting a § 105(a) prelimi-
nary injunction staying an action against a non-debtor is an
issue of first impression in our circuit. Appellants argue that
the bankruptcy court must apply the usual preliminary injunc-
tion standard. Excel disagrees, and claims that the movant
need not show irreparable harm, only that the injunction
would conform to the objectives of the Bankruptcy Code.
[2] In the non-bankruptcy context, we have consistently
required trial courts deciding preliminary injunction motions
to balance the moving party’s likelihood of success on the
merits and the relative hardship of the parties. The moving
party must show:
(1) a strong likelihood of success on the merits, (2)
the possibility of irreparable injury to plaintiff if pre-
liminary relief is not granted, (3) a balance of hard-
ships favoring the plaintiff, and (4) advancement of
the public interest (in certain cases). Alternatively, a
court may grant the injunction if the plaintiff demon-
strates either a combination of probable success on
the merits and the possibility of irreparable injury or
that serious questions are raised and the balance of
hardships tips sharply in his favor.
As we have said many times regarding the two
alternative formulations of the preliminary injunc-
2
The automatic stay applies to any “proceeding against the debtor that
was or could have been commenced before the commencement of the case
under this title, or to recover a claim against the debtor that arose before
the commencement of the case under this title.” 11 U.S.C. § 362(a)(1).
11864 IN RE EXCEL INNOVATIONS, INC.
tion test: These two formulations represent two
points on a sliding scale in which the required degree
of irreparable harm increases as the probability of
success decreases. They are not separate tests but
rather outer reaches of a single continuum.
Save Our Sonoran, Inc. v. Flowers, 408 F.3d 1113, 1120 (9th
Cir. 2005) (citations and internal quotation marks omitted).
We have applied this usual approach in reviewing a prelimi-
nary injunction issued by a bankruptcy court to prevent the
debtor’s shareholder from dissipating assets claimed by the
estate. Rubin v. Pringle (In re Focus Media Inc.), 387 F.3d
1077, 1085-86 (9th Cir. 2004). However, in a case involving
stay of a suit against a court-appointed bankruptcy trustee, we
have also stated that “our usual preliminary injunction stan-
dard does not apply to injunctions issued by the bankruptcy
court pursuant 11 U.S.C. § 105,” and that “the court does not
need to demonstrate an inadequate remedy at law or irrepara-
ble harm.” Beck v. Fort James Corp. (In re Crown Vantage,
Inc.), 421 F.3d 963, 975-76 (9th Cir. 2005).
[3] The majority of circuits that have reviewed injunctions
staying actions against non-debtors have applied the usual
preliminary injunction standard. Am. Imaging Servs. v. Eagle-
Picher Indus., Inc. (In re Eagle-Picher Indus., Inc.), 963 F.2d
855, 858 (6th Cir. 1992); Piccinin, 788 F.2d at 1008 (4th Cir.
1986); Commonwealth Oil Ref. Co. v. EPA (In re Common-
wealth Oil Ref. Co.), 805 F.2d 1175, 1188-89 (5th Cir. 1986).
As the Fifth Circuit pointed out in Commonwealth Oil, the
traditional approach is strongly supported by the legislative
history of § 105(a). 805 F.2d at 1188-89. The relevant Senate
report explained that § 105(a) grants bankruptcy courts “all
the traditional injunctive powers of a court of equity.” S. Rep.
No. 95-989, at 51 (1978), reprinted in 1978 U.S.C.C.A.N.
5787, 5837. “Stays or injunctions issued under these other
sections will not be automatic upon the commencement of the
case, but will be granted or issued under the usual rules for
the issuance of injunctions.” Id. (emphasis added). The Sec-
IN RE EXCEL INNOVATIONS, INC. 11865
ond, Third, and Eighth Circuits have similarly applied the tra-
ditional standard with respect to stays that are not automatic
under § 362(a). See NLRB v. Superior Forwarding, Inc., 762
F.2d 695, 699 n.3 (8th Cir. 1985) (staying NLRB regulatory
proceeding against debtor); Wedgewood Inv. Fund v. Wedge-
wood Realty Group, Ltd. (In re Wedgewood Realty Group,
Ltd.), 878 F.2d 693, 700-01 (3d Cir. 1989) (reimposing auto-
matic stay); Manville Corp. v. Equity Sec. Holders Comm. (In
re Johns-Manville Corp.), 801 F.2d 60, 68-69 (2d Cir. 1986)
(reversing stay of shareholder action seeking to compel debtor
to hold an annual meeting).
