SOLIDUS NETWORKS v. EXCEL INNOVATIONS
The Ninth Circuit Court of Appeals today released an opinion in SOLIDUS NETWORKS v. EXCEL INNOVATIONS, No. 06-17288, a bankruptcy appeal. The panel consisted of Alfred T. Goodwin, Jay S. Bybee, and Milan D. Smith, Circuit Judges.
GOODWIN, Senior Circuit Judge:
Debtor Excel Innovations, Inc. (”Excel”) applied for a preliminary injunction staying arbitration proceedings between two non-bankrupt parties, Indivos Corporation (”Indivos”) and former Excel CEO Ned Hoffman (”Hoffman”). The bankruptcy court granted the injunction, finding a reasonable probability 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. ยง 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 misapprehended 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 Agreement, and the Proprietary Information and Inventions Agreement. 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 Hoffman and Excel to place their Indivos shares in a voting trust as collateral for their obligations under the Settlement Con. . .