Celotex Corp. v. Edwards

115 S. Ct. 1493, 8 Fla. L. Weekly Fed. S 713, 131 L. Ed. 2d 403, 514 U.S. 300, 63 U.S.L.W. 4269, 95 Cal. Daily Op. Serv. 2834, 95 Daily Journal DAR 4940, 27 Bankr. Ct. Dec. (CRR) 93, 1995 U.S. LEXIS 2848, 31 Fed. R. Serv. 3d 355, 32 Collier Bankr. Cas. 2d 685

• Court: Supreme Court of the United States
• Decided: April 19, 1995
• Docket: 93-1504
• Status: Published

Opinions

Chief Justice Rehnquist

delivered the opinion of the Court.

The United States Court of Appeals for the Fifth Circuit held that respondents should be allowed to execute against petitioner’s surety on a supersedeas bond posted by petitioner where the judgment which occasioned the bond had become final. It so held even though the United States Bankruptcy Court for the Middle District of Florida previously had issued an injunction prohibiting respondents from executing on the bond without the Bankruptcy Court’s permission. We hold that respondents were obligated to obey the injunction issued by the Bankruptcy Court.

I

In 1987 respondents Bennie and Joann Edwards filed suit in the United States District Court for the Northern District of Texas against petitioner Celotex Corporation (and others) alleging asbestos-related injuries. In April 1989 the District Court entered a $281,025.80 judgment in favor of respondents and against Celotex. To stay execution of the judgment pending appeal, Celotex posted a supersedeas bond in the amount of $294,987.88, with Northbrook Property and Casualty Insurance Company serving as surety on the bond. As collateral for the bond, Celotex allowed Northbrook to retain money owed to Celotex under a settlement agreement resolving insurance coverage disputes between Northbrook and Celotex.

The United States Court of Appeals for the Fifth Circuit affirmed, issuing its mandate on October 12, 1990, and thus rendering “final” respondents’ judgment against Celotex. Edwards v. Armstrong World Industries, Inc., 911 F. 2d 1151 (1990). That same day, Celotex filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida.¹ The filing of the petition automatically stayed both the continuation of “proceeding^] against” Celotex and the commencement of “any act to obtain possession of property” of Celotex.² 11 U. S. C. §§ 362(a)(1) and (3).

On October 17, 1990, the Bankruptcy Court exercised its equitable powers under 11 U. S. C. § 105(a) and issued an injunction (hereinafter Section 105 Injunction) to augment the protection afforded Celotex by the automatic stay. In pertinent part, the Section 105 Injunction stayed all proceedings involving Celotex “regardless of. . . whether the matter is on appeal and a supersedeas bond has been posted by [Celotex].” App. to Pet. for Cert. A-28.³ Respondents, whose bonded judgment against Celotex had already been affirmed on appeal, filed a motion pursuant to Federal Rule of Civil Procedure 65.1 in the District Court seeking permission to execute against Northbrook on the supersedeas bond. Both Celotex and Northbrook opposed this motion, asserting that all proceedings to enforce the bonds had been enjoined by the Bankruptcy Court’s Section 105 Injunction. Celotex brought to the District Court’s attention the fact that, since respondents had filed their Rule 65.1 motion, the Bankruptcy Court had reaffirmed the Section 105 Injunction and made clear that the injunction prohibited judgment creditors like respondents from proceeding against sureties without the Bankruptcy Court’s permission:

“Where at the time of filing the petition, the appellate process between Debtor and the judgment creditor had been concluded, the judgment creditor is precluded from proceeding against any supersedeas bond posted by Debtor without first seeking to vacate the Section 105 stay entered by this Court.” In re Celotex, 128 B. R. 478, 485 (1991) (Celotex I).

