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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
INRE:
R. Grace & Co. et al.
Debtors.
Chapter 11
Case No. 01- 01139 (JKF)
Adv. Proc. No. 01- 771
Jointly Administered
R. Grace & Co.
et al.
Appellants
Hon. Ronald L. Buckwalter United States District Judge
No. 08-cv- 00246
Libby Claimants
Appellees.
APPELLEES' BRIEF
Adam G. Landis (No. 3407) Kerri K. Mumford (No. 4186) Matthew B. McGuire (No. 4366) Landis Rath & Cobb LLP 919 Market Street , Suite 600 O. Box 2087 Wilmington , DE 19801 Telephone: (302) 467- 4400
Daniel C. Cohn Christopher M. Candon Cohn Whitesell & Goldberg LLP 101 Arch Street Boston , MA 02110
Telephone: (617) 951- 2505
June 20 , 2008
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ABLE OF CONTENTS
TABLE OF AUTHORITIES......................................................................................................... iii
STATEMENT OF JURISDICTION................................................................................................
ISSUE PRESENTED ON APPEAL................................................................................................
STATEMENT OF THE CASE........................................................................................................
Introduction.................................................................................................................. ...........
Procedural Background...........................................................................................................
SUMMARY OF ARGUMENT ...
ARGUMENT........................................................................................................................ ...........
The Bankruptcy Court Properly Concluded that it Lacks Jurisdiction to Enjoin the State Litigation ...............................................................
A.
B. Related- To
Jurisdiction Does Not Extend to the State Litigation .....................
II.
The Bankruptcy Court Committed No Error in Declining to Follow Gerard Because Gerard is Not Law of the Case and Distinguishable from the Present Case............................................................................................ .
A.
1. Grace
s Request to Enjoin the State Litigation is Not the Same Case as Gerard.......................................................... .....
2. Law of
Precedent Exists.................................................................................. .
B. Gerard
The State Litigation......................................................................................... .
III.
If This Court Finds that Jurisdiction Does Exist , the Court Should Review the Merits of Requested Injunction Rather than Remand to the Bankruptcy Court............................................................................................ .
A.
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B. Even
the State Litigation , a Section 105 Injunction is Not Warranted .....................
1. Section 105(a) and
Unusual Circumstances " Requirement.................
unusual circumstances
a. Grace had the burden
.26
b. Grace did
unusual circumstances
test , requiring that Grace demonstrate an identity of interest with the State....................................................................................... ..
c. Grace did
unusual circumstances
test , requiring that Grace demonstrate that the State Litigation will have an adverse effect on Grace s ability to reorganize........................
2. Grace did
issuance of an injunction........................................................................... .
a. The Likelihood of
.29
b.
c. Irreparable
d. Public Interest...................................................................................... 3 3
CONCLUSION............................................................................................................................. .
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TABLE OF AUTHORITIES
Cases
Acierno v. New Castle County , 40 F. 3d 645 (3d Cir. 1994) .........................................................
AFD Fund v. Transmed Foods, Inc. (In re AmeriServe Food Distribution, Inc.
315 B. R.
24 (Bankr. D. Del. 2004) """"'"''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''.....
AH. Robins, Inc.
, 788 F. 2d 994 (4th Cir.), cert' denied , 479 U. S. 876 (1986) .................................................................................................
American Hardwoods, Inc. v. Deutsche Credit Corp., (In re American Hardwoods, Inc. , 885 F.2d 621 (9th Cir. 1989) ...................................................
Arizona v. California , 460 U. S. 605 (1983).................................................................................. .
Carol Gerard v. W. R. Grace & Co. (In re W. R. Grace & Co.
115 Fed. Appx.
565 (3d Cir. 2004)... ................................................................................... , 17-
Casey v. Planned Parenthood of Southeastern Pennsylvania, 14 F. 3d 848 (3d Cir. 1994) ...........
Celotex Corp. v. Edwards , 514 U. S. 300 (1995) ....................................................................... , 10
Chase Manhattan Bank v. Third Eighty-Ninth Assoc. (In re Third Eighty-Ninth Assoc., Inc. 138 B. R. 144 (S. N. Y 1992)...................................................................................................... ..
Christianson v. Colt Indus. Operating Corp. 486 U.S. 800 (1988)...............................................
Clinton v. Jones , 520 U.S. 681 (1997) ....................................................................................
Cunningham v. Pension Benefit Guar. Corp. (In re SiMetco, Inc. 235 B. R. 609 (N. D. Ohio 1999).......................................................................................................
DeBeers Consol. Mines, Ltd. v. United States , 325 U.S. 212 (1945)........................................... .29
Dore & Assocs. Contracting, Inc. v. Am. Druggists ' Ins. Co. 54 B. R. 353 (Bankr. W. D. Wis. 1985)........................................................................................ ...
Feld v. Zale Corp. (In re Zale Corp. , 62 F. 3d 746 (5th Cir. 1995)........................... 7
Gray v. Hirsch , 230 B. R. 239 (S.
24-
Y 1999) ..............................................................................
Hayman Cash Register Co. v. Sarokin , 669 F.2d 162 (3d Cir. 1982)............................................
In re Asbestos Litig. , 271 B. R.118 (S. D. W. Va. 2001) ................................................................
111
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In re Ben Franklin Hotel Assocs. , 186 F. 3d 301 (3d Cir. 1999).................................................... In re Cary Metal Products, Inc. , 158 B.R. 459 (N. D. Ill. 1993).......................................................
In re Circle Land and Cattle Corp. , 213 B.R. 870 (Bankr. D. Kan. 1997) ......................................
In re Combustion Engineering, Inc. , 391 F. 3d 190 (3d Cir. 2004)
passim
In re Commonwealth Oil Refining Co. , 805 F.2d 1175 (5th Cir. 1986)........................................
In re Continental Airlines , 203 F. 3d 203 (3d Cir. 2000)............................................................... .24
In re Crazy Eddie Sec. Litig. , 104 B.R. 582 , (E.
In re Deltacorp, Inc. , 111 B.R. 419 (Bankr. S.
Y 1989).......................................................
Y. 1990)...........................................................
In re Eagle- Picher Indus., Inc. , 963 F. 2d 855 (6th Cir. 1992).................................. ......................
In re Federal- Mogul Global. Inc. , 282 B.R. 301 (D. Del.) (Wolin , J.
mandamus denied , 300 F. 3d 368 (3d Cir. 2002),
cert. denied sub nom.
Daimler Chrysler Corp. v. Official Comm. Of Asbestos Claimants
537 U. S. 1148 (2003)
passim
801 F. 2d 60 (2d Cir. 1986) .................................................................
In re Johns- Manville
Corp. ,
In re Jacksen , 105 B.R. 542 (B.A.P. 9th Cir. 1989).........................................................................
In re Kids Creek Partners , 248 B.R. 554 (Bankr. N. D. Ill. 2000)....................................................
In re Lowenschuss , 67 F. 3d 1394 (9th Cir. 1995) .........................................................................
In re Millennium Seacarriers, Inc. , 419 F. 3d 83 (2d Cir. 2005) ....................................................
In re Nunez 2000 WL 655983 (E.
In re S.
N. Y.
T.R. Corp. , 66 B.R. 49 (Bankr. N. D. Ohio 1986) ................................................................
