Petition for Writ of Certiorari — Northbrook Property & Casualty Insurance v. Edwards, 114 S. Ct. 2120 (1994) (No. 93-1563)

Supreme Court, U.S. . .

FiLED

) 931568 MAR 22 19%

No OFFICE Or THe CLERK

IN THE

Supreme Court of the United States

OcToBER TERM, 1993

NORTHBROOK PROPERTY AND

CASUALTY INSURANCE COMPANY a

Petitioner,

VS.

BENNIE EDWARDS and JOANN EDWARDS,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Fifth Circuit

PETITION FOR LEAVE TO INTERVENE AND PETITION FOR WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE

FIFTH CIRCUIT, OR, IN THE ALTERNATIVE, BRIEF OF AMICUS

CURIAE NORTHBROOK PROPERTY AND CASUALTY INSURANCE

COMPANY IN SUPPORT OF PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

ROBERT B. MILLNER

(Counsel of Record)

LORIE A. CHAITEN

Sonnenschein Nath & Rosenthal

8000 Sears Tower

Chicago, Illinois 60606-6404

(312) 876-8000

Counsel for Petitioner

Northbrook Property and Casualty

Insurance Company

0 x

ee

QUESTIONS PRESENTED

In April 1989, Bennie and Joann Edwards obtained an

asbestos-injury judgment against The Celotex Corporation in

the Northern District of Texas, which judgment was affirmed

by the Fifth Circuit and was secured pending appeal by a

supersedeas bond. Thereafter the bankruptcy court in the Middle

District of Florida — which presides over the Celotex Chapter

11 reorganization case — entered an injunction, under Section

105 of the Bankruptcy Code, prohibiting all persons from, inter

alia, executing on supersedeas bonds that Celotex had posted.

Notwithstanding the bankruptcy court’s injunction (and without

seeking relief or appeal therefrom within the Eleventh Circuit),

the Edwards obtained an order from the Texas district court,

under Fed. R. Civ. P. 65.1, permitting execution against the

surety on the bond, and the Fifth Circuit affirmed. The questions |

presented are:

A. Whether the Fifth Circuit’s decision to permit

execution on the bond is in conflict with applicable precedent of

this Court holding that “persons subject to an injunctive order

issued by a court with jurisdiction are expected to obey that

decree until it is modified or reversed, even if they have proper

grounds to object to the order,” GTE Sylvania, Inc. v. Consumers

Union of the United States, Inc., 445 U.S. 375, 386 (1980)

(citations omitted); and

B. Whether the Fifth Circuit’s collateral attack on, and

interference with, the injunction of a bankruptcy court in another

circuit violates established principles of comity and federal

jurisdiction and so far departs from the accepted and usual

course of judicial proceedings as to call for an exercise of this

Court’s power of supervision.

ii

LIST OF PARTIES

The parties to the proceedings below are identified in the

caption of the case. Although not formally named as a party in

the proceedings below, Northbrook Property and Casualty

Insurance Company’ has an interest in the outcome of this

litigation because Northbrook is the surety on the supersedeas

bond at issue here and is the surety on other bonds Celotex

posted. As a result, Northbrook is petitioning for leave to

intervene to file a petition for a writ of certiorari or, in the

alternative, is filing this Brief as amicus curiae in support of

Celotex’s petition for a writ of certiorari.”

' Northbrook is a wholly-owned subsidiary of Allstate Insurance

Company, which is a wholly-owned subsidiary of The Allstate Corporation,

which is wholly owned by Allstate Holdings, Inc., 80% of which is owned

by Sears, Roebuck and Co.

? Northbrook participated in the proceedings in the United States

District Court for the Northern District of Texas by filing Northbrook

Property and Casualty Insurance Company Memorandum In Opposition To

Motion For Release Of Supersedeas Bond and by participating in the filing

of a Joint Status Report. (A-25.)

