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Jonathan Schloth

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

            In Ferrandino & Son, Inc. v. Sahene Construction L.L.C. (In re Sahene Construction), the United States Bankruptcy Court for the District of Louisiana held that a non-debtor defendant was not entitled to protection of an automatic stay. The bankruptcy court held that the automatic stay would not be extended to an arbitration between two non-debtors merely because the debtor (whose actions were the cause of the arbitration) had filed for bankruptcy.[1]

In August 2020, WMG Development (“Owner”) entered into a contract with a Ferrandino & Son, Inc. (“General Contractor”), to build a dental clinic in Lafayette, Louisiana.[2] The General Contractor entered into an agreement with Sahene Construction (“Subcontractor-Debtor”) to cover site work and construction of the building, costs of which totaled just under $1 million.[3] The contract between the General Contractor and the Subcontractor-Debtor additionally included an indemnification clause (“Indemnity Clause”) that covered claims “arising out of, resulting from, or related to” the agreement or Sahene’s work.[4] By April 2021, the Subcontractor-Debtor had abandoned the project, causing the General Contractor to cover the costs of the work, and in February 2022, the Owner demanded damages and initiated arbitration against the General Contractor “due to certain delays and defective and incomplete work.”[5] The General Contractor sued the Subcontractor-Debtor in February 2023, but that lawsuit was stayed when the Subcontractor-Debtor filed for bankruptcy shortly after the suit was commenced.[6] Subsequently the General Contractor commenced an adversary proceeding in bankruptcy court seeking a preliminary injunction to stay the arbitration and extend the automatic stay to the General Contractor in the arbitration.[7] The General Contractor argued in bankruptcy court that any judgment against it would essentially be a judgment against the Subcontractor-Debtor, as the General Contractor would seek indemnification from the Subcontractor-Debtor based on any arbitration award obtained by the Owner.[8] The bankruptcy court denied the General Contractor’s motion for an injunction to stay the arbitration proceedings and declined to extend the automatic stay.[9]

The bankruptcy court rationalized its decision by examining the test from the U.S. Court of Appeals for the Fifth Circuit in Hoover, where each factor needs to be fulfilled for an injunction to be granted and a stay extended to a non-debtor.[10]

Here, the court found, “at best [the General Contractor] has satisfied [only] one of the four elements.”[11] Going through each element, the court concluded: (1) the General Contractor did not show a likelihood that it would succeed in its arbitration action with the Owner; (2) the General Contractor would not suffer an irreparable injury if not granted the injunction, at worst, it would have an indemnification claim against the Subcontractor-Debtor, a daily occurrence in bankruptcy courts; (3) the General Contractor had not met its burden of proof that arbitration against it would be a greater harm to it, than the grant of an injunction would be to the Owner; and (4) it was unclear whether an injunction would have any impact on the Subcontractor-Debtor’s ability to complete its bankruptcy.[12]

The bankruptcy court’s decision primarily focused on element two, “irreparable injury.”[13] The court referred to the standard established in, In Re Divine Ripe, L.L.C., that, “in order to extend [a] stay to a non-debtor ‘[t]here must be actual . . . identity of interests, such that a judgment against the non-bankrupt party would in fact be a judgment against the bankrupt party.’”[14] The General Contractor was not entitled to absolute indemnity against the Subcontractor-Debtor, but rather there was a “conditional obligation” which depended on the General Contractor’s filing an action, and the ruling in a separate potential bankruptcy proceeding.[15] The bankruptcy court further noted that “[General Contractor] has an adequate remedy at law. Any claim it has against [Subcontractor-Debtor] can be resolved in the bankruptcy claims process, or it can seek relief from stay to continue its federal court litigation.”[16]Finally, the bankruptcy court concluded that the General Contractor’s preliminary injunction would “serve to frustrate not further that public purpose.”[17]

The bankruptcy court’s conclusion kept in place a well-established standard disfavoring preliminary injunctions to non-debtors, while still affording the General Contractor an opportunity to seek indemnification should the Owner prevail in the arbitration action against them.[18]