The Seventh Circuit, in contrast, has expressly held that the
moving party need not show irreparable harm. Fisher v. Apos-
tolou, 155 F.3d 876, 882 (7th Cir. 1998); In re L&S Indus.,
Inc., 989 F.2d 929, 932 (7th Cir. 1993).3 The Seventh Cir-
cuit’s approach rests upon the notion that “[w]hen the evi-
dence shows that the defendants are engaged in . . . the act or
practices prohibited by a statute which provides for injunctive
relief to prevent such violations, irreparable harm to the plain-
tiffs need not be shown.” In re Chicago, Milwaukee, St. Paul
and Pac. R.R., 738 F.2d 209, 213 (7th Cir. 1984). That propo-
sition has its roots in United States v. City and County of San
Francisco, 310 U.S. 16, 30-31 (1940), in which the Supreme
Court affirmed an injunction against a municipality for violat-
ing the terms of a federal land grant. Ultimately, that decision
turned on the Court’s interpretation of congressional intent
behind the land grant statute.
[4] We hold that the usual preliminary injunction standard
applies to stays of proceedings against non-debtors under
§ 105(a). As the relevant House and Senate reports indicate,
Congress intended that standard to apply to § 105(a) prelimi-
3
The First Circuit has also stayed a non-debtor action without applying
or discussing the usual preliminary injunction standard. In re G.S.F. Corp.,
938 F.2d 1467, 1474-76 (1st Cir. 1999), overruled on other grounds by
Conn. Nat’l Bank v. Germain, 503 U.S. 249 (1992).
11866 IN RE EXCEL INNOVATIONS, INC.
nary injunctions. S. Rep. No. 95-989, at 51; H.R. Rep. No. 95-
595, at 342 (1978), reprinted in 1978 U.S.C.C.A.N. 5963,
6298. Moreover, we have consistently held that the automatic
stay does not apply to suits against non-debtors. See Chugach
Timber Corp. v. N. Stevedoring & Handling Corp. (In re Chu-
gach Forest Prods., Inc.), 23 F.3d 241, 246 (9th Cir. 1994)
(summarizing cases). The usual standard helps to ensure that
stays would not be granted lightly.
Crown Vantage does not compel a different result. There,
defendants in an adversary action filed by the debtor’s trustee
had sued the trustee in state court, alleging that the adversary
action was barred by a prior settlement agreement between
the defendants and the debtor. See Crown Vantage, 421 F.3d
at 969. Citing the Barton doctrine,4 which prohibits suits
against court-appointed receivers in other fora without per-
mission from the appointing court, the trustee successfully
moved the bankruptcy court to enjoin the state court action.
The district court vacated the injunction, finding that the
trustee failed to show irreparable harm. Id. at 969-70. We
reversed, stating that “[t]he only requirement for the issuance
of an injunction under § 105 is that the remedy conform to the
objectives of the Bankruptcy Code.” Id. at 975. As we
explained, it makes no sense to require a showing of irrepara-
ble harm in the context of Barton’s bright-line prohibition of
unauthorized litigation against court-appointed receivers.
Once such an action had been filed, “[t]he only appropriate
remedy . . . is to order cessation of the improper action.” Id.
at 976. In other words, irreparable harm need not be shown
because the movant was certain to succeed on its claim of a
Barton violation. “If the movant has a 100% probability of
success on the merits,” the injunction should issue “without
regard to the balance of the hardships.” Sammartano v. First
Judicial Dist. Court, 303 F.3d 959, 965 (9th Cir. 2002) (cita-
tion and internal quotation marks omitted). However, there is
no general rule prohibiting suits against non-debtors. See
4
Barton v. Barbour, 104 U.S. 126 (1881).
IN RE EXCEL INNOVATIONS, INC. 11867
Chugach Forest Prods., 23 F.3d at 246-47. To obtain equita-
ble relief, the party seeking the stay should be required to sat-
isfy the usual preliminary injunction standard.
