Free Appellant's Brief - District Court of Delaware - Delaware

Case 1:07-cv-00609-RLB

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
INRE:
R. Grace & Co. et al.
1 :07-cv- 00609 Hon. Ronald L. Buckwalter United States District Judge

Debtors.

Libby Claimants

et al.

Appellants

Appeal from United States Bankruptcy Court for the District of Delaware
Chapter 11

R. Grace & Co. et al.

Appellees.

Case No. 01- 01139 Adv. Proc. No. 01- 771 Hon. Judith K. Fitzgerald

APPELLANTS' BRIEF

Adam G. Landis (No. 3407) Kerri K. Mumford (No. 4186) 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

October 25 ,

2007

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TABLE OF CONTENTS
TABLE OF AUTHORITIES............................................................................................. .............
BASIS OF APPELLATE JURISDI CTION ................................................................ ......... ........... ISSUES PRESENTED ON APPEAL................ ........ ..................................................... .................

STANDARD OF REVIEW............................ .................................................................................
STATEMENT OF THE CASE............................................................................... ..................... ....

Introduction.................................................................................................................. ...........

Procedural Background...........................................................................................................
The State Litigation................... ..................................
The BNSF Litigation................. ..................................
The Bankruptcy Court Stay Order ...............
.1 0

SUMMARY OF ARGUMENT ..................................................................................................... ARGUMENT.. ...............................................................................................................................

The Stay Order Constitutes an Improperly Entered Preliminary Injunction and Should be Overturned by this Court ..............................................
II.

The Bankruptcy Court Lacked Subject Matter Jurisdiction to Enjoin the State Litigation or the BNSF Litigation ...........................................

A. Subject
B. The Bankruptcy Court Lacked

to Enter the Stay Order Enjoining the State Litigation ....................................

C. For the
III.

, the Bankruptcy Court Lacked Jurisdiction to Enjoin the BNSF Litigation Pursuant to the Stay Order..............................

Even if the Bankruptcy Court Concluded Jurisdiction Existed to Enjoin the State Litigation or BNSF Litigation , a Section 105 Injunction was Not Warranted.............................................................................................................. .

CONCLUSION.............................................................................................. ............................. ...

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TABLE OF AUTHORITIES
Cases
H. Robins, Inc. v. Piccinin (In re A.H. Robins Co. , 788 F. 2d 994 (4th Cir.), cert. denied , 479 U. S. 876 (1986) .................................................................................................

Am. Imaging Servs. v. Eagle-Picher Indus., Inc. (In re Eagle- Picher Indus., Inc. 963 F.2d 855 (6th Cir. 1992) ........................................................................................................ American Hardwoods, Inc. v. Deutsche Credit Corp., (In re American Hardwoods, Inc. , 885 F. 2d 621 (9th Cir. 1989) ................................................ .17
Carol Gerard v. W. R. Grace & Co. (In re W. R. Grace & Co.
115 Fed. Appx.

565 (3d Cir. 2004)... ............................................................................................ .21
, 21

Celotex Corp. v. Edwards , 514 U. S. 300 (1995) .....................................................................

Clinton v. Jones , 520 U. S. 681 (1997) ......................................................................................... .29

Coffin v. Malvern Fed. Sav. Bank , 90 F. 3d 851 (3d Cir. 1996) ....................................................

Cunningham v. Pension Benefit Guar. Corp. (In re SiMetco, Inc. 235 B. R. 609 (N. D. Ohio 1999).................................................................................................... .17
Durden v. Hydro Flame Corp. , 983 P. 2d 943 (Mont. 1999) ........................................................ .24
Fed. Ins. Co. v. W. R. Grace, et aI. , Civil Action Nos. 04- 844 and 04- 845: Memorandum and Opinion (D. Del. November 22 2004) (Buckwalter

Feld v. Zale Corp. (In re Zale Com. , 62 F. 3d 746 (5th Cir. 1995) .............................

, 17 , 19

Finstad v. W. R. Grace & Co. , 8 P. 3d 778 (Mont. 2000) ...............................................................

Fisher v. Apostolou , 155 F. 3d 876 (7th Cir. 1998)
Granny Foods. Inc. v. Brotherhood of Teamsters and Auto Truck Drivers Goose Local No. 70 of Alameda County , 415 U. S. 423 (1974) .. ...................... ................ ...................... .13

Great Northern Ry. v. United States , 187 F. Supp. 690 (D. Mont. 1960) ..................................... .24
In re Cary Metal Products, Inc. , 158 B. R. 459 (N. D. Ill. 1993).................................................... .17

In re Circle Land and Cattle Corp. , 213 B. R. 870 (Bankr. D. Kan. 1997) ....................................

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In re Combustion Engineering, Inc. 391 F. 3d 190 (3d Cir. 2004) ..........................
In re Deltacorp, Inc. 111 B.R. 419 (Bankr. S.

16-

21-

Y. 1990).........................................................

In re Federal- Mogul Global, Inc. , 282 B.R. 301 (D. Del.) (Wolin , 1.), 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) .................................................................................................. In re Johns- Manville
Corp. ,

21-

801 F. 2d 60 (2d Cir. 1986) .............................................................. .17

In re Jacksen , 105 B. R. 542 (B.

P. 9th Cir. 1989)...................................................................... .17

In re Kids Creek Partners , 248 B. R. 554 (Bankr. N. D. Ill. 2000)..................................................
In re Nunez , 2000 WL 655983 (E.
In re O'

Y.)....................................................................................

Brien EnvtI. Energy, Inc. 188 F. 3d 116 (3d Cir. 1999) ......................................................

In re Profl Ins. Mgmt. , 285 F. 3d 268 (3d Cir. 2002)................................................................... , 3
In re Reliance Acceptance Group, Inc. , 235 B. R. 548 (D. Del. 1999) ............................................
In re Resorts Int'L Inc. , 372 F. 3d 154 (3d Cir. 2004).................................................................... .28
In re S.