Despite the Bankruptcy Court’s reaffirmation and clarification of the Section 105 Injunction, the District Court allowed respondents to execute on the bond against Northbrook.⁴

Celotex appealed, and the Fifth Circuit affirmed. Edwards v. Armstrong World Industries, Inc., 6 F. 3d 312 (1993) (Edwards II). It first held that, because the appellate process for which the supersedeas bond was posted had been completed, Celotex no longer had a property interest in the bond and the automatic stay provisions of 11 U. S. C. § 362 therefore did not prevent respondents from executing against Northbrook. 6 F. 3d, at 315-317. The court then acknowledged that “[t]he jurisdiction of bankruptcy courts has been extended to include stays on proceedings involving third parties under the auspices of 28 U. S. C. § 1334(b),” id., at 318, and that the Bankruptcy Court itself had ruled that the Section 105 Injunction enjoined respondents’ proceeding against Northbrook to execute on the supersedeas bond. Ibid. The Fifth Circuit nevertheless disagreed with the merits of the Bankruptcy Court’s Section 105 Injunction, holding that “the integrity of the estate is not implicated in the present case because the debtor has no present or future interest in this supersedeas bond.” Id., at 320. The court reasoned that the Section 105 Injunction was “manifestly unfair” and an “unjust result” because the supersedeas bond was posted “to cover precisely the type of eventuality which occurred in this case, insolvency of the judgment debtor.” Id., at 319. In concluding that the Section 105 Injunction was improper, the Fifth Circuit expressly disagreed with the reasoning and result of Willis v. Celotex Corp., 978 F. 2d 146 (1992), cert. denied, 507 U. S. 1030 (1993), where the Court of Appeals for the Fourth Circuit, examining the same Section 105 Injunction, held that the Bankruptcy Court had the power under 11 U. S. C. § 105(a) to stay proceedings against sureties on the supersedeas bonds. 6 F. 3d, at 320.

Celotex filed a petition for rehearing, arguing that the Fifth Circuit’s decision allowed a collateral attack on an order of the Bankruptcy Court sitting under the jurisdiction of the Court of Appeals for the Eleventh Circuit. The Fifth Circuit denied the petition, stating in part that “we have not held that the bankruptcy court in Florida was necessarily wrong; we have only concluded that the district court, over which we do have appellate jurisdiction, was right.” Id., at 321. Because of the conflict between the Fifth Circuit’s decision in this case and the Fourth Circuit’s decision in Willis, we granted certiorari. 511 U. S. 1105 (1994). We now reverse.

II

Respondents acknowledge that the Bankruptcy Court’s Section 105 Injunction prohibited them from attempting to execute against Northbrook on the supersedeas bond posted by Celotex. Brief in Opposition 6, n. 2 (recognizing that the Section 105 Injunction “was intended to, and did, enjoin collection attempts like those made by [respondents] against Northbrook in this case”). In GTE Sylvania, Inc. v. Consumers Union of United States, Inc., 445 U. S. 375, 386 (1980), we reaffirmed the well-established rule that “persons subject to an injunctive order issued by a court with jurisdiction are expected to obey that decree until it is modified or reversed, even if they have proper grounds to object to the order.” In GTE Sylvania, we went on to say:

“There is no doubt that the Federal District Court in Delaware had jurisdiction to issue the temporary restraining orders and preliminary and permanent injunctions. Nor were those equitable decrees challenged as only a frivolous pretense to validity, although of course there is disagreement over whether the District Court erred in issuing the permanent injunction. Under these circumstances, the CPSC was required to obey the injunctions out of respect for judicial process.” Id., at 386-387 (internal quotation marks, citations, and footnote omitted).

This rule was applied in the bankruptcy context more than 60 years ago in Oriel v. Russell, 278 U. S. 358 (1929), where the Court held that turnover orders issued under the old bankruptcy regime could not be collaterally attacked in a later contempt proceeding. Respondents acknowledge the validity of the rule but contend that it has no application here. They argue that the Bankruptcy Court lacked jurisdiction to issue the Section 105 Injunction, though much of their argument goes to the correctness of the Bankruptcy Court’s decision to issue the injunction rather than to its jurisdiction to do so.

The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute. Title 28 U. S. C. § 1334(b) provides that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” The district courts may, in turn, refer “any or all proceedings arising under title 11 or arising in or related to a case under title 11 ... to the bankruptcy judges for the district.” 28 U. S. C. § 157(a). Here, the Bankruptcy Court’s jurisdiction to enjoin respondents’ proceeding against Northbrook must be based on the “arising under,” “arising in,” or “related to” language of §§ 1334(b) and 157(a).