Interest Research Group of New Jersey, Inc. v. Magnesium Elektron, Inc. 123 F. 3d 111 (3d Cir. 1997)...........................................................................................................
MacArthur Co. v. Johns- Manville
Corp. ,
837 F.2d (2d Cir. 1988) .............................................. .29
Oklahoma Federated Gold and Numistatics, Inc. v. Blodgett 24 F . 3d 13 6 (10th Cir. 1994) ........................................................................................................ .27
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Malley Lumber Co. v. Lockard (In re Lockard) , 884 F. 2d 1171 (9th Cir. 1989) ............... .26 , 27
Opticians Ass n of Am. v. Indep. Opticians of Am. , 920 F. 2d 187 (3d Cir. 1990) .......................
Off v. State of Montana , 106 P. 3d 100 (Mont. 2004)............................................................... , 12
Pacor, Inc. v. Higgins 743 F. 2d 984 (3d Cir. 1984)
passim
Phar- Mor, Inc. Sec Litig. V. Gen. Elec. Capital Corp. (In re Phar- Mor, Inc. Sec. Litig. 166 B. R. 57 (W. D. Pa. 1994)............................................................................................ ........... ..
Plumb v. Fourth Judicial Dist. Court 927 P.2d 1011 (Mont. 1996)..............................................
Robbins v. Chase Manhattan Bank, N.
1994 WL 149597 *2 (W. D. Va. 1994).......................
Schwartz v. Aquatic Dev. Group, Inc. (In re Aquatic Dev. Group, Inc. 352 F . 3d 671 (2d Cir. 2003).......................................................................................................... .
Stetson v. Howard D. Wolf & Assocs. , 955 F.2d 847 (2d Cir. 1992) ...........................................
Travelers Casualty and Surety Co. v. Chubb Indemnity Insurance Co. (In re Johns- Manville Corp ), 517 F. 3d 52 (2d Cir. 2008).............................................................
The Pitt News v. Fisher , 215 F. 3d 354 (3d Cir. 2000)...................................................................
S. v. GUY, 903 F. 2d
1240 (9th Cir. 1990) ..................................................................................
United States v. Pepperman , 976 F.2d 123 (3d Cir. 1992) (quoting In re Morristown & Erie Railroad Co. , 885 F.2d 98 (3d Cir. 1989) ......................................................................................
United States v. Sutton , 786 F.2d 13
.25
Univ. Med. Ctr. v. Am. Sterilizer Co. (In re Univ. Med. Ctr. 82 B. R. 754 (Bankr E. D. Pa. 1988) ...............................................................................................
Williams v. Runyon 130 F. 3d 568 (3d Cir. 1997) ....................................................................... .18
Zerand- Bernal Group, Inc. v. Cox , 23 F. 3d 159 (7th Cir. 1994) ............................................... 7 ,
Statutes
11 U. S. c. 9
11 U. C. 9 524(g) .............................................................................................................
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28 U. S. c. 9
28 U. S.
28 U.
c.
C. 9 158( a)(3).. ............
28 U. S. c. 9
, 19
Fed. R. Civ. P. 1 .......................................................................................................................... ..
Fed. R. Civ. P. 59(
Mont. Code Ann. 9 27- 703 (1997) ............................................................................................ .
Rules
Third Circuit Internal Operating Procedure 5. 5.4 (July 2002)...................................................... .21
Treatise
2 Collier on Bankruptcy
03 ................................................................................................ ..
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ST A
As set forth in the Opposition of Libby Claimants to Motion ofW. R. Grace for Leave to
Appeal Order Denying Injunction dated April 21 , 2008 1 the
asbestos from the Debtors ' operations in and near Lincoln County, Montana (the " Libby
Claimants ) assert that the Debtors (collectively, " Grace ) and the State of Montana (the " State
have failed to demonstrate an exceptional circumstance for this appeal , and have not
demonstrated that all other requirements for granting leave to appeal under 28 U.S. C.
have been met.
9 158(a)(3)
ISSUE PRESENTED ON APPEAL
Whether the Bankruptcy Court properly concluded that it lacks subject matter jurisdiction
to enter a preliminary injunction staying the Libby Claimants ' pending litigation against a nondebtor party, the State , where the litigation asserts claims against the State for its own tortious
conduct (the " State Litigation
STATEMENT OF THE CASE
Introduction
The suffering of the people of Libby, Montana due to asbestos disease from exposure to
Libby asbestos originating from the vermiculite mine and mill operated by Grace is well
chronicled? Through the Center
CARD Clinic ) in Libby,
Montana , Dr. Alan C. Whitehouse and Dr. C. Brad Black have diagnosed at least 1 500 patients
with asbestos related disease due to exposure to Libby asbestos in or near Lincoln County,
Montana. 3 The CARD Clinic regularly treats about 1
200 of these 1
500 patients.
4 Since the
I (Adversary Proc. D. I. 505. 2 (Adversary Proc. D. I. 417
3(
4(
, Ex. C , ~2.
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CARD Clinic opened in 2000 , more than 65 patients have died of cancer or respiratory failure
related to asbestos disease. 5 Most of those deaths have occurred since Grace filed its Chapter
case on April 2 , 2001. 6 Currently the CARD Clinic has over 80 patients on oxygen , and over
100 patients are severely limited , with short life expectancy. 7 Most of these require 24- hour
care.
But the devastating disease in Libby, said to be 10 times more deadly than more common
types of asbestosis , was not caused by Grace alone. The State also engaged in tortious conduct
injuring the people of Libby. In
Orr v. State of Montana , 106 P. 3d 100 (Mont. 2004), the
Montana Supreme Court held that under the state s Industrial Hygiene Act the State had
statutory duties to the public and persons confronted with workplace hazards
. at 110 , ,-r 40
and that " the State had discretion to determine what information to gather , but once that
information was gathered , it had no discretion about whether to distribute it."
. at 108 , ,-r 25.
The court noted: " (I)t appears that the record is bereft of any actions taken by the State to warn
the miners or the Libby townspeople of their plight."
. at 110 , ,-r 37.
Libby Claimants continue to suffer and die , without medical coverage for end stage care.
The Grace Libby Medical Program does not pay for nursing home care or 24-hour home care for
patients with asbestos disease. The affidavits of those who have performed the 24- hour home
care , and of those who are currently performing it , show enormous suffering and terrible stress.
For the Libby Claimants , especially those on oxygen , these services are critical as they are
5(
6 Since the Chapter 11 filing, at least 41 clients of the fIrm McGarvey, Heberling, Sullivan & McGarvey in
Kalispell , Montana have died of asbestos related disease. ( 7( , Ex. C , ~7.
8(
, ~7.
, Ex. D , ~4.
9 (Adversary Proc. D. I. 363 , Ex. A-
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unable to care for themselves , leaving exhausted family members to bear the burden , with no
help from Grace.