R. Corp. , 66 B. R. 49 (Bankr. N. D. Ohio 1986) ..............................................................
et. aI.

In re W. R. Grace,

Chapter 11 Case No. 01- 01139- JJF

.........................................................

456 U. S.

Ins. Corp. ofIreland, Ltd. v. Compagnie des Bauxites de Guinee 694 (1982)................................................................................................................... ....

40 B . R.

Johns- Manville Corp. v. Asbestos Litig. Group (In re Johns- Manville Com. 219 (S. N. Y. 1984)............. ..................... ................... ......... ................ .......

Nutrasweet Co. v. Vit- Mar Enterprises, Inc. , 112 F. 3d 689 (3d Cir. 1997) ..............................
Off v. State of Montana , 106 P. 3d 100 (Mont. 2004)............................................................... , 22
Pacor, Inc. v. Higgins , 743 F. 2d 984 (3d Cir. 1984) ............................................................... 18-

Pan American World Airways, Inc. v. Flight Engineers ' Int' l Ass 306 F . 2d 840 (2d Cir. 1962)................................................................................... ...................... ..

Plumb v. Fourth Judicial District Court , 927 P. 2d 1011 (Mont. 1996) .........................................

III

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Sampson v. Murray , 415 U. S. 61 (1974) ............................................................................

Solidus Networks, Inc. v. ExcelInnovations, Inc. (In re ExcelInnovations, Inc. 2007 WL 2555941 (9th Cir. 2007) State, ex reI., Deere & Co. v. District Court of the Fifth Judicial District
730 P . 2d 396 (Mont. 1986).................................... ....................................................................... .

310 F . 3d

Stonington Partners v. Lernout & Hauspie Speech Products, N. 118 (3d Cir. 2002).............................................................................................................
, 406 F. 3d 918 (7th Cir. 2005) .................................... , 14

United Airlines, Inc. v. U.S. Bank N.

Wedgewood Inv. Fund v. Wedgewood Realty Group, Ltd.

(In re Wedgewood Realty Group, Ltd. , 878 F. 2d 693 (3d Cir. 1989) .........................................

R. Grace & Co. v. Chakarian (In re W. R. Grace & Co. 366 B.R. 295 (Bankr. D. Del. 2007) ............................................................................

, 16 ,

19

R. Grace & Co. v. Libby Claimants (In re W. R. Grace & Co. 2006 WL 1313190 (D. Del. 2006) ..............................................................................................
Zerand- Bernal Group, Inc. v. Cox , 23 F . 3d 159 (7th Cir. 1994) ...................................................

Statutes
11 U. S ,C. S 105.................................. ......... .................................... ..............................
11 U .

, 18

C. S 524(g).............................................. ......................................................... ................ ..

28 U. S. C. S 157( a) ............. .................. ........... ................
28 U.
C. S

28 U . 28 U .

C. S 1292(

C. S 1334(b)................. ............. ..................................................... ................. .......

, 19 ,

20

Fed. R. Bankr. P. 7065.................................... ............

, 13

Fed. R. Bankr. P. 8002( a) ...................................................... ..........................................................
Fed. R. Bankr. P. 8003(

Fed. R. C i

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Fed. R. Civ. P. 65(b) . 2 .......................................................................................................
Mont. Code Ann. S 27- 703 (1997) .......................................................................................

13-

Mont. Code Ann. S 27- 221 (1997) .............................................................................................

Rules
Third Circuit Internal Operating Procedure 5. 5.4 (July 2002).......................................................

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BASIS

OF APPELLATE JURISDICTION

This is an appeal from an order of the Bankruptcy Court enjoining claimants injured by
exposure to asbestos from the Debtors ' operations in and near Lincoln County, Montana (the
Libby C1aimants

1 from prosecuting

State Litigation ) against the State

of Montana (the " State ) and their tort claims (the " BNSF Litigation ) against the BNSF Railway

Companl (" BNSF" ).

Specifically, the order enjoins the State

Bankruptcy Court takes under advisement requests by Debtor W. R. Grace & Co. , Inc.
Grace 3 and the State 4 that the Bankruptcy Court reconsider its Order Denying Debtors

Motion to Expand the Preliminary Injunction to Include Actions Against the State of Montana
and Memorandum and Opinion 6 both entered on Apri116 , 2007 (collectively, the " Injunction
Denial Decision ), together with Grace s motion to expand the Preliminary Injunction to include

the BNSF Litigation dated March 26 , 2007 (the " BNSF Injunction Motion

The Bankruptcy Court order is reviewable as a preliminary injunction because , whether

I As identified in the Amended and Restated Verified Statement of Cohn Whitesell & Goldberg LLP and Landis
No. 01- 01139

Rath & Cobb LLP Pursuant to Fed. R. Bankr. P. 2019 (Bankr. Case DJ. 15692) filed in the bankruptcy case (Case (JFK)), as it may be amended and restated from time to time. The Libby Claimants represented in this appeal include the plaintiffs in what are believed to be all pending lawsuits enjoined by the Bankruptcy Court. However , the Bankruptcy Court' s order, by its terms , enjoins new litigation as well , and thus affects additional persons not parties to this appeal. Items designated by the Libby Claimants , the State , and Grace to be included in the record are from the main bankruptcy case , the bankruptcy adversary proceeding, and the previous appeal to this Court (Docket No. I :06- CV26). Accordingly, cites to the record indicate whether the docket reference is from the main bankruptcy case (Bankr. Case DJ. ~, " the bankruptcy adversary proceeding " (Adversary Proc. D. " or the prior appeal to
this Court " (Dist. Crt. App. D.

2 Along with its predecessors , the Great Northern Railway Company, the Burlington Northern Railroad Company,
3 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. 4 State of Montana s Motion for Reconsideration of Court' s Opinion and Order Denying Debtors ' Motion for Expansion of Preliminary Injunction Entered April 16 2007. (Adversary Proc. D. I. 426. 5 (Adversary Proc. D. I. 420. 6 (Adversary Proc. D. I. 419. ) Reported as R. Grace & Co. v. Chakarian (In re W.R. Grace & Co. 366 B. R. 295 (Bankr. D. Del. 2007). 7 Debtors ' Motion to Expand the Preliminary Injunction to Include Actions Against BNSF dated March 26 2007. (Adversary Proc. D. I. 389.