The parties also dispute what a bankruptcy court should
consider with regard to the “likelihood of success” prong of
the preliminary injunction standard. Appellants contend that
Excel must show likelihood of success on its complaint in the
adversary proceeding, specifically its claim that the arbitration
violated the automatic stay under § 362(a). Excel rejoins that
it needed to show only likelihood of success in reorganization.
[5] We hold that a debtor seeking to stay an action against
a non-debtor must show a reasonable likelihood of a success-
ful reorganization. “The inquiry for a preliminary injunction
necessarily focuses on the outcome of a later proceeding, at
which time the merits of the questions giving rise to the litiga-
tion will be decided.” Commonwealth Oil, 805 F.2d at 1189.
Within the confines of the instant adversary proceeding, how-
ever, there is no “later proceeding” at which time Excel’s
claims will reach final disposition. Excel has already received
the maximum injunctive relief — a stay until confirmation of
a reorganization plan — that the bankruptcy court could grant.
See Am. Hardwoods, Inc. v. Deutsche Credit Corp. (In re Am.
Hardwoods, Inc.), 885 F.2d 621, 624-27 (9th Cir. 1989)
(bankruptcy courts lack the power to issue injunctions that
outlast plan confirmation). In this context, the most relevant
“future proceeding” is the debtor’s reorganization. Because
Excel’s claim is ultimately that arbitration would harm its
ability to reorganize, it makes sense to require a showing of
a “reasonable likelihood of a successful reorganization.”
Homestead Holdings, Inc. v. Broome & Wellington (In re PTI
Holding Corp.), 346 B.R. 820, 826 (Bankr. D. Nev. 2006)
(considering likelihood of success in reorganization under
merits prong of preliminary injunction inquiry); see also
Eagle-Picher Indus., 963 F.2d at 859-60 (same); In re Monroe
Well Serv., Inc. 67 B.R. 746, 751-52 (Bankr. E.D. Pa. 1986)
(same); Otero Mills, Inc. v. Sec. Bank & Trust (In re Otero
11868 IN RE EXCEL INNOVATIONS, INC.
Mills, Inc.), 21 B.R. 777, 779 (Bankr. D.N.M. 1982) (same);
but see FTC v. First Alliance Mortgage Co. (In re First Alli-
ance Mortgage Co.), 264 B.R. 634, 653 (C.D. Cal. 2001) (col-
lecting conflicting cases). Moreover, because the gravamen of
Excel’s adversary complaint is that the arbitration would harm
the bankruptcy estate, adopting Appellants’ approach would
collapse the traditionally distinct merits and hardship prongs
into a single hardship inquiry.
In sum, our usual preliminary injunction standard applies to
applications to stay actions against non-debtors under
§ 105(a). In granting or denying such an injunction, a bank-
ruptcy court must consider whether the debtor has a reason-
able likelihood of a successful reorganization, the relative
hardship of the parties, and any public interest concerns if rel-
evant.
B. Proceedings Below
[6] Both the bankruptcy court and the BAP applied incor-
rect legal standards. Citing Am. Hardwoods, 885 F.2d at 623,
the bankruptcy court stated that a preliminary injunction is
proper whenever an action in another forum “could conceiv-
ably have any effect on the administration of the bankruptcy
estate.” That is actually the standard for determining whether
the bankruptcy court has subject matter jurisdiction over a
motion for a preliminary injunction. Id. at 623. Whether the
bankruptcy court has subject matter jurisdiction is a distinct
question from whether an injunction should issue. The two
inquiries cannot be identical; otherwise a bankruptcy court
would be required to grant every preliminary injunction
motion over which it has jurisdiction.
The BAP likewise applied an incorrect standard. The BAP
relied on the “unusual circumstances” doctrine the Fourth Cir-
cuit developed in Piccinin, which provides an exception to the
general rule that the automatic stay does not apply to actions
against non-debtors. Piccinin held that the automatic stay may
IN RE EXCEL INNOVATIONS, INC. 11869
be extended if unusual circumstances make the interests of the
debtor and the non-debtor defendant inextricably interwoven.