Grace has not only failed to provide the care that the Libby Claimants need and deserve but has sought to prevent them from obtaining compensation in the tort system from the State
and other recognized wrongdoers with no special relationship to Grace or its Chapter
Grace s attempt to " expand" to the State the preliminary injunction that Grace obtained early on
its bankruptcy case to enjoin asbestos-related claims against insurers and other affiliates of Grace
(the " Preliminary Injunction ) goes far beyond the original purpose of the Preliminary
Injunction , and far beyond the typical case where the debtor in a mass tort case seeks to enjoin
suits against its insurers and affiliates to protect the bankruptcy estate. Rather, in direct
contradiction to the consistent teachings of the Third
In re Combustion
Engineering, Inc. , 391 F. 3d 190 (3d Cir. 2004)-Grace seeks to shield a non- debtor party from
on- going litigation that cannot , as a matter of law , have a direct impact on Grace s estate. In
Combustion Engineering and two earlier decisions , the Third Circuit concluded that the
bankruptcy court did not have jurisdiction to enjoin litigation among non- debtor parties merely
because the defendant claimed a right of contribution or indemnity against the debtor - as the
State does here. The Bankruptcy Court properly recognized this established , controlling Third
Circuit precedent in its orders denying Grace s request to enjoin the State Litigation (the " Denial
Order
). 10
Denial Order " will refer to the following Bankruptcy Court orders: (i) Order Denying Debtors Motion to Expand the Preliminary Injunction to Include Actions Against the State of Montana (Adversary Proc. D. 420) and Memorandum and Opinion (Adversary Proc. D. I. 419), both entered on April 16 , 2007 (collectively, the Injunction Denial Order ) and (ii) Order Denying Motions to Reconsider (Adversary Proc. D. I. 484) and Memorandum Opinion (Adversary Proc. D. I. 483), both entered on March 31 , 2008 (collectively, the Reconsideration Order
10 For convenience
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Procedural Backe:round
On April 2 , 2001 (the " Petition Date ), Grace filed petitions for relief under Chapter
of the Code. On the same date , Grace filed an adversary complaint seeking,
Preliminary Injunction. ll
2001 12 and
inter alia the
, 2001 entered the Preliminary Injunction sought by Grace Y On
, 2002 , the Bankruptcy Court entered an order modifying the Preliminary Injunction to expand
its scope to include certain additional affiliates of Grace.
Prior to and after the Petition Date , the Libby Claimants commenced the State Litigation
in the Montana District Courts for Lincoln , Cascade , and Lewis and Clark Counties against the
State. IS The State Litigation
August 22 ,
2005 , more than four years after Grace entered Chapter 11. 16 On that day, Grace
(the "
filed a motion 17
State Injunction Motion ) to expand the Preliminary Injunction to include
the State Litigation. The Libby Claimants filed an opposition to the State Injunction Motion
joined in by the PI Committee representing all asbestos personal injury claimants.
On December 19 2005 ,
the Bankruptcy Court held a hearing on the State Injunction
Motion. 20 Sixteen months later (during which the Bankruptcy Court imposed a " temporary stay
II (Adversary Proc. D.I. 359 , ~ 3.
12 (
13 (
14
15
16 (
I. 87. I. 363 , p. 5.
17 Debtors
18 19
' Motion to Expand the Preliminary Injunction to Include Actions Against the State of Montana.
' Motion to Expand the Preliminary Injunction to Include Actions
(Adversary Proc. D. I. 359.
Against the State of Montana. (Adversary Proc. D. I. 363.
Debtors ' Motion to Expand the Preliminary Injunction to Include Actions Against the State of Montana. (Adversary ' Reply in Support of Their Motion to Expand the Proc. D. I. 365. ) Grace filed a Preliminary Injunction to Include Actions Against the State of Montana. (Adversary Proc. D. I. 367. 20 (Bankr. Case D. I. 11473.
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of the State Litigation), the Bankruptcy Court ruled in the Injunction Denial Order on April 16
2007 , that " related- to subject matter jurisdiction does not exist for the purpose of expanding the
injunction to include the (State Litigation). ,,
In response to the Injunction Denial Order , on April 26 , 2007 , Grace 22
and the State
filed motions to reconsider (collectively, the " Motions for Reconsideration ). On
2007
the Libby Claimants 24 and the PI Committee 2S
filed
Reconsideration. On May 21 , 2007 , the Bankruptcy Court heard oral argument on the Motions
for Reconsideration , along with another motion (the " BNSF Injunction Motion ) by Grace to
expand the Preliminary Injunction-this
time to include the Libby Claimants ' actions against
, 2008 , with the State Litigation having
27 the
BNSF Railway Company 26
("
BNSF" ).
On
been stayed in the meantime through yet another " temporary stay,
denied the Motions for Reconsideration on the same ground as before: the Bankruptcy Court
lacks subject matter jurisdiction over the State Litigation.
On April 11
, Grace filed a motion for leave to appeal the Denial Order. 28 The State
of Montana joined in Grace s motion. 29 On April 21 , 2008 , the Libby Claimants filed an
21 (Adversary Proc. D. I. 419 , p. 11.)
22 Debtors
' Motion to Alter and Amend the Court' s Order Denying Its Request to Expand the Preliminary Injunction
to Include Actions Against the State of Montana. (Adversary Proc. D. I. 427. 23 State of Montana s Motion for Reconsideration of Court' s Opinion and Order Denying Debtors ' Motion for
Expansion of Preliminary Injunction Entered on April 16 , 2007. (Adversary Proc. D. I. 426. 24 Libby Claimants ' Objection to Motions Filed by Debtors and State of Montana to Reconsider Order Denying
Debtors ' Motion to Expand the Preliminary Injunction to Include Actions Against the State of Montana. (Adversary Proc. D. I. 442. 25 ' and the State of Montana s Motions to Reconsider the Court' s Decision Denying a Stay of Litigation Against Montana. (Adversary Proc. D. I. 443. 26 Along , the Great Northern Railway Company, the Burlington Northern Railroad Company, and The Burlington Northern & Santa Fe Railway Company. 27 (Bankr. Case D. I. 15948 , p. 94:1.) 28 Motion ofW. R. Grace for Leave to Appeal Order Denying Injunction (Adversary Proc. D. I. 495. 29 (Dist. Crt. D.I. 1; 91 (subsequently consolidated with this appeaL))
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opposition to the motion. 30 The Court has not yet ruled on Grace s motion.
In the meantime , the State sought and obtained from the Bankruptcy Court a stay pending
appeal. On May 13 2008 , the Libby Claimants ' motion to dissolve the stay was denied by this
Court. 3
, even though the Bankruptcy Court has ruled on two separate occasions that the
federal courts have no jurisdiction to stay the State Litigation , the Libby Claimants have been
barred for more than two and one- half years-and remain
pursuing the State Litigation.
from
SUMMARY OF ARGUMENT
The Libby Claimants respectfully submit that the Denial Order should be affirmed
because the Bankruptcy Court properly (i) concluded that it lacks jurisdiction to enjoin the State
Litigation under long-established Third Circuit precedent , and (ii) declined to follow the Third
Circuit's non- precedential decision Carol Gerard v. W. R. Grace & Co. (In re W. R. Grace &
Co. , 115 Fed. Appx. 565 (3d Cir. 2004). In the event that this Court concludes that
does exist , the Court should review the merits of Grace s request and deny the injunction.
ARGUMENT
The Bankruptcy Court Properly Concluded that it Lacks Jurisdiction to Enjoin
the State Litie:ation
The Bankruptcy Court properly concluded that (1) it could not enjoin the State Litigation
unless it had subject matter jurisdiction over the State Litigation
related to " Grace s bankruptcy within the meaning of28 U.
i. e.
the State Litigation is
C. 9 1334(b); and (2) under long-
established Third Circuit precedent , affirmed and amplified in
Combustion Engineering , the
30
R. Grace for Leave to Appeal Order Denying Injunction
(Adversary Proc. D. I. 505. 31 (Dist. Crt. D. I. 7.