iii

TABLE OF CONTENTS

Page

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ees Y 8 A) + FE an ee oe 2

REASONS FOR GRANTING LEAVE TO

INTERVENE, AND, IN THE ALTERNATIVE

INTEREST OF AMICUS CURIAE ...00.........:::ccccceeeeeseeees 4

ov yy et od of! 6

A. The Underlying Tort Judgment.........................0... 6

B. The Bankruptcy Court Section 105 Injunction...... 7

C. Further Bankruptcy Court Proceedings

Concerning Its Injunction ...................cccccceeeeeeeeees 8

D. Proceedings Below (Within The Fifth Circuit) .....11

1. The Motion in Texas for Release

EE 11

iv

TABLE OF CONTENTS - Continued

REASONS FOR GRANTING THE PETITION

FOR A WRIT OF CERTIORARE ......cccccorecosscoscesesseseoscees 15

I. THE FIFTH CIRCUIT’S DECISION

TO PERMIT EXECUTION ON THE

EDWARDS BOND IS IN CONFLICT

WITH APPLICABLE PRECEDENT

OF THIS COURT AND OF THE FIFTH

Il. THE FIFTH CIRCUIT’S COLLATERAL

ATTACK ON, AND INTERFERENCE

WITH, THE BANKRUPTCY

COURT’S INJUNCTION VIOLATES

ESTABLISHED PRINCIPLES OF

COMITY AND FEDERAL JURISDICTION

AND CALLS FOR AN EXERCISE OF

THIS COURT’S POWER OF

NG PITY seevisincthbodinedhesetdetverbtunccetintwatoneanent 18

CIN IES wericsnessinhtctichnrcicdetnibsemnsgisichasedaibbateitbacncsecdes 20

TABLE OF AUTHORITIES

Cases: Page

Imre A.H. Robins Co., 880 F.2d 694 (4th Cir.), cert.

oi Nl RL | ne 17

Carter v. Attorney General of the United States,

FOE ee Ge Ce BEE otcitectinnicinatndstincncsanccctecnsene 19

Carter v. United States, 733 F.2d 735 (10th Cir.

1984), cert. denied, 469 U.S. 1161 (1985) .0....... eee eee 19

In re Celotex Corp., 128 B.R. 478 (Bankr.

tS B LIS orieintah SUNN S ee reo DOTTIE passim

In re Celotex Corp., 140 B.R. 912

Re Mane eS ae passim

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

ee a, Be atanicnieninniciedibhititiessinitdnatubinasienicncuticsecsteates 16

Edwards v. Armstrong World Indus., Inc., 911

yt Bin a. Ts 2 ee tc eee passim

Ellicott Mach. Corp. v. Modern Welding Co., Inc.,

Fae ee Be ee BR ccreneritreitetectniniiientntatinccitiin 20

Feller v. Brock, 802 F.2d 722 (4th Cir. 1986).................. 19

GTE Sylvania, Inc. v. Consumers Union of the

United States, Inc., 445 U.S. 375 (1980) ..............0200000 i, 15

Howat v. State of Kansas, 258 U.S. 181

ee EEL CEN eT 17, 20

vi

TABLE OF AUTHORITIES - Continued

Cases: Page

In re Johns-Manville Corp., 801 F.2d 60

CB8 CRs TRGB) cenrececiinsecivinrsctiirsetssinieccesbenevseesnecsboesensanee 16

Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co.,

SES UB, BRO REE ccevitinienticastversetitetrisschorssinsevevcenesecvins 18

Lapin v. Shulton, Inc., 333 F.2d 169

(9th Circuit) cert. denied, 379 U.S. 404 (1964) .........00.... 19

Locke v. United States, 75 F.2d 157

(5th Cir.), cert. denied, 295 U.S. 733 (1935) ............. 15, 17

MacArthur Co. v. Johns Manville Corp.,

837 F.2d 89 (2d Cir.), cert. denied,

SD ee cee tehctivttttnederctineniniecinrncsscetieresititinnons 17

Mann Mfg., Inc. v. Hortex, Inc., 439 F.2d 403

CR GE STAD dccntiecscccvcrensitsinscbinsnthieseenenecnanteetisicnevoteotions 19

In re Monroe Well Serv., Inc., 67 B.R. 746

eS NR RS EE ae eee 16

In re Myerson & Kuhn, 121 B.R. 145

a IE, Fu Be cctnecesntibidalinbcentinasitiiingaereeericeesen 17

In re Otero Mills, Inc., 21 B.R. 777

(Bankr. D. N. Mex.), aff'd, 25 B.R. 1018

MB Fa RSE ee vee ee ee 17

Pasadena City Bd. of Educ. v. Spangler,

BEF VB; SS CRG sciicicecivveviniiciccevitilitsiiciniictianitiaiiaihavitintiiaiia 18

vii

TABLE OF AUTHORITIES - Continued

Cases: Page

In re Stadium Management Corp., 95 B.R. 264

ED. DEER SIGE iieccnsttctitcccthiacerntitnindttinibsdaniccsssinetistisoesees 16

Treadaway v. Academy of Motion Picture Arts

and Sciences, 783 F.2d 1418 (9th Cir. 1986) ..........000..... i9

United States v. United Mine Workers of America,

Ee rns A CPT Herbdlcainabeiisiiisenssblicinaiinitiiininitortccnnansccen 15

Willis v. Celotex Corp., 978 F.2d 146 (4th Cir.