788 F.2d at 998-1004 (affirming stay of actions against debt-
or’s officers under a combination of § 362(a), § 105(a), and
the court’s inherent equitable powers); see also S.I. Acquisi-
tion, Inc. v. Eastway Delivery Serv., Inc. (In re S.I. Acquisi-
tion, Inc.), 817 F.2d 1142, 1147-50 (5th Cir. 1987) (extending
the § 362(a) automatic stay to action against debtor’s alleged
alter egos). The BAP treated the “unusual circumstances”
doctrine and the usual preliminary injunction standard as sep-
arate and distinct bases for affirming the stay. That is error,
because the “unusual circumstances” doctrine does not negate
the traditional preliminary injunction standard. As we have
noted, stays under the doctrine, “although referred to as exten-
sions of the automatic stay, were in fact injunctions issued by
the bankruptcy court after hearing and the establishment of
unusual need to take this action to protect the administration
of the bankruptcy estate.” Chugach Forest Prods., 23 F.3d at
247 n.6 (quoting Patton v. Bearden, 8 F.3d 343, 349 (6th Cir.
1993)). Indeed, Piccinin itself applied the usual preliminary
injunction standard in affirming the stay. 788 F.2d at 1008.
[7] The bankruptcy court and the BAP alternatively found
preliminary injunctive relief warranted under the usual pre-
liminary injunction standard. We find that the injunction can-
not be affirmed under their application of the usual standard.
As discussed above, the first prong of the usual preliminary
injunction standard is whether the debtor can demonstrate a
reasonable likelihood of success on the merits. The bank-
ruptcy court did not consider that issue at all. That failure to
consider a critical element of the injunction standard is revers-
ible error. The BAP did find that Excel had shown reasonable
likelihood of a successful reorganization, but the BAP’s find-
ing is not supported by the record. The BAP noted that “Hoff-
man was actively marketing Excel’s products in his
consulting position.” That mere fact is insufficient to show
that Excel had a reasonable chance of successfully reorganiz-
11870 IN RE EXCEL INNOVATIONS, INC.
ing. There is no indication in the record of what Hoffman’s
marketing activities are or how they could meaningfully con-
tribute to Excel’s reorganization. Excel’s bankruptcy petition
shows that it had no income from business operations during
the past twenty-four months. Although it is not a high burden
to show a reasonable likelihood of success in reorganization,
the BAP’s conclusion that Excel had done so amounted to an
abuse of discretion because “the record contains no evidence
on which [the BAP] rationally could have based that deci-
sion.” Benedor Corp. v. Conejo Enters., Inc. (In re Conejo
Enters., Inc.), 96 F.3d 346, 351 (9th Cir. 1996).
The next prong is the balance of hardship between the par-
ties. A bankruptcy court must “identify the harms which a
preliminary injunction might cause to defendants and . . .
weigh these against plaintiff’s threatened injury.” Caribbean
Marine Servs. Co. v. Baldrige, 844 F.2d 668, 676 (9th Cir.
1988) (citation omitted). The bankruptcy court and the BAP
ignored the potential harm to Indivos. The bankruptcy court
stated without explanation that the “limited delay in the pro-
cess of the arbitration will not result in appreciable harm to
Indivos [and] Solidus.” However, Indivos had argued that it
would suffer harm from losing its bargained-for right to bring
an arbitration claim against Hoffman at a time of its choosing.
Accord PTI Holding, 346 B.R. at 831 (weighing stay’s
adverse effect on bargained-for contractual rights). The bank-
ruptcy court’s “failure to identify, evaluate, and weigh the
potential harm alleged by [Indivos] is reversible error.”
Caribbean Marine Servs., 844 F.2d at 677.
The bankruptcy court did consider the potential harm to
Excel, and found that (1) Hoffman might raise a defense of
indemnification by arguing to the arbitrator that he acted as
Excel’s agent with a promise of indemnification from Excel;
(2) denying the stay might lead to inconsistent results between
the arbitration and the bankruptcy court; and (3) Hoffman
might disclose privileged attorney-client communications,
where Excel is the holder of the privilege, and Excel may
IN RE EXCEL INNOVATIONS, INC. 11871
have to participate in the arbitration to protect its privilege.
These findings are insufficient to support the conclusion that
Excel stands to suffer irreparable harm if arbitration proceeds.