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State Litigation is not related to the Grace bankruptcy. Accordingly, the Bankruptcy Court
correctly determined that it was without jurisdiction to issue the injunction requested by Grace.
Subiect Matter Jurisdiction is a Threshold Requirement
A bankruptcy court has subject matter jurisdiction to enjoin litigation among third parties only if the bankruptcy court has subject matter jurisdiction over the litigation sought to be
enjoined.
Combustion Engineering , 391 F. 3d at 224- 25; Feld v. Zale Corp. (In re Zale Corp. , 62
see also Zerand- Bernal Group, Inc. v. Cox , 23 F. 3d
159 ,
3d 746 , 751 (5th Cir. 1995);
Cir. 1994). In
162 (7th
Combustion Engineering , the Third Circuit defined the threshold issue as
to '
whether the District Court properly exercised ' related
jurisdiction over the non- derivative
asbestos claims against non- debtors Basic and Lummus " when it enjoined those claims.
Combustion Engineering , 391 F. 2d at 224. The court cautioned that " (w)hile aspects of the
(merits) analysis may be relevant to the ' related
analytically distinct."
to '
jurisdiction inquiry,
. The court went
jurisdictional issue , concluding that the proponents of the injunction had failed to establish the
court' s jurisdiction to enter it.
. at 225- 33. Reaching the merits of the injunction under Section
105(a) of the Bankruptcy Code only in order to determine whether it would be pointless to
remand for more fact- finding
on the issue ofjurisdiction
32
. at 233 , the court then conducted a
separate analysis of whether the Bankruptcy Code permitted entry of the injunction.
233- 39.
The Fifth Circuit similarly explained in
Zale
Subject matter jurisdiction and power (under Section 105) are separate
prerequisites to the court' s capacity to act. Subject matter jurisdiction is the court' s authority to entertain an action between the parties before it.
Power under Section 105 is the scope and forms of relief the court may order in an action in which it has jurisdiction.
32 The
the enjoined litigation-an issue that
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Zale , 62 F. 3d at 751
(citing American Hardwoods, Inc. v. Deutsche Credit Corp. (In re American
Hardwoods, Inc. , 885 F. 2d 621 624 (9th Cir. 1989)).
The requirement for jurisdiction over the target litigation reflects the well-established
principle that Section 105 " does not provide an independent source of federal subject matter
jurisdiction.
Combustion Engineering, 391 F. 3d at 225.
Accord In re Johns- Manville
Corp.
801 F.2d 60 , 63 (2d Cir. 1986);
In re Jacksen , 105 B. R. 542 , 544 (B.AP. 9th Cir.
Y.);
In re
Nunez 2000 WL 655983 , at *8 (E.
(Bankr. N. D. Ill. 2000);
In re Kids Creek Partners , 248 B.R. 554 561
Cunningham v. Pension Benefit Guar. Corp. (In re SiMetco, Inc. 235
In re Cary Metal Products, Inc. , 158 B. R. 459 , 465 (N. D. Ill.
877 (Bankr. D. Kan. 1997). Section
R. 609 , 618 (N. D. Ohio 1999);
1993);
In re Circle Land and Cattle Corp. , 213 B.R. 870
105(a) is properly viewed as only an " aid to the exercise of jurisdiction. "
111 B.R. 419 , 420 (Bankr. S.
In re Deltacorp, Inc.
Y. 1990). A bankruptcy court may not invoke Section
In re S. T.R. Corp. ,
give the court jurisdiction which it does not already possess.
66 B. R. 49 , 51
(Bankr. N. D. Ohio 1986).
The Bankruptcy Court correctly recognized this threshold principle and properly
concluded that before it could consider the merits of Grace s request to enjoin the State
Litigation , it was required to determine whether it had jurisdiction over the State Litigation.
stated by the Bankruptcy Court:
While aspects of the 9105(a) analysis may be relevant to " relatedIn re Combustion jurisdiction , the two inquiries are analytically distinct.
Engineering, Inc. , 391 F. 3d 190 224- 25 (3d Cir. 2004). Section
does not provide an independent source of federal subject matter jurisdiction. . at 225. Therefore , this court must establish subject
matter jurisdiction before considering the merits of a 91
Injunction Denial Order at p. 6.
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Related- To
Jurisdiction Does
The Bankruptcy Court lacks jurisdiction over the Libby Claimants ' litigation against the
State because under long-standing Third Circuit precedent, related-to jurisdiction under 28
U.S. C. 9 1334(b) does not extend to litigation among non- debtor parties unless a judgment
rendered in the litigation would result in direct and automatic liability of the debtor s estate. No
direct and automatic liability in Grace can result from the State Litigation. Accordingly, the
Bankruptcy Court rightly determined that it was without jurisdiction to enter the injunction
sought by Grace.
The jurisdiction of bankruptcy courts is grounded in and limited by statute. 28 U.S.
91334(b); 28 U.S. C. 9 157(a). Section 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. "
In turn ,
Section 157(a) permits the district court to refer " any
or all proceedings arising under title
bankruptcy judges for the district."
Celotex Corp. v. Edwards , 514 U.S. 300 307 (1995). In the
present case , since the claims of the Libby Claimants against the State arose neither under the
Bankruptcy Code nor in Grace s Chapter 11 case , the sole issue for the Bankruptcy Court was
whether those claims are " related
to "
the Chapter
Courts have universally adopted the test first articulated by the Third Circuit in
Pacor,
Inc. v. Higgins , 743 F. 2d 984 , 994 (3d Cir. 1984), for determining whether related-to jurisdiction
exists:
A matter is related to the bankruptcy case for 913 outcome of that proceeding could conceivably have any effect on the , an action is estate being administered in bankruptcy. . related to bankruptcy if the outcome could alter the debtor s rights liabilities , options or freedom of action (either positively or negatively) and in any way impacts upon the handling and administration of the
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bankruptcy estate.
Applying this standard , the Third Circuit held that related- to jurisdiction did not extend to
personal injury litigation between non- debtor parties , neither of them related to the Chapter
debtor , stating:
At best , (the personal injury lawsuit) is a mere precursor to the potential third party claim for indemnification by Pacor against Manville. Yet the outcome ofthe (the Manville , in that it could not determine any rights , liabilities , or course of action of the debtor. Since Manville is not a party to the (the personal injury lawsuit), it could not be bound by res judicata or collateral estoppel.
. at 995. Accordingly, the Third Circuit concluded:
there would be no automatic creation of liability
against Manville on
account of a judgment against Pacor. Pacor is not a contractual guarantor
of Manville, nor has Manville agreed to indemnify Pacor , and thus a
judgment in the (the personal injury lawsuit) could not give rise to any
automatic liability on the part of the estate. All issues regarding Manville s possible liability would be resolved in the subsequent third
party impleader action. .
administration of the estate , until such time as Pacor may choose to pursue
its third party claim.
. at 995- 96 (emphasis added). Since the Chapter
automatically
by the litigation , the litigation could not affect the estate in any way and thus was not related to
the debtor s Chapter 11 case.