I. ~.

I. -

and The Burlington Northern & Santa Fe Railway Company.

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or not intended as such by the Bankruptcy Court , it has continued beyond the time permissible
under Fed. R. Civ. P. 65(b) (as incorporated by Fed. R. Bankr. P. 7065).

See Sampson v.

Murray , 415 U. S. 61 , 86- 88 (1974)(no matter how denominated by the court , a restraining order

that extends beyond the time permitted under Rule 65(b) acts as a preliminary injunction and is
reviewable as such);

United Airlines, Inc. v. U. S. Bank N.

, 406 F. 3d 918 , 923- 24 (7th Cir.
(3d Cir. 1997).

2005);

Nutrasweet Co. v. Vit- Mar Enterprises, Inc. 112 F. 3d 689 , 692- 94

Accordingly, this Court has jurisdiction over this appeal pursuant to 28 U.

C. S 1292(a)(1)

which provides this Court with jurisdiction of appeals from interlocutory orders " granting,
continuing, modifying, refusing or dissolving injunctions , or refusing to dissolve or modify

injunctions.

See In re Profl Ins. Mgmt. , 285 F. 3d 268 282 n.16 (3d Cir. 2002)(bankruptcy
C. S 1292(a)(1));

court orders regarding injunctions are appealable as of right pursuant to 28 U.

In re Reliance Acceptance Group, Inc. 235 B. R. 548 , 553 (D. Del. 1999)(same). In a prior
related appeal (Docket No. 06- 26), with many of the same parties involved here , this Court
exercised jurisdiction under 28 U.
that 28 U.
c. S 158(a)(3), not
,9

C. S 1292(a)(1) governed the appeaI.
ISSUES

PRESENTED ON APPEAL

Did the Bankruptcy Court have subject matter jurisdiction to enter a " temporary
stay " of litigation by the Libby Claimants against a non-debtor party, the State , where the

litigation asserts claims against the State for its own tortious conduct and where the Bankruptcy

Court itself has ruled that it lacks subject matter jurisdiction to enter a preliminary injunction of

8 Memorandum and Order Dismissing Appeal and Remanding to Bankruptcy Court. (Dist. Crt. App. D. I. 26.
Reported as

R. Grace & Co. v. Libby Claimants (In re W. R. Grace & Co. 2006 WL 1313190 (D. Del. 2006). 9 To the extent that this Court determines that this appeal is from an interolocutory order that requires a motion for
leave to appeal under 28 U. c. ~ 158(a), the Libby Claimants motion for leave to appeal pursuant to Fed. R. Bankr. P. 8003(c) and consider this appeal.

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this very litigation?

Did the Bankruptcy Court have subject matter jurisdiction to enter a " temporary
stay " of litigation by the Libby Claimants against a non- debtor party, BNSF , where the litigation

asserts claims against BNSF for its own tortious conduct and where the Bankruptcy Court has

failed to determine that it has subject matter jurisdiction over such litigation? Did the Bankruptcy Court err in staying the Libby Claimants ' pending litigation
against the State and BNSF based solely on their own tortious conduct without requiring Grace to establish grounds for entry of an injunction against independent third- party litigation under the
stringent standards established by caselaw?

STANDARD OF REVIEW
Legal determinations of the Bankruptcy Court are reviewed

de novo factual findings for

clear error and exercises of discretion for abuse thereof.

See

Profl Ins. Mgmt. , 285 F. 3d at

282- 83 (3d Cir. 2002). The Bankruptcy Court' s application of the law to the facts is reviewed
novo.

In re O' Brien EnvtI. Energy, Inc. , 188 F. 3d 116 , 122 (3d Cir. 1999). Where the

Bankruptcy Court does not apply correct legal standards , its decision will be reversed even if the
decision entailed an exercise of discretion.

See Stonington Partners v. Lernout & Hauspie

Speech Products, N.

310 F. 3d 118 , 121 (3d Cir. 2002). Since the issues on this appeal are

matters of law or concern application of incorrect legal standards in the issuance of an injunction
the de novo

standard of review applies.
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

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chronicled. IO Through the Center for Asbestos Related Disease (the " 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. I
200 of these 1

500 patients.

CARD Clinic opened in 2000 , more than 65 patients have died of cancer or respiratory failure

related to asbestos disease

Since April 2 ,

2001 , the date Grace filed its Chapter

, 41

clients of the firm McGarvey, Heberling, Sullivan & McGarvey in Kalispell , Montana have died
of asbestos related disease. 14 Currently the CARD Clinic has over 80 patients on oxygen , and

over 100 patients are severely limited , with short life expectancy.
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 and BNSF also engaged in

tortious conduct injuring the people of Libby. As to the State , the Montana Supreme Court in
Orr v. State of Montana , 106 P. 3d 100 (Mont. 2004), held that under the state s Industrial
Hygiene Act

the State had statutory duties to the public and persons confronted with workplace
at 110 ,

hazards

Orr , 106 P. 3d

~ 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 1 08 , ~ 25. The court noted: " (IJt

appears that the record is bereft of any
. at

actions taken by the State to warn the miners or the Libby townspeople of their plight."

11 0 ,

~ 37. As to BNSF , the Libby Claimants ' state court actions against this railroad company

10

II (
12 ( 13 ( 14 ( 15 ( 16 (

I. 417
, Ex. C , ~2.
, ~7.

, Ex. D , ~4. , Ex. C , ~7.

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are premised on common negligence and strict liability claims relating to BNSF' s operations on
BNSF' s property by BNSF personnel. The cases against BNSF are based upon proof that

knew specifically of the asbestos hazard arising from BNSF' s operations- including

asbestos

contamination on BNSF' s property and transport of asbestos by BNSF-yet failed to meet

industrial hygiene standards to protect its employees and Libby residents in neighboring areas.