We do not see how Excel would be irreparably harmed if
Hoffman argues to the arbitrator that he breached the contract
as an agent of Excel. An agent is always liable for breaching
an independent obligation that the agent owes to the injured
party, in spite of the fact that the agent may have acted in
accordance with a principal’s instructions. See 3 B.E. Witkin,
Summary of California Law §§ 197, 199 (10th ed. 2005).
Indivos accuses Hoffman of violating a contract Hoffman
signed. If that is proven, Hoffman is liable to Indivos whether
or not he acted as Excel’s agent. The bankruptcy court stated
that agency arguments would create “enormous problems” for
Excel. Aside from possible disclosure of privileged communi-
cations, which is discussed separately below, the bankruptcy
court did not explain what those problems would be. Specula-
tive injury cannot be the basis for a finding of irreparable
harm. Goldie’s Bookstore, Inc. v. Superior Court, 739 F.2d
466, 472 (9th Cir. 1984). In any event, even if Hoffman pre-
sents evidence that reflects badly on Excel, arbitration pro-
ceedings between Hoffman and Indivos cannot impose new
liabilities on Excel for the simple reason that Excel is not a
party to the arbitration.
The bankruptcy court and the BAP again engaged in specu-
lation when they cited the risk of inconsistent judgments as
justification for the injunction. The BAP explained:
For example, the arbitrator might rule that Hoffman
was acting as Excel’s agent when he breached the
settlement and the bankruptcy court might rule that
he was not. Such inconsistent results could compli-
cate Excel’s litigation with Appellants, as well as
any claim proceedings in respect to Hoffman’s proof
of claim for indemnification. Such complications
would tax judicial resources.
11872 IN RE EXCEL INNOVATIONS, INC.
The BAP’s reasoning is unpersuasive. Although Hoffman
repeatedly asserted his intention to defend the arbitration by
claiming that he acted as Excel’s agent, the issue is simply
irrelevant to the arbitration. Hoffman is a party to the Settle-
ment Contracts. If he breached the contract, he is liable to
Indivos whether he acted as an Excel officer or in his own
interest. The bankruptcy court expressed concern that the
arbitrator might disagree with that proposition, but the bank-
ruptcy court identified no plausible legal theory that might
support such a disagreement.
The only way that Hoffman’s agency status might harm
Excel is if Hoffman has a right to indemnity from Excel and
the arbitration creates liabilities that Hoffman can pass on to
Excel. Other courts have stayed suits against a debtor’s offi-
cers where “unusual circumstances” made the interests of the
debtor and its officers inextricably intertwined. See, e.g., Pic-
cinin, 788 F.2d at 1007; Eagle-Picher Inds., 963 F.2d at 860.
“In the Ninth Circuit, the vitality of the ‘unusual circum-
stances’ exception is not clear.” Chugach Forest Prods., 23
F.3d at 247. We need not determine the vitality of that doc-
trine today, because the bankruptcy court’s findings do not
support the conclusion that “there is such identity between the
debtor and [Hoffman] that the debtor may be said to be the
real party defendant and that a judgment against [Hoffman]
will in effect be a judgment or finding against the debtor.”
Piccinin, 788 F.2d at 999. The bankruptcy court made no
findings on whether Hoffman has an indemnity agreement
with Excel, or whether that agreement actually covers Hoff-
man’s potential liabilities from arbitration. The bankruptcy
court merely noted that Hoffman might state a “defense” of
indemnification; the statement sheds little light on the scope
and magnitude of Excel’s actual exposure to Hoffman. Nota-
bly, unlike Piccinin and Eagle-Picher Indus., there is no evi-
dence that Excel has an insurance policy or other assets that
would be immediately dissipated to cover a duty to defend
and indemnify Hoffman.
IN RE EXCEL INNOVATIONS, INC. 11873
The bankruptcy court also found that Excel will be harmed
if Hoffman, to defend the arbitration, divulges privileged
communication between him and Excel’s counsel.5 The only
relevant evidence we have is Hoffman’s statement that he will
reveal privileged communication. Such conclusory allegations
are insufficient to establish irreparable harm. See Caribbean
Marine Servs., 844 F.2d at 674-75. Ordinarily, the party
asserting attorney-client privilege has the burden of establish-
ing all of the elements of the privilege. United States v.