Pacor has been expressly approved by the United States Supreme Court.
Celotex 514
Pac or in
S. at 308. And the Third Circuit has confirmed the on- going vitality of
Engineering , 391 F. 3d at 225, and
Combustion
In re Federal- Mogul Global. Inc. , 282 B. R. 301 (D. Del.),
mandamus denied 300 F. 3d 368 (3d Cir. 2002),
cert denied sub nom Daimler Chrysler Corp. v.
Official Comm. of Asbestos Claimants , 537 U. S. 1148 (2003).
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In
Combustion Engineering , a prepackaged Chapter
, the plan provided for all
asbestos claims-including claims against non- debtor affiliates Basic , Inc. and ABB Lummus
Global , Inc.
to be channeled to a post-confirmation trust created under Section 524(g) of the
Bankruptcy Code. The plan provided for all three entities , along with their respective parent
companies , to make substantial contributions of cash and other assets to the post-confirmation
trust. Fulfilling a
, the bankruptcy court entered an injunction
under Section 105 barring the assertion of asbestos claims against Basic and Lummus. After a
thorough analysis of Pac or and
Federal- Mogul , the Third Circuit held that related- to jurisdiction
cannot be extended to claims of asbestos plaintiffs against the non- debtors (Basic and Lummus)
simply because of their corporate affiliation with the debtor or because the substantial financial
contributions to the plan by the non- debtor affiliates depended on a channeling injunction in their
favor.
Combustion Engineering , 391 F. 3d at 225- 27. Accordingly, the court considered
other factors advanced by the debtor as grounds for related- to jurisdiction: a unity of interest
based on the debtor s obligations of indemnity or contribution to the non- debtor affiliates , and the
existence of shared insurance between the debtor and the affiliates.
The
Combustion Engineering decision rejected the debtor s assertion that the non- debtor
affiliates ' potential rights of contribution or indemnity from the debtor
jurisdiction.
. at 230- 32.
In so doing, the court
s contention
that common production sites between the debtor and affiliates provided " a sufficient basis for
the kind of ' unity of interest' that could give rise to ' related
to '
jurisdiction.
. at 232. In the
State Litigation , of course , the State is not even in the business of producing asbestos products.
Rather , liability in the State is predicated on the State s own violation of a governmental duty to
33 There is
, so this factor will not be addressed in this
Brief.
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warn about hazards at Grace s production sites.
Orr , 106 P. 3d at 108. The Court of Appeals for
the Second Circuit recently emphasized that this independent legal duty is dispositive, holding
that the bankruptcy and district courts erred by asserting subject matter jurisdiction over
litigation between non- debtor parties based on the factual relationship of the litigation claims to
the Chapter 11 debtor , since the defendant in the non- bankruptcy litigation had " an independent
legal duty (imposed by state law) in its dealing with plaintiffs , notwithstanding the factual
background in which the duty arose.
Travelers Casualty and Surety Co. v. Chubb Indemnity
Corp.
Insurance Co. (In re Johns- Manville
517 F. 3d 52 , 63 (2d Cir. 2008). But even if the fact
that the inspections made by the State and the warnings it failed to issue concerned Grace
operations in Libby could be shoe- horned into the concept of a " common production site
between Grace and the State Combustion Engineering makes it crystal clear that this factor does
not
represent a " unity of interest" that could confer jurisdiction.
Combustion Engineering , 391
3d at 231- 32.
This aspect of
Combustion Engineering was not new , but simply an application of
Pacor
and
principles long settled under
Federal- Mogul.
As the court in
Combustion Engineering
observed Pacor rejected related- to jurisdiction even though the non- debtor s exposure to liability
resulted from sale of products that the debtor manufactured , and Federal- Mogul found no
jurisdiction even though the non- debtors ' exposure to liability resulted from incorporating the
debtor s products into their own.
continued:
Combustion Engineering , 391 F. 3d at 231- 32.
The court
In both cases the unity of exposure created by asbestos contained in a common
product was insufficient to give rise to " related to " jurisdiction when the third-
party claim would not directly result in liability for the debtor.
. at 232.
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The District Court' s decision in
Federal- Mogul explains why a claim against a non- debtor
who merely asserts a right of contribution or indemnity does not directly result in liability for the
debtor. In
Federal- Mogul , non- debtors Chrysler , Ford and other automakers who were
codefendants with the debtors in thousands of asbestos-related tort lawsuits (referred to as the Friction Products Litigation) sought to transfer those cases to the Delaware Bankruptcy Court
arguing that the tort suits were " related
bankruptcy jurisdiction.
to "
the debtors' Chapter 11 case so as to confer
Pacor , District Court held that " related- to bankruptcy
jurisdiction (does) not extend to a dispute between non- debtors unless that dispute , by itself
creates at least the logical possibility that the estate will be affected. Federal- Mogul , 282 B.R.
at 309. The debtor , although a putative indemnitor , had no cause for concern that common facts
would be litigated against the non- debtors , because no factual determination could be binding on
the debtor s estate.
. at 306. An indemnitor can be bound
given an opportunity to be heard and defend , but since the automatic stay prevents the debtor
from being required to defend , the debtor cannot be bound:
Implicit in
Pacor rationale is that a debtor may not be prejudiced by its failure to defend a lawsuit against a third- party common- law indemnitee without de facto depriving the debtor of the benefit of the automatic stay of litigation against it.
. at n. 3. Accordingly:
The Court sees no justification to take the situation ofthese movants (the nondebtor codefendants of the debtor in asbestos litigation) outside of the rule of Pacor. judgment against them will not bind the debtors. No asset of the estate is threatened nor is any re-ordering of creditors in the offing. recovery by asbestos claimants against the movants may give rise to claims indeed very substantial claims , against the debtors in the future. when the movants appear as creditors of the estate and the facts underlying the liability are adjudicated in the context of the bankruptcy, that the Friction Product Claims will affect the estate.
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. at 311 (emphasis added). The District Court concluded: " To the extent that the validity of an
indemnity agreement is in doubt , the directness between the third- party action and a judicial
ruling that will affect the estate is attenuated.
Federal- Mogul , 282 B.R. at 311- 12. The District
Court' s denial of jurisdiction was upheld by the Third Circuit , which concluded:
Any indemnification claims that the (automakers) might have against Debtors have not yet accrued and would require another lawsuit before they could have an impact on Federal- Mogul's bankruptcy proceeding. . . .
Federal- Mogul , 300 F. 3d at 382.
Before
Combustion Engineering , it was possible (albeit incorrect) to distinguish
Pacor
and
Federal- Mogul on the basis that those decisions involved attempts to remove litigation to the
bankruptcy court , rather than attempts to enjoin such litigation. But in
Combustion Engineering
the Third Circuit applied the exact same analysis of related-to jurisdiction to the injunction
situation. As the Bankruptcy Court properly recognized in the Injunction Denial Order , it is now
clear that related- to jurisdiction must exist for litigation to be enjoined by the bankruptcy court
just the same as it must exist for litigation to be removed to the bankruptcy court. Injunction
Denial Order at p. 6.
The following chart succinctly summarizes the Third Circuit case law on whether subject
matter jurisdiction exists to enjoin non- debtor litigation based on claims for indemnification or
contribution by the non- debtor
defendant.