Respondents argue that the Bankruptcy Court had jurisdiction to issue the Section 105 Injunction only if their proceeding to execute on the bond was “related to” the Celotex bankruptcy. Petitioner argues the Bankruptcy Court indeed had such “related to” jurisdiction. Congress did not delineate the scope of “related to”⁵ jurisdiction, but its choice of words suggests a grant of some breadth. The jurisdictional grant in § 1334(b) was a distinct departure from the jurisdiction conferred under previous Acts, which had been limited to either possession of property by the debtor or consent as a basis for jurisdiction. See S. Rep. No. 95-989, pp. 153-154 (1978). We agree with the views expressed by the Court of Appeals for the Third Circuit in Pacor, Inc. v. Higgins, 743 F. 2d 984 (1984), that “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate,” id., at 994; see also H. R. Rep. No. 95-595, pp. 43-48 (1977), and that the “related to” language of § 1334(b) must be read to give district courts (and bankruptcy courts under § 157(a)) jurisdiction over more than simply proceedings involving the property of the debtor or the estate. We also agree with that court’s observation that a bankruptcy court’s “related to” jurisdiction cannot be limitless. See Pacor, supra, at 994; cf. Board of Governors, FRS v. MCorp Financial, Inc., 502 U. S. 32, 40 (1991) (stating that Congress has vested “limited authority” in bankruptcy courts).⁶

We believe that the issue whether respondents are entitled to immediate execution on the bond against Northbrook is at least a question “related to” Celotex’s bankruptcy.⁷ Admittedly, a proceeding by respondents against Northbrook on the supersedeas bond does not directly involve Celotex, except to satisfy the judgment against it secured by the bond. But to induce Northbrook to serve as surety on the bond, Celotex agreed to allow Northbrook to retain the proceeds of a settlement resolving insurance coverage disputes between Northbrook and Celotex. The Bankruptcy Court found that allowing respondents — and 227 other bonded judgment creditors — to execute immediately on the bonds would have a direct and substantial adverse effect on Celotex’s ability to undergo a successful reorganization. It stated:

“[I]f the Section 105 stay were lifted to enable the judgment creditors to reach the sureties, the sureties in turn would seek to lift the Section 105 stay to reach Debtor’s collateral, with corresponding actions by Debtor to preserve its rights under the settlement agreements. Such a scenario could completely destroy any chance of resolving the prolonged insurance coverage disputes currently being adjudicated in this Court. The settlement of the insurance coverage disputes with all of Debtor’s insurers may well be the linchpin of Debtor’s formulation of a feasible plan. Absent the confirmation of a feasible plan, Debtor may be liquidated or cease to exist after a carrion feast by the victors in a race to the courthouse.” In re Celotex, 140 B. R. 912, 915 (1992) (Celotex II).

In light of these findings by the Bankruptcy Court, it is relevant to note that we are dealing here with a reorganization under Chapter 11, rather than a liquidation under Chapter 7. The jurisdiction of bankruptcy courts may extend more broadly in the former case than in the latter. Cf. Continental Ill. Nat. Bank & Trust Co. v. Chicago, R. I. & P. R. Co., 294 U. S. 648, 676 (1935). And we think our holding— that respondents’ immediate execution on the supersedeas bond is at least “related to” the Celotex bankruptcy — is in accord with representative recent decisions of the Courts of Appeals. See, e. g., American Hardwoods, Inc. v. Deutsche Credit Corp., 885 F. 2d 621, 623 (CA9 1989) (finding “related to” jurisdiction where enforcement of state-court judgment by creditor against debtor’s guarantors would affect administration of debtor’s reorganization plan); cf. MacArthur Co. v. Johns-Manville Corp., 837 F. 2d 89, 93 (CA2) (noting that a bankruptcy court’s injunctive powers under § 105(a) allow it to enjoin suits that “might impede the reorganization process”), cert. denied, 488 U. S. 868 (1988); In re A. H. Robins Co., 828 F. 2d 1023, 1024-1026 (CA4 1987) (affirming Bankruptcy Court’s § 105(a) injunction barring products liability plaintiffs from bringing actions against debtor’s insurers because such actions would interfere with debtor’s reorganization), cert. denied sub nom., 485 U. S. 969 (1988).⁸