Munoz, 233 F.3d 1117, 1128 (9th Cir. 2000); see also Admi-
ral Ins. Co. v. U.S. Dist. Court, 881 F.2d 1486, 1492 (9th Cir.
1989) (setting forth elements of privilege). There is no evi-
dence in the record to show that the communication Hoffman
threatens to reveal is in fact, or at least likely to be, protected
by attorney-client privilege. Moreover, it is unclear how reve-
lation of privileged communication would harm Excel in a
way cognizable under the Bankruptcy Code. See Am. Hard-
woods, 885 F.2d at 625 (injunction must be consistent with
the Code’s objectives). Section 105(a) is not a general remedy
to prevent the introduction of inadmissible evidence in pro-
ceedings in which the debtor may take an interest. The record
is silent on how disclosure of privileged communication will
in and of itself hamper Excel’s ability to reorganize, under-
mine the rights of Excel’s creditors, or otherwise undermine
the objectives of the Bankruptcy Code.
Excel argues that it will suffer harm in the form of litiga-
tion expenses it will incur if it chooses to participate in the
arbitration to protect privileged communication. However,
since the arbitration is not against Excel itself and is not sub-
ject to the automatic stay, Excel’s choice to expend money to
5
The BAP noted that “the question of who has the privilege, Excel,
Hoffman, or both jointly, has never been determined,” and found it unnec-
essary to address that question. The issue should not have been ignored.
Excel’s rights could be harmed only if Hoffman discloses information to
which Excel holds the privilege. If Hoffman alone holds the privilege, he
has the choice to assert or waive the privilege.
11874 IN RE EXCEL INNOVATIONS, INC.
participate in the arbitration is not by itself sufficient to estab-
lish irreparable harm. Excel must show that the expenses will
be substantial enough to interfere with its reorganization or
harm creditors. See EEOC v. Rath Packing Co., 787 F.2d 318,
325 (8th Cir. 1986) (litigation expenses insufficient to justify
discretionary stay of a regulatory action that is not subject to
the automatic stay); First Alliance Mortgage, 264 B.R. at 656
(“First Alliance presented no evidence other than conclusory
declarations of counsel as to what the litigation costs would
be if the multiple actions proceed separately.”); In re Gercke,
122 B.R. 621, 627-28 (Bankr. D.D.C. 1991) (declining to
enjoin state court document production order where debtor
has not shown that the expenses “will be substantial enough
to threaten the administrators’ other current administrative
tasks”). There is no evidence in the record on what the impact
on Excel would be if it chooses to participate in the arbitra-
tion.
Although the bankruptcy court recited the usual prelimi-
nary injunction standard, the court failed to apply it. The court
ignored both Excel’s likelihood of success and the alleged
harm to Indivos. Perhaps because the bankruptcy court ini-
tially granted the injunction under the mistaken view that any
proceeding with any conceivable effect on the debtor should
be enjoined, the court placed a much lower burden on Excel
than what is ordinarily required to show irreparable harm.
That is an abuse of discretion, particularly since Excel’s weak
showing on the likelihood of a successful reorganization
heightened its burden to show irreparable harm. See Carib-
bean Marine Serv., 844 F.2d at 674 (“A plaintiff must do
more than merely allege imminent harm sufficient to establish
standing; a plaintiff must demonstrate immediate threatened
injury as a prerequisite to preliminary injunctive relief.”); see
also Earth Island Inst. v. U.S. Forest Serv., 351 F.3d 1291,
1298 (9th Cir. 2003) (holding that the district court applied an
improper legal standard by imposing a higher burden of proof
for irreparable harm than warranted).
IN RE EXCEL INNOVATIONS, INC. 11875
V. CONCLUSION
[8] We hold that a bankruptcy court asked to enjoin a pro-
ceeding between two non-debtors must balance the debtor’s
likelihood of successfully reorganizing with the relative hard-
ship of the parties. Because the bankruptcy court abused its
discretion by applying erroneous legal standards, we vacate
the preliminary injunction and remand for further proceed-
ings.
REVERSED AND REMANDED