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Jurisdiction Based on Indemnification or Contribution
Indemnification! Contribution Common Law Contractual
Disputed
Clear
Common Law/Disputed and Common Law/Clear : No subject matter jurisdiction. The Third Circuit has ruled three times that a common law right of indemnity or contribution against a debtor that would arise from judgment in a litigation among non- debtors does not cause the litigation to be " related to " the debtor s bankruptcy for purposes of establishing federal jurisdiction. Combustion Engineering , 391 F. 3d at 232; FederalMogul , 300 F. 3d at 382; Pacor , 743 F. 2d at 994- 95.
Contractual/Disputed : No subject matter debtor party claims a right of indemnity under a contract rather than common law FederalMogul made clear that the right to indemnification must be direct and automatic. Upon examining the indemnification agreements submitted by Chrysler in the Federal- Mogul case , the District Court stated that " the question whether this purported indemnity agreement would be determined to bind the (debtors) is open and one not easily resolved. The Court is unwilling again to rest subject matter jurisdiction on this tenuous support. . at 311 (quoting In re Asbestos Litig. , 271 B. R. 118 124 (S. D. W. Va. 2001)).
Contractual/Clear : Subject matter jurisdiction unclear. State Litigation , the Third Circuit has left unclear the issue of whether an indemnification agreement to which the debtor asserts no defense would be sufficient to establish relatedto jurisdiction. On the one hand , the Third Circuit indicated in dictum that an uncontested contractual indemnity from the debtor held by the defendant in non- debtor litigation could establish related- to jurisdiction. Pacor , 743 F.2d at 995. On the other hand , the logic and rationale of Pac or Federal- Mogul and Combustion Engineering support the opposite result by establishing that a judgment against the defendant in the non- debtor litigation would not automatically result in liability of the bankruptcy estate since the debtor-protected by the automatic stay from any adverse effect of the nonbankruptcy litigation-would be free debtor defendant' s indemnity claim on any basis , including issues already determined as between the non- debtor parties. Pacor , 743 F. 2d at 995; Federal- Mogul , 282 B.R. at 309.
The Bankruptcy Court followed this established precedent and correctly determined that
Pacor Federal- Mogul , and Combustion Engineering required the conclusion that the Bankruptcy
Court lacked jurisdiction to enjoin the State Litigation. As stated by the Bankruptcy Court:
(In Federal- Mogul ) (t)he bankruptcy court accurately reiterated the holding of Pacor stating that jurisdiction exists where " the potential impact on the debtor s estate would have been direct with no intervening adjudication or
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joinder of issue necessary for judgment against the non- debtor to affect assets re- prioritize creditors and thwart the bankruptcy court' s administration of the estate. " Injunction Denial Order at Federal- Mogul Global. Inc.
282 B.R. at 307).
The position (of) claims in the (State Litigation) is nearly identical to the claims in Pacor and Federal- Mogul. Before any effect on the Debtors can be realized , the State of Montana must first be found liable in state court and then
pursue its claim for indemnification in bankruptcy court. Order at p. 9.
Montana law prohibits the State of Montana from litigating or establishing a factual basis (i. e. percentage of comparative fault) against Debtors for either contribution or indemnity during the course of the (State Litigation) . . . . A judgment against the State of Montana will not bind Debtors. An intervening adjudication is necessary to affect the estate. Injunction Denial Order at pp. 910.
In (the State Litigation), it is the actions of the State of Montana, not Debtors which are the basis of the claims. Injunction Denial Order at p. 10.
Here... , as
Pacor and Federal- Mogul , the (State Litigation) will not be binding on the estate and will not have a direct impact on the estate without additional intervening adjudication. Injunction Denial Order at p. 11.
Grounded as it is in controlling Third Circuit precedent , the foregoing analysis is unassailable.
If a state court verdict were to enter against the State , the State would need to return to
the Bankruptcy Court to seek allowance of a claim for indemnity or contribution against
just like Pacor in the
Pacor case. In the contested matter relating to allowance
claim , Grace will not be bound by any determination or order in the State Litigation. 34 While the
Third Circuit may have left the door open to consider whether an undisputed contractual
indemnification claim is sufficient to confer subject matter jurisdiction on the bankruptcy court the State does not have a contract with Grace and , even if it did , Grace has repeatedly disputed
34 Apart
, Montana law prohibits the State from litigating or establishing percentage of comparative fault) against Grace for either contribution or indemnity during the course of the State Litigation. See generally Mont. Code Ann. ~ 27- 703 (1997); Plumb v. Fourth Judicial Dist. Court , 927 P. 2d 1011 (Mont. 1996) (entry of fIndings against a non- party violates substantive due process).
a factual basis (i.
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the validity of the State s claims. 3s The Third Circuit has not left the door open for assertion of
federal jurisdiction where the right of indemnity is non-contractual or where it is disputed. Here
it is both. Absent a demonstration by Grace and the State that the State Litigation is
distinguishable in any meaningful way from the situation in
Pacor and
Federal- Mogul , the Denial
Order must be affirmed as the Bankruptcy Court lacks jurisdiction over the State Litigation.
II.
The Bankruptcy Court Committed No Error
In
Declining to Follow Gerard
Because Gerard is Not Law of the Case and
In the face of this overwhelming Third Circuit precedent , Grace and the State instead
maintain that the Third Circuit' s panel opinion in
Carol Gerard v. W. R. Grace & Co. (In re W.
Grace & Co. , 115 Fed. Appx. 565 (3d Cir. 2004), is law of the case and , thus , the Bankruptcy
Court erred in declining to follow the panel' s ruling. However , the doctrine oflaw of the case
has no application to Grace s request to enjoin the State Litigation because (a) this request for a
new injunction is not the same case as
Gerard and (b) law of the case does not apply because
is a supervening precedent that overrules
Combustion Engineering
Gerard (or , more precisely,
Grace s and the State
s interpretation of
Gerard). Thus Gerard would not govern this appeal
even if it were not , in fact , distinguishable.
Gerard is Not Law of the
Grace s Request to Enjoin the State Litigation is Not the Same Case as Gerard
Under the law ofthe case doctrine , once an issue has been decided it will not be
relitigated in the same case except in unusual circumstances.
Hayman Cash Register Co. v.
Sarokin , 669 F.2d 162 , 165 (3d Cir. 1982). " (T)he doctrine posits that when a court decides
See State Injunction Motion (Adversary Proc. D. I. 359 , ~ 25 , n. 12) (li The Debtors do not concede that the State possesses a valid indemnifIcation and/or contribution claim against them. The State , however , alleged such rights in its Third- Party Complaint and its fIled proof of claim. "
35
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upon a rule of law, that decision should continue to govern the same issues in subsequent stages
in the same case.
(quoting
Christianson v. Colt Indus. Operating Corp. , 486 U. S. 800 815- 16 (1988)
460
Arizona v. California
U.S. 605 , 618 (1983) (dictum));
see also Williams v.
Runyon , 130 F. 3d 568 573 (3d Cir. 1997). The purpose of the doctrine is to " maintain
consistency and avoid reconsideration of matters once decided
during the course of a single
continuing lawsuit.
Casey v. Planned Parenthood of Southeastern Pennsylvania , 14 F. 3d 848
856 (3d Cir. 1994 ) (emphasis added; citations omitted).
