## Facts

- Six individuals formed Bailey Ridge Partners, LLC (the debtor), which operated a pig-feeding and pig-housing business.
- The members initially met with First Dakota National Bank (First Dakota), which loaned the debtor about $5.6 million.
- First Dakota also made a separate $500,000 loan to member Jerry Ruba personally, secured by Ruba’s farm; the funds were provided for the debtor’s benefit, and Ruba received a membership interest in the debtor in return based on assurances the company would repay the loan.
- After Ruba defaulted, First Dakota sued Ruba in federal court in South Dakota, and Ruba filed a third-party claim against the debtor seeking payment/indemnification for the debt.
- Later, the debtor refinanced and funded improvements through an approximately $11.4 million loan from Dubuque Bank & Trust Company (Dubuque Bank), secured by liens on the debtor’s property and assets (valued at roughly $11.5 million).
- Five members (Floyd “Chet” Davis, Paul Engle, Jason Grubb, Nicole Nearman, and Verlyn Nafe) personally guaranteed the Dubuque Bank debt; Dubuque Bank sued these guarantors after the debtor defaulted.
- Around the time of the debtor’s financial distress, the debtor entered a five-year contract with a large pork-products producer that provided predictable income and required the debtor to switch its business to that producer exclusively; projections suggested increased revenue if facilities were modified.
- Dubuque Bank also pursued foreclosure remedies, but in early January 2017 the debtor filed Chapter 11, which stayed actions against the debtor (including foreclosure and Ruba’s third-party action against the debtor) but did not automatically stay actions against non-debtors.
- The debtor and members sought court-ordered stay relief to halt (1) Dubuque Bank’s guaranty litigation against the five non-debtor members and (2) First Dakota’s South Dakota suit against Ruba.
- The members testified they were aligned in support of reorganization, had contributed funds (including covering payroll in the prior year), and intended to continue supporting operations and the reorganization effort if needed.

## Issues

1. Whether the bankruptcy court should extend the automatic stay or issue an injunction under 11 U.S.C. § 105(a) to stop Dubuque Bank’s state-court litigation against the non-debtor guarantor-members during the Chapter 11 case.
2. Whether the bankruptcy court should, under 11 U.S.C. § 105(a), stay First Dakota’s federal lawsuit against non-debtor member Jerry Ruba (and related matters) because of its effect on the debtor’s estate and reorganization.

## Decision

- The court granted the debtor’s amended motion and extended stay-type protection to enjoin Dubuque Bank’s guaranty litigation against the five non-debtor members.
- The court granted the joint motion and stayed First Dakota’s South Dakota federal action against Jerry Ruba for the duration necessary to protect the Chapter 11 process (subject to later modification if circumstances changed).

## Legal Principles

- The automatic stay under 11 U.S.C. § 362 generally applies to the debtor and property of the estate; it does not automatically bar suits against non-debtors such as guarantors or other members.
- Under 11 U.S.C. § 105(a), a bankruptcy court may issue orders, including injunctive relief, necessary or appropriate to carry out the Bankruptcy Code, including protecting a reorganization when litigation elsewhere would materially interfere with the case.
- A court may extend stay-like protection to non-debtors in “unusual circumstances,” including when there is a close identity of interests between the debtor and the non-debtor and the outside litigation would functionally harm the estate or reorganization.
- Requests to restrain non-bankruptcy litigation are evaluated using injunction factors, including the debtor’s likelihood of confirming a plan, the risk of harm to the estate if litigation proceeds, the balance of harms, and the public interest in orderly bankruptcy administration.

## Conclusion

The bankruptcy court extended stay protection to halt actions against Bailey Ridge’s non-debtor members because the record showed a realistic path to reorganization tied to the members’ ongoing management and financial support, and ongoing creditor litigation against the guarantors and Ruba posed a substantial risk of disrupting the Chapter 11 case and diminishing value for the estate and creditors.


In Re Bailey Ridge Partners, LLC, 571 Bankr. 430 (2017)