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

unable to care for themselves , leaving exhausted family members to bear the burden , with no

help from Grace. The case of Danny Freebury is illustrative of the plight of many Libby

Claimants. Danny Freebury is 59 years old and resided in Libby from 1955- 1964 and again from
2000 to date.

bound. His son does the cooking, housekeeping, shopping and home maintenance , and feeds the
animals. I9 His son comes home from high school each day to cook lunch and check on his
father. 2o Danny Freebury states he wants his son to go to college next Fall and he is feeling bad

about leaving me. Danny Freebury needs eight hours per day of home assistance , skilled nursing
visits , and a case manager to coordinate medical assistance?1

Grace has not only failed to provide the care that Danny Freebury and many other Libby

17 18
19 (
20 (

I. 363 , Ex. A, ~ 7. , ~ 8.

21 (

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Claimants need and deserve ,

but has sought to prevent them from obtaining compensation in the

tort system from the State and BNSF - recognized wrongdoers with no special relationship to

Grace or its Chapter

s attempt to extend to the State and BNSF 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

Circuit-most

In re Combustion Engineering, Inc. , 391 F. 3d 190 (3d Cir.

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 and BNSF do here. The Bankruptcy Court itself, in
the Injunction Denial Decision , held that it lacks subject matter jurisdiction to enjoin the State

Litigation. Yet in response to a

s motion

for an even further extension of the Preliminary Injunction , this time to enjoin the BNSF
Litigation , the Bankruptcy Court entered a stay of unspecified duration against the State

Litigation and the BNSF Litigation.
Procedural Back2round

On April 2 , 2001 (the " Petition Date ), Grace filed a petition for relief under Chapter
of the Code. 22 On the same date , Grace filed an adversary complaint seeking,
inter alia the

22

In re W. R.

Grace.

et. at.

Chapter 11 Case No. 01- 01139

(JKF).

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Preliminary Injunction. 23 The Bankruptcy Court entered a temporary restraining order on April
, 2001 24 and on

, 2001 entered the Preliminary Injunction sought by Grace. 25 On January

, 2002 , the Bankruptcy Court entered an order modifying the Preliminary Injunction to expand

its scope to include certain additional affiliates of Grace.
The State Litigation

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?? The State Litigation proceeded uninterrupted by and without
August 22 , 2005 , more than four years after Grace entered Chapter 11. 28 On that day, Grace

filed a motion 29

(the "

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.
the Bankruptcy Court held a hearing on the State Injunction

On December 19 , 2005 ,

Motion. 32 At the conclusion of the hearing, the Bankruptcy Court stated that it would take the

State Injunction Motion under advisement. 33

In

response , the State asked the Bankruptcy Court

to " stay the Libby Claimants from taking discovery or proceeding any further with the (State

23 (Adversary Proc. D. I.
24 (

359 ,

~ 3.

25 (

26 (Adversary I. 87. 27 (Adversary Proc. D. I. 363
28 (

, p. 5.

29 Debtors

' Motion to Expand the Preliminary Injunction to Include Actions Against the State of Montana. (Adversary Proc. D. I. 359. 30 Opposition ' Motion to Expand the Preliminary Injunction to Include Actions Against the State of Montana. (Adversary Proc. D. I. 363.

31 Joinder of the Official

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.
32 (Bankr. Case
33 (

, p. 199:21.)

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Litigation J until the (Bankruptcy J Court renders a decision on (the

The Bankruptcy Court indicated that it considered the extension of the stay appropriate and
sought the Libby Claimants ' agreement to such a stay. 35 Asked by the Libby Claimants for an

indication of the time period within which the Bankruptcy Court would render a decision , the
Bankruptcy Court suggested it could be more than a year. 36 Having previously entered into a

voluntary stay in a separate matter wherein the Bankruptcy Court took ten months to render its
decision
37 the

stay. 38 The Bankruptcy Court then orally entered a stay, 39

written order on January 17 2006. The Libby Claimants appealed to this Court. 41 The Libby Claimants asserted (as they do
in this appeal) that the Bankruptcy Court' s order was reviewable as a preliminary injunction

regardless of whether it was denominated as such by the Bankruptcy Court , because it provided
for a stay continuing beyond the time permissible under Fed. R. Civ. P. 65(b). 42 On May 10

2006 , after briefing and oral argument , this Court determined:

The Court believes , generally, that the conditions necessary for the Court to entertain this interlocutory appeal are not present in this case. However the Court thinks the indefinite nature of the Bankruptcy Court' s stay order may present an exceptional circumstance. Therefore , the Court exercises
34 ( 35 ( 36 (

200:21- 25 , p. 201:7- 11.) , p. 202:15- 25.

and 201:1-

s attempt to further expand the Preliminary Injunction to cover Montana Vermiculite Company, the Bankruptcy Court asked the Libby Claimants if they would continue a voluntary stay pending its ruling on Grace s motion. The Libby Claimants acceded to the Bankruptcy Court' request. The decision was not rendered until 10 months later. (Adversary Proc. DJ. 298 and 299. 38 (Bankr. Case D. I. 11473 203:139 (

37 In a similar

40 (Adversary Proc. D. I. 376.
41 Notice
2005. (Adversary Proc. D. I. 373. ) On January 19 2006 , the Libby Claimants filed an Amendment to Notice of Appeal , clarifying that the appeal was of the written order , which replaced and superseded the oral order announced in open court on December 19 2005. (Adversary Proc. D. I. 378. but Pursuant to Fed. R. Bankr. P. 8002(a), " a notice of appeal filed after the announcement of a decision or order before entry of the judgment , order , or decree shall be treated as filed after such entry and on the day thereof." I. 5.

, p. 203:8.