Grace s request for an injunction against the State Litigation does not concern the same issues , does not involve the same parties , and , therefore , is not the same case as
Gerard . The
happenstance (or stratagem) that Grace sought to amend the complaint in a pre-existing adversary proceeding to include the State and the Libby Claimants rather than file a new
adversary proceeding does not cause Grace s request for a new injunction against different
litigation among different parties 36
to be
case " as the injunction against the
Gerard
litigation for purposes of " law of the case.
See U.S. v. Guy , 903 F.2d 1240 , 1242 (9th Cir.
1990) (law of the case does not apply where court is faced with a similar dispute involving
different parties). Grace s and the State s arguments about merely extending or modifying the
existing Preliminary Injunction are misleading; the State does not even arguably fall within any
category of protected parties under the existing Preliminary Injunction. Accordingly, Grace
carries the burden of proving in this case , under the heightened standard of Fed. R. Civ. P. 59(e),
36
See Debtors ' Motion for Leave to Further Amend Complaint dated August 22 , 2005 (Adv. Proc. D. I. 360), whereby Grace seeks to amend the original complaint to include the State and the Libby Claimants. As an exhibit to that motion , Grace attached its list of the Libby Claimants. Many of the Libby Claimants were not plaintiffs in the Gerard matter versus Maryland Casualty Company, and of course the State was not a party in Gerard . A list of Libby Claimants who have sued the State but not Maryland Casualty Company, along with an affIdavit of counsel is attached to the Libby Claimants ' Objection to Motions Filed by Debtors and State of Montana to Reconsider Order Denying Debtors ' Motion to Expand the Preliminary Injunction to Include Actions Against the State of Montana (Adv. Proc. D. I. 442).
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why a new injunction should issue for the State s benefit. For these reasons alone , law of the
case does not govern Grace s request to enjoin the State Litigation.
Law of the Case Does Not Auulv Where Suuervenine: Precedent Exists
Law of the case does not apply where a supervening decision has changed an applicable
rule oflaw. 37 Magnesium Elektron , 123 F. 3d at 116 - 117;
AFD Fund v. Transmed Foods, Inc.
(In re AmeriServe Food Distribution, Inc. ), 315 B. R. 24 (Bankr. D. Del. 2004). Grace s and the
State s interpretation of
Gerard places it
squarely
contrary to
Combustion Engineering
-a
decision ofthe Third Circuit ,
and one expressly decided on a precedential basis in contrast to
Gerard , which was issued as a non- precedential decision. In
Gerard , the Third Circuit panel
vacated a District Court order that the Bankruptcy Court lacked related- to jurisdiction for the
Bankruptcy Court to expand the Preliminary Injunction to include the Libby Claimants
independent actions against Maryland Casualty Company.
Combustion Engineering in permitting an injunction against litigation among third parties
without requiring that the court be able to exercise jurisdiction over that litigation.
above Combustion Engineering made clear in the Third Circuit what had previously been made
clear in the Fifth and Seventh Circuits: that a bankruptcy court must establish jurisdiction over
the matter to be enjoined before issuing a Section 105 injunction.
Combustion Engineering , 391
Zerand-
3d at 224- 25;
Feld v. Zale Corp. (In re Zale Corp. , 62 F. 3d 746 , 751 (5th Cir. 1995);
159 ,
Bernal Group, Inc. v. Cox , 23 F. 3d
162 (7th Cir. 1994)(" only after (the non- debtor lawsuits)
are shoehorned into the bankruptcy court on authority of Section 1334(b) can such suits be
stayed by authority of Section 105"
37 The
, which permit reconsideration of an issue previously decided in a case , include situations in which: (i) new evidence is available; (ii) a supervening new law has been
announced; or (iii) the earlier decision was clearly erroneous and would create manifest injustice.
See Public
Interest Research Group of New Jersey. Inc. v. Magnesium Elektron. Inc. , 123 F. 3d
111 ,
116 - 117
(3d Cir. 1997).
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Gerard is Distine:uishable from and Inapplicable to the State Litie:ation
In addition to not being law of the case , the Gerard opinion is distinguishable from and
inapplicable to the State Litigation because (1)
Gerard was expressly rendered as a non-
precedential decision , (2) the Bankruptcy Court correctly followed and applied long-established
Third Circuit precedent contrary to
Gerard (3) Bankruptcy Court fully considered and
Gerard
distinguished the
Gerard decision , and (4)
, in any event , inapplicable to the present
situation because the outcome resulted largely from its odd procedural posture , not present in the
instant case.
The
Gerard
decision preceded
Combustion Engineering and was expressly rendered on a
non- precedential basis under the Third Circuit' s Internal Operating Procedure 5. 5.4.
Accordingly, the Bankruptcy Court need not have cited
Gerard at all. However , the Bankruptcy
Court did address
Gerard , in both the Injunction Denial Order and the Reconsideration Order.
As the Bankruptcy Court itself stated in the Reconsideration Order:
(T)his court did not " overlook" the
expressly cited
Gerard case. Indeed , the court Gerard and distinguished it on its facts.
Reconsideration Order at p. 8. The Bankruptcy Court distinguished
Gerard on the basis that in
Gerard Maryland Casualty Company asserted contractual indemnification against the Grace
estate whereas , in the instant case , the State asserted common law contribution and indemnity.
Reconsideration Order at pp. 7Although the Libby Claimants regard
citing Injunction Denial Order , 366 B. R. at 298 301- 02.
Gerard as just plain wrong, the Bankruptcy Court certainly
drew a valid distinction between
Gerard and the present case. Most importantly, the Bankruptcy
Court' s decision in the present case is solidly grounded in Third Circuit precedent, including the
Combustion Engineering
decision which had not yet been rendered at the time of
Gerard.
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It should also be noted that
Gerard is distinguishable from the instant case by reason of its
procedural posture. The
Gerard panel imposed the burden of proof on the Libby Claimants
because they sought to clarify or modify a preliminary injunction that already included their
independent claims against Maryland Casualty Company (the Libby Claimants had not opposed
initial entry of the injunction). This procedural peculiarity drove the
Gerard decision.
Specifically, the
Gerard panel stated:
But , here , the issue before the Bankruptcy Court was not whether it should exercise jurisdiction over suits pending elsewhere , nor even whether it should enjoin such suits , but , rather , whether it should modify an injunction already entered in the Bankruptcy Court in favor of Grace and (Maryland Casualty Company). Gerard , 115 Fed. Appx. at 567.
It is important to note at the outset that the appeal before us is not an appeal from the entry of the Injunction , but , rather , from the Bankruptcy Court' refusal to interpret , alter , or reconsider the Injunction after its entry as Plaintiffs urge. Due to this procedural fact , it was Plaintiffs , as moving parties , who had the burden to demonstrate to the court that the Injunction was
somehow improper as to them. This they failed to do.
. at 568.
We have little difficulty, especially given the constraints of Rule 60(b), in concluding that the Bankruptcy Court did not err in refusing to modify its previous grant of an injunction broad enough in scope to include a stay of The
Lawsuit.
. at 569.
The
Gerard panel criticized the District Court' s order vacating the injunction for lack of
subject matter jurisdiction on the basis that the District Court did not appreciate " the nature of
the proceeding before the Bankruptcy Court.