Respondents, relying on our decision in Board of Governors, FRS v. MCorp Financial, Inc., 502 U. S. 32 (1991), contend that § 1334(b)’s statutory grant of jurisdiction must be reconciled and harmonized with Federal Rule of Civil Procedure 65.1, which provides an expedited procedure for executing on supersedeas bonds. In MCorp, we held that the grant of jurisdiction in § 1334(b) to district courts sitting in bankruptcy did not authorize an injunction against a regulatory proceeding, but there we relied on “the specific preclusive language” of 12 U. S. C. § 1818(i)(1), which stated that “ ‘no court shall have jurisdiction to affect by injunction or otherwise the issuance or enforcement of any [Board] notice or order.’” 502 U. S., at 39, 42. There is no analogous statutory prohibition against enjoining the maintenance of a proceeding under Rule 65.1. That Rule provides:

“Whenever these rules . .. require or permit the giving of security by a party, and security is given in the form of a bond or stipulation or other undertaking with one or more sureties, each surety submits to the jurisdiction of the court and irrevocably appoints the clerk of the court as the surety’s agent upon whom any papers affecting the surety’s liability on the bond or undertaking may be served. The surety’s liability may be enforced on motion without the necessity of an independent action....”

This Rule outlines a streamlined procedure for executing on bonds. It assures judgment creditors like respondents that they do not have to bring a separate action against sureties, and instead allows them to collect on the supersedeas bond by merely filing a motion. Just because the Rule provides a simplified procedure for collecting on a bond, however, does not mean that such a procedure, like the more complicated procedure of a full-fledged lawsuit, cannot be stayed by a lawfully entered injunction.

Much of our discussion dealing with the jurisdiction of the Bankruptcy Court under the “related to” language of §§ 1334(b) and 157(a) is likewise applicable in determining whether or not the Bankruptcy Court’s Section 105 Injunction has “only a frivolous pretense to validity.” GTE Sylvania, 445 U. S., at 386 (internal quotation marks and citation omitted). The Fourth Circuit has upheld the merits of the Bankruptcy Court’s Section 105 Injunction, see Willis, 978 F. 2d, at 149-150, and even the Fifth Circuit in this case did not find “that the bankruptcy court in Florida was necessarily wrong.” See Edwards II, 6 F. 3d, at 321. But we need not, and do not, address whether the Bankruptcy Court acted properly in issuing the Section 105 Injunction.⁹

We have made clear that “ ‘[i]t is for the court of first instance to determine the question of the validity of the law, and until its decision is reversed for error by orderly review, either by itself or by a higher court, its orders based on its decision are to be respected.’ ” Walker v. Birmingham, 388 U. S. 307, 314 (1967) (quoting Howat v. Kansas, 258 U. S. 181, 189-190 (1922)). If respondents believed the Section 105 Injunction was improper, they should have challenged it in the Bankruptcy Court, like other similarly situated bonded judgment creditors have done. See Celotex II, 140 B. R., at 912. If dissatisfied with the Bankruptcy Court’s ultimate decision, respondents can appeal “to the district court for the judicial district in which the bankruptcy judge is serving,” see 28 U. S. C. § 158(a), and then to the Court of Appeals for the Eleventh Circuit, see § 158(d). Respondents chose not to pursue this course of action, but instead to collaterally attack the Bankruptcy Court’s Section 105 Injunction in the federal courts in Texas. This they cannot be permitted to do without seriously undercutting the orderly process of the law.

The judgment of the Court of Appeals, accordingly, is reversed.

It is so ordered.

1 For purposes of this case, we assume respondents’ judgment became final before Celotex filed its petition in bankruptcy.