42 Brief of

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jurisdiction under 28 U. C. S 158(a)(3) for the limited purpose of addressing the indefiniteness of the Bankruptcy Court' s stay order. A time frame in which the Bankruptcy Court will render its decision on the Debtors ' motion to expand the preliminary injunction to include actions against the State of Montana would be appropriate in light of the indefinite stay order presently in place. However , the Bankruptcy Court is , in the first instance , best suited to determine that time frame.
R. Grace v. Libby Claimants (In re W. R. Grace & Co. , 2006 WL 1313190 , *1 (D. Del.
2006). 43 Accordingly, this Court remanded the matter to the Bankruptcy Court so that it could

advise the parties of a specific date on or before which it expects to render its decision on
Debtors ' motion to expand the preliminary injunction.
The Bankruptcy Court ignored this Court' s directive and never provided the parties with a

date upon which it would decide the State Injunction Motion. More than
Court' s ruling (and 16 months from the entry of the initial stay order), the Bankruptcy Court

ruled in the Injunction Denial Decision 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 J.

In response to the Injunction Denial Decision , on April 26 , 2007 , Grace

44 and the State

filed motions to reconsider the Injunction Denial Decision (collectively, the " Motions for
Reconsideration ). On
2007 , the Libby Claimants 46 and the PI Committee
47 filed

oppositions to the Motions for Reconsideration.

43 (Dist. Crt. App. D. I. 26. 44 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. 45 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. 46 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. 47 ' 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.

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The BNSF Litigation

In the meantime , Grace had moved to extend the Preliminary Injunction even further
beyond its original reach. On March 26 2007 , Grace filed a motion to expand the Preliminary

Injunction to include the BNSF Litigation (the " BNSF Injunction Motion

48 Until the filing of

the BNSF Injunction Motion , the BNSF Litigation proceeded uninterrupted by and without
involvement of Grace.
On April 13 ,

2007 , three days before the Bankruptcy Court' s Injunction Denial Decision

was issued , the Libby Claimants filed their opposition to the BNSF Injunction Motion. 49 The PI

Committee filed their opposition on the same day.

' and the

PI Committee s oppositions , BNSF itself filed an opposition to the BNSF Injunction Motion.
On April 24 , 2007 , Grace filed its reply in support of the BNSF Injunction Motion.

The Bankruptcy Court Stay Order
On May 21 , 2007 , the Bankruptcy Court heard oral argument on the Motions for

Reconsideration of the Injunction Denial Decision , along with the BNSF Injunction Motion.

Because of the common issues between the Injunction Denial Decision (relating to the State
Litigation) and the BNSF Injunction Motion , all counsel concerned with either the BNSF

Injunction Motion or reconsideration of the Injunction Denial Decision addressed the

48 Debtors

' Motion to Expand the Preliminary Injunction to Include Actions Against BNSF. (Adversary Proc. D.
' Motion to Expand the Preliminary Injunction to Include Actions

398. 49 Opposition

50 Opposition ' Motion to Expand the Preliminary Injunction to Include Actions Against BNSF. (Adversary Proc. D. I. 414. 51 BNSF s Response to Debtors ' Motion to Expand the Preliminary Injunction to Include Actions Against BNSF. (Adversary Proc. D. I. 413.
52 Debtors

AgainstBNSF.

L 417.

' Reply in Support of Their Motion to Expand the Preliminary Injunction to Include Actions Against
424.

BNSF. (Adversary Proc. D. L

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Bankruptcy Court at that time. Upon hearing all of the arguments , the Bankruptcy Court
announced that it would take the matters under advisement.
On June 6 , 2007 , the Bankruptcy Court entered an order intending to stay the State and

BNSF Litigation pending its ruling on the Motions for Reconsideration and the BNSF Injunction
Motion. 54 The order , however , caused substantial confusion as it could have been interpreted to

stay cases against any and all defendants nationwide , not just the State or BNSF. To address the
Bankruptcy Court' s error , the Libby Claimants 55
and the
56 filed

amend the order (the " Motions to Alter Stay Order

). The

that the stays , to the extent appropriate at all , should not exceed that which Grace or the State has
requested. BNSF filed ajoinder to the Libby Claimants ' motion. 57 On July 6 , 2007 , Grace 58 and
the State
59 filed

On July 23 2007 , the Bankruptcy Court held a hearing on the Motions to Alter the Stay
Order. 6o At the outset of the hearing, the Bankruptcy Court acknowledged that the June 6 order

was overly broad and should be limited to the State and BNSF Litigation. 61 In response to the

53 (Bankr. Case D.
54 In no filed

I. 15948 , p. 94:1.

the argument of these matters- including after the Bankruptcy Court announced that it would take the matters under
advisement-did any party It was only after counsel to the Libby Claimants had been excused that it was suggested that the Bankruptcy Court enter a " temporary stay " ofthe State Litigation. The prepared and submitted. No request for a stay of the BNSF Litigation was made by any pleading or during the hearing on the BNSF Injunction Motion. Nevertheless, the State submitted a proposed order to stay the State Litigation (Bankr. Case D. L 15821) and Grace submitted a proposed order to stay the BNSF Litigation (Adversary Proc. D. L 446). The Libby Claimants (Adversary I. 447. ) and the PI Committee (Bankr. Case D. L 15821 and (Adversary Proc. DJ. 448. ) opposed the entry of the proposed orders. 55 (Adversary I. 459. 56 (Adversary Proc. D. I. 459. 57 (Adversary I. 461.) 58 Debtors ' Consolidated Response to Motions to Alter and Amend the Court' s Temporary Stay Order Regarding Actions Against BNSF and the State of Montana. (Adversary Proc. D. L 463. 59 ' Motion to Alter or Amend the Court' s Modified Order Regarding the Debtors ' Motion to Expand the Preliminary Injunction to Include Actions Against BNSF. (Adversary
Proc. D. L
61 (

60 (Bankr. Case D.
. at p. 85:5.

462.