. at 568. Because the appeal concerned the
Bankruptcy Court' s refusal to modify an already-entered injunction , the Gerard panel stated that
the " issue of bankruptcy jurisdiction to entertain the motion relating to the Injunction was in
reality a non- issue.
. The panel stated
related to '
the case
because it resulted from an adversary proceeding seeking injunctive relief that Grace initiated;
thus , the Bankruptcy Court had jurisdiction to enforce its own order.
. at 567- 68. This is an
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important distinction between the present case and
Gerard since it is , or course , axiomatic that
In re
bankruptcy courts " retainjurisdiction to enforce and interpret
Millennium Seacarriers, Inc. , 419 F. 3d
83 ,
97 (2d Cir. 2005). When
Gerard is viewed in this
light , the issue presented in this instance is strikingly different. This appeal does not concern an
attack on a previously issued injunction. This appeal concerns the Bankruptcy Court' s refusal to
issue an injunction in the first instance.
It is a misreading of
Gerard
for Grace to argue that
Gerard establishes that bankruptcy
jurisdiction exists to enjoin litigation among third parties because the injunction was sought by
the debtor as distinct from some other party in interest. Most likely the
Gerard panel meant no
more than that , when someone asks the bankruptcy court to modify a previously entered
injunction , the relevant jurisdictional issue is whether the bankruptcy court has jurisdiction to
consider the modification request rather than whether the bankruptcy court had jurisdiction to
enter the injunction in the first place. Whether or not the panel was correct in this regard , it is
clear that the procedural posture of
Gerard
involving a motion to modify or clarify an already-
issued injunction rather than a motion to obtain an injunction in the first instance-permeated the
panel' s
because
analysis of jurisdiction.
Gerard is simply irrelevant to the Denial Order
in the current situation
the issue is whether the Bankruptcy Court has jurisdiction to
enter a new injunction , not limit an injunction that has already been entered.
Grace is incorrect in characterizing
Pacor Federal- Mogul , and Combustion Engineering
as " inapposite "
because " (i)n each of them , the courts were not dealing with adversary
proceedings initiated by debtors that involved core issues in the bankruptcy cases. ,,
Combustion Engineering involved a core proceeding (confirmation of a Chapter 11 plan), 39 a
38 Grace
39 ConfIrmation
C. ~ 157(b)(2)(L).
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requested injunction rather than removal , and the requesting party was the debtor. Grace
further explanation that " in Combustion Engineering , bankruptcy (injunctive?) protection was
being sought not only on behalf of the debtor , but also on behalf of two affiliated companies of
the debtor that sold ' different products (from the debtor), (which were) involved in different
asbestos-containing materials , and were sold to different markets
just a restatement of the obvious: that in
40 is not
Combustion Engineering , as in the instant case , the
injunction sought by the debtor was for the protection of a non- debtor defendant.
In sum , Grace s and the State s reliance on
Gerard is misplaced.
Gerard is an expressly
non- precedential decision superseded by, in contravention of and distinguishable from
Combustion Engineering and the earlier line of decisions from the Third Circuit and elsewhere
upon which it relies. To apply
Gerard , this Court would need to overrule
Combustion
Engineering
III.
If This Court Finds that Jurisdiction Merits of Requested Iniunction Rather than Remand to the Bankruptcy Court
This Court Should Consider the Full Merits of the Appeal
Notwithstanding the pleas of Grace and the State to remand the appeal back the
Bankruptcy COurt
41 this
Claimants assert that the record before the Bankruptcy Court cannot support either relatedjurisdiction or the merits of the requested injunction.
See In re Ben Franklin Hotel Assocs. , 186
3d 301 ,
306 (3d Cir. 1999) ("Because the record has been sufficiently developed for us to
resolve this legal issue , we need not remand to the District Court to consider it in the first
instance.
see also Stetson v. Howard D. Wolf & Assocs. , 955 F. 2d
847
850- 51 (2d Cir. 1992)
40 Grace 41 Grace
Combustion Engineering, 391 F. 3d at 231).
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An appellate court has the power to decide cases on appeal if the facts in the record adequately
support the proper result. " ).
Since the
sub judice
the question whether
there is jurisdiction and , if so , grounds to issue the injunction sought by Grace , the record is
sufficient for this Court to reach the same issue. Grace declined to offer any testimony, or even
affidavits , in support of the requested injunction , so the usual considerations regarding a trial
court' s evaluation of evidence do not apply.
Even if this Court Concludes Jurisdiction Exists to Enjoin the State Litie:ation. a Section 105 Iniunction is Not
Even where a bankruptcy court has jurisdiction to enjoin actions between non- debtors the Bankruptcy Court is still constrained by the limits on such injunctions established under
federal law. The Supreme Court has established that , in considering a stay of any civil litigation
federal courts must give paramount importance to the rights of the plaintiff.
Clinton v. Jones
520 U. S. 681 , 707- 08
(1997). This requirement does not disappear
related to a bankruptcy proceeding. Indeed , when the injunction of non- debtor litigation is in the
context of a Chapter
, it is established that even if the bankruptcy court has jurisdiction , it
may enter the injunction only if the moving party demonstrates the existence of (i) unusual
circumstances warranting the injunction and (ii) the traditional prerequisites to issuance of an
injunction.
See Zale , 62 F. 3d at 761 , 765. Grace failed to meet either requirement in
its request to enjoin the State Litigation.
Section 105(a) and the " Unusual
Circumstances " Requirement
Section 105(a) is intended to assure that bankruptcy courts may take whatever actions are
necessary or appropriate to further the purposes ofthe substantive provisions
However , there are limits to the relief that a court may grant under Section 105.
Combustion
Engineering , 391 F. 3d at 236;
In re Continental Airlines , 203 F. 3d 203 211 (3d Cir. 2000). As
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the Third Circuit has stated Section 105 does not ' give the court power to create substantive
rights that would otherwise be unavailable under the Code.
2d 123
United States v. Pepperman , 976
131 (3d Cir. 1992) ( quoting In re Morristown & Erie Railroad Co. , 885 F.2d 98 100
(3d Cir. 1989));
see also United States v. Sutton , 786 F.2d 1305 , 1308 (5th Cir. 1986). Courts
have indicated that the Section 105 power must be used sparingly and in extraordinarily limited
circumstances.
Univ. Med. Ctr. v. Am. Sterilizer Co. (In re Univ. Med. Ctr.) , 82 B.R. 754 , 757
Pa. 1988);
(Bankr. E. D.
see also Chase Manhattan Bank v. Third Eighty-Ninth Assoc. (In re
Y. 1992). Section 105(a)
Third Eighty-Ninth Assoc., Inc. , 138 B.R. 144 , 146 (S.
sense constitutes ''' a roving commission to do equity.
Combustion Engineering , 391 F.3d at
236 ( quoting Schwartz v. Aquatic Dev. Group, Inc. (In re Aquatic Dev. Group, Inc. , 352 F.
671 680 (2d Cir. 2003)).
Consistent with these principles and recognizing that a particularly high standard is required to enjoin litigation between non- debtor parties , courts have held that " (i)fthe
bankruptcy court does not determine that
unusual circumstances exist the court may not enter
actions.
an injunction of the third- party
Zale , 62 F. 3d at 761 (emphasis added). Unusual
circumstanc