2 As of the filing date, more than 141,000 asbestos-related bodily injury lawsuits were pending against Celotex, and over 100 asbestos-related bodily injury cases were in some stage of appeal, with judgments totaling nearly $70 million being stayed by supersedeas bonds that Celotex had posted.

3 The Bankruptcy Court noted that, upon request of a party in interest and following 30 days’ written notice and a hearing, it would “consider granting relief from the restraints imposed” by the Section 105 Injunction. App. to Pet. for Cert. A-28. Several of Celotex’s bonded judgment creditors whose cases were still on appeal filed motions requesting that the Bankruptcy Court lift the Section 105 Injunction (1) to enable their pending appellate actions to proceed and (2) to permit them to execute upon the bonds once the appellate process concluded in their favor. The Bankruptcy Court granted the first request but denied the second. In re Celotex, 128 B. R. 478, 484 (1991) (Celotex I).

4 Two days after the District Court entered its order, the Bankruptcy Court ruled on motions to lift the Section 105 Injunction that had been filed by several bonded judgment creditors who, like respondents, had prevailed against Celotex on appeal. The Bankruptcy Court again reaffirmed the Section 105 Injunction and it again explained that the injunction prohibited judgment creditors like respondents from executing on the supersedeas bonds against third parties without its permission. In re Celotex, 140 B. R. 912, 914 (1992) (Celotex II). It refused to lift the Section 105 Injunction at that time, finding that Celotex would suffer irreparable harm. It reasoned that if the judgment creditors were allowed to execute against the sureties on the supersedeas bonds, the sureties would in turn seek to lift the Section 105 Injunction to reach Celotex’s collateral under the settlement agreements, possibly destroying any chance of a successful reorganization plan. See id,., at 914-915.

To protect the bonded judgment creditors, the Bankruptcy Court ordered that: (1) the sureties involved, including Northbrook, establish escrow accounts sufficient to insure full payment of the bonds;- (2) Celotex create an interest-bearing reserve account or increase the face amount of any supersedeas bond to cover the full amount of judgment through confirmation; and (3) Celotex provide in any plan that the bonded claimants’ claims be paid in full unless otherwise determined by the court or agreed by the claimant. Id., at 917. The Bankruptcy Court also directed Celotex to file “any preference action or any fraudulent transfer action or any other action to avoid or subordinate any judgment creditor’s claim against any judgment creditor or against any surety on any supersedeas bond within 60 days of the entry” of its order. Ibid. Accordingly, Celotex filed an adversary proceeding against respondents, 227 other similarly situated bonded judgment creditors in over 100 cases, and the sureties on the supersedeas bonds, including Northbrook. See Second Amended Complaint in Celotex Corp. v. Allstate Ins. Co., Adversary No. 92-584 (Bkrtcy. Ct. MD Fla.). In that proceeding, Celotex asserts that tfie bonded judgment creditors should not be able to execute on their bonds because, by virtue of the collateralization of the bonds, the bonded judgment creditors are beneficiaries of Celotex asset transfers that are voidable as preferences and fraudulent transfers. See ibid. Celotex also contends that the punitive damages portions of the judgments can be voided or subordinated on other bankruptcy law grounds. See ibid. This adversary proceeding is currently pending in the Bankruptcy Court.

5 Proceedings “related to” the bankruptcy include (1) causes of action owned by the debtor which become property of the estate pursuant to 11 U. S. C. § 541, and (2) suits between third parties which have an effect on the bankruptcy estate. See 1 Collier on Bankruptcy ¶ 3.01[1][c][iv], p. 3-28 (15th ed. 1994). The first type of “related to” proceeding involves a claim like the state-law breach of contract action at issue in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50 (1982). The instant case involves the second type of “related to” proceeding.

6 In attempting to strike an appropriate balance, the Third Circuit in Pacor, Inc. v. Higgins, 743 F. 2d 984 (1984), devised the following test for determining the existence of “related to” jurisdiction:

“The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. . . . Thus, the proceeding need not necessarily be against the debtor or against the debtor’s property. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” Id., at 994 (emphasis in original; citations omitted).

