## Facts

- F.T.L., Inc. (FTL) operated a car wash business in Newport News, Virginia.
- Frank Lash, Jr. and Robyn W. Lash (the Lashes) were majority shareholders, officers, and directors of FTL and personally guaranteed FTL’s secured debt to Crestar Bank.
- Crestar was FTL’s predominant secured creditor, owed approximately $785,000, secured by FTL’s assets and by a lien on the Lashes’ residence arising from the guaranty.
- FTL filed a voluntary Chapter 11 petition on July 31, 1991, operated profitably during the case, and made monthly adequate-protection payments to Crestar.
- In January 1992, Crestar obtained and perfected a judgment lien against the Lashes’ residence and pursued collection through garnishments; a foreclosure sale was scheduled for January 28, 1993.
- FTL’s amended Chapter 11 plan required the Lashes to contribute all equity in their home to fund the reorganization.
- The Lashes pursued a home-equity loan and a small-business loan to finance the plan; the financing was conditioned on their continued ownership and management of FTL and continuation of their guaranty.
- FTL and the Lashes filed an adversary proceeding seeking to enjoin foreclosure, asserting that foreclosure would eliminate plan funding and likely cause the reorganization to fail.

## Issues

1. Whether “unusual circumstances” justified a bankruptcy court’s equitable injunction preventing a secured creditor from foreclosing on non-debtor guarantors’ residence when foreclosure would materially impair the debtor’s Chapter 11 reorganization.
2. Whether the traditional preliminary-injunction factors supported a temporary injunction to preserve the status quo during plan confirmation efforts.

## Decision

- The bankruptcy court granted a preliminary injunction enjoining Crestar from foreclosing on the Lashes’ residence for 90 days.
- The court found “unusual circumstances” because the debtor’s reorganization was closely tied to the Lashes and the home equity that the plan required.
- The court concluded foreclosure would irreparably harm the estate and the creditor body by eliminating a key funding source and undermining a likely confirmable plan.
- The court determined the limited, short-term injunction would not substantially harm Crestar given ongoing adequate-protection payments and Crestar’s secured position in the Chapter 11 case.

## Legal Principles

- In limited “unusual circumstances,” a bankruptcy court may use equitable powers to enjoin creditor action against non-debtor third parties when the debtor and the third party are closely identified, or when the creditor’s action would reduce value otherwise available to the debtor’s creditors as a group.
- Requests to restrain collection activity against non-debtors are evaluated under traditional preliminary-injunction factors: likelihood of success (including feasibility/confirmability of a plan), irreparable harm, balance of harms, and public interest.
- A temporary injunction may be appropriate to preserve plan funding and the reorganization process where creditor enforcement against a guarantor would effectively defeat Chapter 11 relief.

## Conclusion

The court entered a 90-day injunction barring foreclosure on the non-debtor guarantors’ residence because the home equity was essential to the debtor’s proposed Chapter 11 plan, and foreclosure would likely derail reorganization and diminish value available to creditors as a whole.


F.T.L., Inc. v. Crestar Bank (In re F.T.L., Inc.), 152 B.R. 61 (Bankr. E.D. Va. 1993)