I. 16445.

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Libby Claimants '

argument that the Court lacked authority to enter such an order in an injunction

proceeding, the Bankruptcy Court stated: " I think it' s still appropriate to keep in place the

preliminary injunction. I will attempt to get an opinion out very promptly. I' m calling this a
temporary stay. ,, 62 Pursuant to the Bankruptcy Court' s directive , Grace prepared a form of order
to reflect the Bankruptcy Court' s rulings , which was submitted to the Bankruptcy Court under a

certification of counsel on August 6 2007. 63 On August 29 2007 , the Bankruptcy Court entered

the order staying the State Litigation and BNSF Litigation , pending the Bankruptcy Court'
rulings on the Motions for Reconsideration and the BNSF Injunction Motion (the " Stay
Order

64 On August 30 , 2007 , the Libby Claimants filed a notice of appeal of the Stay Order.

SUMMARY OF ARGUMENT
The Libby Claimants respectfully submit that the Stay Order should be vacated because
(1) the Stay Order constitutes a preliminary injunction entered in violation of Fed. R. Civ. P.

65(a), (2) the Bankruptcy Court lacked subject matter jurisdiction to enjoin litigation between
non- debtor parties not related to the Grace bankruptcy within the meaning of28 U.
C. S

1334(b) and long-established Third Circuit precedent , and (3) the Stay Order was entered

without meeting (or even considering) the four-part test for issuance of an injunction and other
requirements to stay third- party litigation in the context of a Chapter

ARGUMENT

The Stay Order Constitutes an Improperly Entered Preliminary Injunction and Should be Overturned by this Court
The Stay Order provides:

62 (Id. at p. 9798:24- , 1. 63 (Adversary Proc. D. L 465. 64 (Adversary Proc. D. L 466. 65 (Adversary Proc. D.
L 467.

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(PJending the Court' s ruling on the Injunction Motions , all actions commenced against the State of Montana and/or BNSF that arise out of alleged exposure to asbestos indirectly or directly caused by the Debtors (the " Montana Actions ), shall be temporarily stayed pending the Court' ruling on the Injunction Motions.

Since this order stays the State Litigation and the BNSF Litigation , it is , self-evidently, an

injunction. Injunctions are governed by Rule 65 of the Federal Rules of Civil Procedure.
Depending on the notice given (not an issue here) or the duration (which is very much the issue),

an injunction is either a temporary restraining order or a preliminary injunction.

Other than by consent , a temporary restraining order may not exceed ten days ' duration
except that " for good cause shown " the order may be extended for another ten days. Fed. R. Civ.

65(b). Although the order provides that the State
temporarily stayed

" the Stay Order by its terms has no expiration date. The Stay Order is not a

temporary restraining order because " temporary restraining orders must expire by their own
terms within 1
Granny Goose Foods. Inc. v.

Brotherhood of Teamsters and Auto Truck Drivers Local No. 70 of Alameda County , 415 U.S.
423 433 (1974). A temporary restraining order of potentially unlimited duration is
a preliminary injunction.

Sampson v. Murray , 415 U.S. 61 , 87- 88 (1974). In

Sampson , the

Supreme Court ruled that because of the strict limitations on the scope of temporary restraining
orders , any such order that continues beyond the time permissible in Fed. R. Civ. P. 65(b) should
be construed as a preliminary injunction so as to be immediately appealable.

. at 85- 86.

In so

holding, the Court observed that if a court " were able to shield its orders from appellate review

merely by designating them as temporary restraining orders , rather than as preliminary

66 Since the injunction
7001 et seq.

, Grace brought an adversary proceeding governed by Rules

of the Federal Rules of Bankruptcy Procedure. With a modification not pertinent here , Fed. R. Civ. P. 65 is made applicable to adversary proceedings by Fed. R. Bankr. P. 7065. Other than Rule 7065 , there is no process or authority for issuance of an injunction in a bankruptcy case , and Grace has cited none.

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injunctions , (the courtJ would have virtually unlimited authority over the parties in an injunctive

proceeding.
Applying

. at 86- 87.

Sampson , the Third Circuit held in

Nutrasweet Co. V. Vit- Mar

Entemrises, Inc.

112 F.3d 689 (3d Cir. 1997), that a district court' s temporary restraining order that had remained

in effect for 77 days at the time defendants filed their notice of appeal was the equivalent of a
preliminary injunction , and thus subject to appellate review.
. at 694. The court explained:

(TJemporary restraining orders. . . cannot be continued indefinitely without observance of the safeguards required for entry of a preliminary injunction and that temporary restraining orders of indefinite duration whether or not issued with notice , are subject to appellate review. The most prevalent view is that a temporary restraining order , even if issued
with notice ,

cannot be continued beyond the periods prescribed in Fed. R.

Civ. P. 65(b) without being treated as the equivalent of a preliminary injunction and thus subject to appellate review.
. at 692.

Other courts of appeal treat with similar gravity the time limit for a stay to escape review

under the preliminary injunction standard. Said the Seventh Circuit:
Temporary restraining orders that extend past 20 days are reviewable as preliminary injunctions , no matter what the rendering judge may have called them.
United Airlines, Inc. v. U.S. Bank N.
406 F. 3d 918 , 923 (7th Cir. 2005) (citing

Sampson , 415

S. at 86- 88). As explained by the Court of Appeals for the Second Circuit:

an appropriate adjudication ,

(Fed. R. Civ. P. 65(b)J contemplates that notice and hearing shall result in i. e. the issuance or denial of a preliminary injunction not an extension ofthe temporary stay.

The purpose of a temporary restraining order is to preserve an existing situation in status quo until the court has an opportunity to pass upon the merits of the demand for a preliminary injunction. Such an order is necessarily limited to a very brief period because what may later prove to be a right of the party who is restrained is suspended before even a tentative adjudication as to that right has been had. . . . It is because the remedy is so drastic and may have such adverse consequences that the authority to issue temporary restraining orders is carefully hedged in Rule

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65(b) by protective provisions. And the most important of these protective provisions is the limitation on the time during which such an order can
continue to be effective.

Pan American World Airways, Inc. v. Flight Engineers ' Int' l Ass
Cir. 1962) (emphasis added).

306 F.2d 840 , 842- 43 (2d

This case exemplifies the injustice that Rule 65(b) proscribes. Since December 2005 , the
Libby Claimants have been barred by " temporary " stays from pursuing the State Litigation.