The First, Fourth, Fifth, Sixth, Eighth, Ninth, Tenth, and Eleventh Circuits have adopted the Pacor test with little or no variation. See In re G. S. F. Corp., 938 F. 2d 1467, 1475 (CA1 1991); A H. Robins Co. v. Piccinin, 788 F. 2d 994, 1002, n. 11 (CA4), cert. denied, 479 U. S. 876 (1986); In re Wood, 825 F. 2d 90, 93 (CA5 1987); Robinson v. Michigan Consol. Gas Co., 918 F. 2d 579, 583-684 (CA6 1990); In re Dogpatch U. S. A, Inc., 810 F. 2d 782, 786 (CA8 1987); In re Fietz, 852 F. 2d 455, 457 (CA9 1988); In re Gardner, 913 F. 2d 1515, 1518 (CA10 1990); In re Lemco Gypsum, Inc., 910 F. 2d 784, 788, and n. 19 (CA11 1990). The Second and Seventh Circuits, on the other hand, seem to have adopted a slightly different test. See In re Turner, 724 F. 2d 338, 341 (CA2 1983); In re Xonics, Inc., 813 F. 2d 127, 131 (CA7 1987); Home Ins. Co. v. Cooper & Cooper, Ltd., 889 F. 2d 746, 749 (CA7 1989). But whatever test is used, these cases make clear that bankruptcy courts have no jurisdiction over proceedings that have no effect on the estate of the debtor.

7 The dissent agrees that respondents’ proceeding to execute on the supersedeas bond is “related to” Celotex’s bankruptcy, post, at 318, n. 5, but noting that “only the district court has the power [under 28 U. S. C. § 157(c)(1)] to enter ‘any final order or judgment’ ” in related “[n]on-core proceedings,” post, at 321-322, the dissent concludes that the Bankruptcy Court here did not possess sufficient “related to” jurisdiction to issue the Section 105 Injunction, post, at 322. The Section 105 Injunction, however, is only an interlocutory stay which respondents have yet to challenge. See infra, at 313. Thus, the Bankruptcy Court did not lack jurisdiction under § 157(c)(1) to issue the Section 105 Injunction because that injunction was not a “final order or judgment.”

In any event, respondents have waived any claim that the granting of the Section 105 Injunction was a noncore proceeding under § 157(c)(1). Respondents base their arguments solely on 28 U. S. C. § 1334, and concede in their brief that the “bankruptcy court had subject matter jurisdiction to issue orders affecting the bond, then, only if the proceedings on the bond were ‘related’ to the Celotex bankruptcy itself within the meaning of § 1334(b).” Brief for Respondents 22. We conclude, and the dissent agrees, that those proceedings are so related. See post, at 317-318, and n. 5. We thus need not (and do not) reach the question whether the granting of the Section 105 Injunction was a “core” proceeding.

8 We recognize the theoretical possibility of distinguishing between the proceeding to execute on the bond in the Fifth Circuit and the § 105 stay proceeding in the Bankruptcy Court in the Eleventh Circuit. One might argue, technically, that though the proceeding to execute on the bond is “related to” the Title 11 case, the stay proceeding “arises under” Title 11, or “arises in” the Title 11 case. See In re Monroe Well Serv., Inc., 67 B. R. 746, 753 (Bkrtcy. Ct. ED Pa. 1986). We need not and do not decide this question here.

9 The dissent contends that Celotex’s attempts to set aside the supersedeas bond are “patently meritless” because none of Celotex’s claims can impair Northbrook’s obligation to respondents. See post, at 325. That premise, however, is not so dear as to give the Section 105 Injunction “only a frivolous pretense to validity.” There is authority suggesting that, in certain circumstances, transfers from the debtor to another for the benefit of a third party may be recovered from that third party. See In re Air Conditioning, Inc. of Stuart, 845 F. 2d 293, 296-299 (CA11), cert. denied, 488 U. S. 993 (1988); In re Compton Corp., 831 F. 2d 586, 595 (1987), modified on other grounds, 835 F. 2d 584 (CA5 1988). Although we offer no opinion on the merits of that authority or on whether it fits the facts here, it supports our conclusion that the stay was not frivolous.