They appealed to this Court for relief. Instead of vacating the stay or requiring the
Court to rule on the merits within the 20 days required by Rule 65(b), this Court in May 2006

directed the Bankruptcy Court to set its own timetable for a ruling. The Bankruptcy Court

ignored that order. Finally, almost a year later , the Bankruptcy Court ruled. The Bankruptcy
Court determined that it lacked subject matter jurisdiction to enjoin the State
complete vindication for the Libby Claimants , except that the Bankruptcy Court then entered
another " temporary " stay while having under advisement the motions for reconsideration filed by

Grace and the State. It has now been more than six months since the Bankruptcy Court'

determination that it has no jurisdiction to stay the State Litigation. Yet the " temporary " stay
remains in effect , barring the Libby Claimants from pursuing the State Litigation and now also

the BNSF Litigation where the jurisdictional considerations are almost identical. Libby Claimants continue to suffer and die while their quest for justice against the State
and BNSF is barred by arbitrary judicial action in blatant disregard for the requirements of Rule

65(b) decreed with crystalline clarity by the United States Supreme Court and the Court of

Appeals for the Third Circuit. It is time to bring this sorry
justice to a close. The Stay Order should

improperly entered as demonstrated above , and because , as will be demonstrated below , subject

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matter jurisdiction does not exist to enjoin the State Litigation or the BNSF Litigation , nor can
the standards for entry of such an injunction be met.

II.

The Bankruptcy Court Lacked Subject Matter Jurisdiction to En ioin the State Liti2ation or the BNSF Liti2ation
The Bankruptcy Court correctly held in the Injunction Denial Decision that before

enjoining litigation between third parties, the Bankruptcy Court must determine its own subject
matter jurisdiction over the litigation sought to be enjoined.

R. Grace & Co. v. Chakarian (In

re W. R. Grace & Co. , 366 B. R. 295 , 299 (Bankr. D. Del. 2007). Yet the Bankruptcy Court

failed to do so in connection with the Stay Order. For the same reasons that the Bankruptcy
Court itself ruled in the Injunction Denial Decision that it lacked jurisdiction to enjoin the State
Litigation , the Bankruptcy Court lacked jurisdiction to issue the Stay Order enjoining that same

litigation and also enjoining the BNSF Litigation.

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.

In re Combustion Engineering, Inc. , 391 F . 3d 190 , 224- 25 (3d Cir. 2004);

Feld v. Zale

Corp. (In re Zale Corp. 62 F. 3d 746 , 751 (5th Cir. 1995);
Cox , 23 F. 3d
159 ,
162 (7th Cir. 1994). In

see also Zerand- Bernal Group, Inc. v.

Combustion Engineering , the Third Circuit defined the
to '

threshold issue as " 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 " (wJhile aspects of
to

the S 105(a) analysis (concerning the merits of the injunctionJ may be relevant to the ' related
jurisdiction inquiry, these inquiries are analytically distinct."

. The court went on to conduct

an extensive analysis of the jurisdictional issue , concluding that the proponents of the injunction

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had failed to establish the court' s jurisdiction to enter it.

. at 225- 33. Reaching the

the injunction under Section 105(a) only in order to determine whether it would be pointless to
remand for more fact- finding on the issue of jurisdiction
. at 233 , the court then conducted a

separate and equally extensive 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.
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 of the Bankruptcy Code (the bankruptcy equivalent of the All Writs
Act) " does not provide an independent source of federal subject matter jurisdiction.
Combustion Engineering , 391 F. 3d at 225.
(2d Cir. 1986);

Accord In re Johns- Manville

Corp. , 801 F. 2d 60 ,

63

In re Jacksen 105 B.R. 542 , 544 (B.A.P. 9th Cir. 1989);
Y.);

In re Nunez , 2000 WL

655983 , at *8 (E.

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.
In re Circle Land

R. 609 , 618 (N. D. Ohio 1999);
1993);

In re Kids Creek Partners , 248 B. R. 554 , 561 (Bankr. N. D. Ill. 2000);

and Cattle Corp. , 213 B. R. 870 , 877 (Bankr. D. Kan. 1997). Section 105(a) is properly
as only an " aid

to the exercise of jurisdiction.

In re Deltacorp, Inc. , 111 B. R. 419 , 420 (Bankr.

Y. 1990). A bankruptcy court may not invoke Section
that it does not already possess.

Combustion Engineering , 391 F. 3d at 224- 25;

In re S.

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Corp. , 66 B. R. 49 , 51 (Bankr. N. D. Ohio 1986);

compare Fed. Ins. Co. v. W. R. Grace, et aI.

Civil Action Nos. 04- 844 and 04- 845: Memorandum and Opinion (D. Del. November 22 2004)
(Buckwalter , J.)(specifying Section 105(a) as the procedural vehicle for the appointment of a

futures representative where jurisdiction to make such an appointment was conferred by Section
524(g)).

In sum , before the Bankruptcy Court could even consider the merits of Grace s request to

further enjoin the State Litigation and Grace s request to enjoin the BNSF Litigation , the

Bankruptcy Court was required to determine whether it had jurisdiction over the State Litigation

and BNSF Litigation. The Bankruptcy Court failed to do so. For that reason alone , the Stay
Order must be vacated. But in any event , as demonstrated below , established Third Circuit
precedent makes it clear that the Bankruptcy Court lacks jurisdiction to enjoin either the State
Litigation or the BNSF Litigation.

The Bankruptcy Court Lacked Subject Matter Jurisdiction to Enter the Stay Order Enioininl! the State
In the Injunction Denial Decision , the Bankruptcy Court correctly determined that
Combustion Engineering
building on the line of Third Circuit cases that includes

Pacor, Inc. v.

Higgins , 743 F. 2d 984 (3d Cir. 1984) and
Del.),

In re Federal- Mogul Global, Inc. , 282 B. R. 301 (D.
cert denied sub nom Daimler Chrysler

mandamus denied 300 F. 3d 368 (3d Cir. 2002),

Corp. v. Official Comm. of Asbestos Claimants 537 U. S. 1148

that the Bankruptcy Court lacks jurisdiction to enjoin the State Litigation. As stated in the words
of the Bankruptcy Court:

While aspects of the sI05(a) analysis may be relevant relatedIn re Combustion jurisdiction , the two inquiries are analytically distinct. Engineering, Inc. , 391 F. 3d 190 224- 25 (3d Cir. 2004). Section 105(a) ' does not provide an independent source of federal subject matter jurisdiction. at 225. Therefore , this court must establish subject matter jurisdiction before

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considering the merits of a
(In

Chakarian 366 B. R. at 299.

Federal- Mogul ) (t)he bankruptcy court accurately reiterated the holding Pacor stating that jurisdiction exists where ' the potential impact on the debtor s estate would have been direct with no intervening adjudication or 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. Chakarian , 366 B. R. at 300 (citing Federal- Mogul Global, Inc. , 282 B.R. at 307).
of

The position (of) claims in the (State Litigation) is nearly identical to the 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. Chakarian 366 B.R. at 301.
claims in

Here... however , as in 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. Chakarian , 366 B. R. at 302.

Without a finding of . , it is unnecessary to conduct an analysis of whether an injunction under s105(a) is appropriate. Chakarian , 366 B.
at 302.

Grounded as it is in controlling Third Circuit precedent , the foregoing analysis is unassailable as
will be demonstrated below.

The jurisdiction of bankruptcy courts is grounded in and limited by statute. 28 U.
S1334(b); 28 U.

C. S 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 is whether those claims are
related to "

the Chapter

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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 S outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. . . . Moreover , 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 in any way impacts upon the handling and administration of the 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. outcome of the (the personal injury lawsuit) would in no way bind 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. . . . There would 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.

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Pacor has been expressly approved by the United States Supreme Court.

Celotex 514

S. at 308. And the Third Circuit has confirmed the on- going vitality of
Engineering , 391 F. 3d at 22567 and

Pacor

in

Combustion

In re Federal- Mogul Global, Inc. , 282 B. R. 301 (D. Del.),
cert denied sub nom Daimler Chrysler Corp. v.

mandamus denied 300 F. 3d 368 (3d Cir. 2002),

Official Comm. of Asbestos Claimants , 537 U. S. 1148 (2003).
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 prerequisite to

, the bankruptcy court entered an injunction

under Section 105 barring the assertion of asbestos claims against Basic and Lummus. After a
thorough analysis of

Pacor 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

67 Grace failed to cite

Court to the Third Circuit' s

Combustion Engineering in the State Injunction Motion and instead pointed the Bankruptcy opinion in Carol Gerard v. W. R. Grace & Co. (In re W. R. Grace & Co. , 115 Fed. Appx. 565 (3d Cir. 2004), which was expressly rendered as " non- precedential." This may be taken as an indication that Gerard . That decision vacated a District Court order Grace knows it must lose unless this Court incorrectly applies 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. Although Gerard rested largely upon an odd procedural posture that does not exist here-the panel determined that the Libby Claimants had the burden of proof since the appeal was not from the Bankruptcy Court' s imposition of the injunction but rather the Bankruptcy Court' s refusal to clarify and/or reconsider the injunction-the decision is at odds with Combustion Engineering in permitting an injunction against litigation among third parties without requiring that the court be able to exercise jurisdiction over that litigation. In this regard , it is overruled by Combustion Engineering, later decision and one that was expressly rendered on a precedential basis. Under Third Circuit rules , this means Gerard panel who did not also that the decision was circulated to the full court , including the two members of the serve on the Combustion Engineering panel. See Third Circuit Internal Operating Procedure 5.5.4 (July 2002). In the matter before the Bankruptcy Court , Grace indisputably had the burden of proof and the Bankruptcy Court was bound by Combustion Engineering s requirement that there exist related- to jurisdiction over the State Litigation before the Bankruptcy Court may consider enjoining it.

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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 the

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 court rejected the debtor s assertion that the non- debtor

affiliates ' potential rights of contribution or indemnity from the debtor established relatedjurisdiction.

. at 230- 32.

In so doing, the court

s contention
sufficient basis for

that common production sites between the debtor and affiliates provided " a
the kind of ' unity of interest' that could give rise to '
related to '

jurisdiction.

. at 232. In the

State Litigation , of course , the State of Montana is not even in the business of producing asbestos
products. Rather ,

the State s liability in the State Litigation is predicated on the State s own
Orr , 106

violation of a governmental duty to warn about hazards at Grace s production sites.

3d at 108. But even if the fact that the inspections made by the State and the warnings it
to issue regarding Grace s 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 F . 3d at 231- 32.
This aspect of

Combustion Engineering was not new , but simply an application of
Pacor and
Federal- Mogul.
As the court in

principles long settled under

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

68 There is

, so this factor will not be addressed in this

Brief.

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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.

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 auto makers 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 to " the debtors ' Chapter 11 case so as to confer
bankruptcy jurisdiction.

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.

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

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:

Case 1:07-cv-00609-RLB

Document 6

Filed 10/25/2007

Page 30 of 37

The Court sees no justification to take the situation of these movants (the nondebtor codefendants of the debtor in asbestos litigation) outside of the rule of Pacor . A 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. . at 311 (emphasis added). 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

69 In this
Section 105 injunction), the jurisprudence of the Third Circuit parts company with the Fourth Circuit. In

Robins, Inc. v. Piccinin (In re A. H. Robins Co. 788 F. 2d 994 1000 (4th Cir. 1986), the Fourth Circuit upheld an injunction of litigation against non- debtor defendants who had a right of indemnification from the debtor because of concern that an indemnitee may be " unfairly mulcted by inconsistent judgments " if required to prove its indemnity claim in a bankruptcy claim allowance proceeding wherein the debtor would not be bound by the non- bankruptcy judgment against the indemnitee. Apart from being inconsistent with con