1992), cert. denied, 113 S. Ct. 1846 (1993)......... 14, 17, 19

In re Wood, 825 F.2d 90 (Sth Cir. 1987) ..........cccceceeeeee 16

viii

TABLE OF AUTHORITIES

Statutes: Page

Fed. R. Civ. P. 65.1 ei sieedocitedibiadsdetiadonctt LAH 8

11 U.S.C. SIOS(R) ..-ccccccoccccrccceccsccecsvoscscssessreoosssonessooooes 2,3

11 U.S.C. SS106C) ....cccccscccssoseccssecosccccesesesvescososessoscesecs 10

D1 UGC, BSOG conc ccssccsccccccesstscssesessecvesovveessecsescerenesoses 5, 10

91 USC, GBI cecccoscrcrsscsncsensesscssoesssvescscovosnerssseseoooonss 5, 11

BE U.S.C. BSED ...cccccccosecescescocececssovecceccoscesoscvsvescsoossoscesous 5

BE UBL. GSSD .ncrcccesrvcccsceeses cicochallitiasstiooedintoustinebsitoeds 5,14

28 U.S.C. § 157(D)(2) ......-ccscccssssessseerccereesssscnsressenssesenees 16

2B U.S.C. $ 1SB(O) ...ccrcecccccccescsesosssccsesecseseseessoveercess 2, 3,19

2B U.S.C. § 1254(1) .cnrecccooccscvccccrresereovees ‘aseiidieaieibatlancdal 2

PB U.B.C. © BBO .nncecccoscecaroresccescccossosvronssoosvosesrscosssvocovees 6

28 U.S.C. § 1334(D) ...........ccccccceeeeeseeccreseserererees 2,4, 12, 16

28 U.S.C. § 1334(d) .......:cccsescsrsccssrercesessrreessssscrreeseeesseens 12

a + 6 ler sen

No.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

THE CELOTEX CORPORATION,

Petitioner,

BENNIE EDWARDS and JOANN EDWARDS,

Respondents.

PETITION FOR LEAVE TO INTERVENE AND PETITION FOR

WRIT OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE FIFTH CIRCUIT, OR,

IN THE ALTERNATIVE, BRIEF OF AMICUS CURIAE

NORTHBROOK PROPERTY AND CASUALTY INSURANCE

COMPANY IN SUPPORT OF PETITION FOR WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Northbrook Property and Casualty Insurance Company

(“Northbrook”) prays for leave to intervene and further prays

that a writ of certiorari be granted to review the judgmert of

the United States Court of Appeals for the Fifth Circuit entered

in Edwards v. Armstrong World Indus., Inc., on November 5,

1993, and the denial of Celotex’s petition for rehearing and

suggestion for rehearing en banc, entered on December 22, 1993.

In the alternative, Northbrook files this Brief in support of the

Petition for Writ of Certiorari to the United States Court of

Appeals for the Fifth Circuit, filed by Celotex, in accordance

with Rule 37 of the Rules of this Court and pursuant to the

attached consent of all parties.

OPINIONS BELOW

The Fifth Circuit’s opinion as to execution on the

supersedeas bond (A-1) is reported at 6 F.3d 312. The Fifth

Circuit’s denial of the petition for rehearing and suggestion for

rehearing en banc (A-19) is reported at 6 F.3d 321. The order

of the district court (A-24) is unreported.

JURISDICTION

The judgment of the Fifth Circuit was entered on

November 5, 1993, affirming the decision of the United States

District Court for the Northern District of Texas. On

December 22, 1993, the Fifth Circuit entered its order denying

Celotex’s petition for rehearing and suggestion for rehearing en

banc. This Court's jurisdiction is invoked pursuant to 28 U.S.C.

§ 1254(1).

STATUTES INVOLVED

This case involves Federal Rule of Civil Procedure 65.1,

11 U.S.C. §105(a) and 28 U.S.C. §§ 158(a), 1334(b):

Fed. R. Civ. P. 65.1

Whenever these rules, including the Supplemental Rules

for Certain Admiralty and Maritime Claims, require or permit

the giving of security by a party, and security is given in the

form of a bond or stipulation or other undertaking with one or

more sureties, each surety submits to the j risdiction of the court

and irrevocably appoints the clerk of the court as the surety’s

agent upon whom any papers affecting the surety’s liability on

the bond or undertaking may be served. The surety’s liability

may be enforced on motion without the necessity of an

independent action. The motion and such notice of the motion

as the court prescribes may be served on the clerk of the court,

who shall forthwith mail copies to the sureties if their addresses

are known.

11 U.S.C. §105(a).

(a) The court may issue any order, process, or judgment

that is necessary or appropriate to Carry out the provisions of

this title. No provision of this title providing for the raising of

an issue by a party in interest shall be construed to preclude the

court from, sua sponte, taking any action or making any

determination necessary or appropriate to enforce or implement

court orders or rules, or to prevent an abuse of process.

28 U.S.C. §158(a).

(a) The district courts of the United States shall have

jurisdiction to hear appeals from final judgments, orders, and

decrees, and, with leave of the court, from interlocutory orders

and decrees, of bankruptcy judges entered in cases and

proceedings referred to the bankruptcy judges under section

157 of this title. An appeal under this subsection shall be taken

only to the district court for the judicial district in which the

bankruptcy judge is serving.

28 U.S.C. § 1334(b)

(b) Notwithstanding any Act of Congress that confers

exclusive jurisdiction on a court or courts other than the district

courts, 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.

REASONS FOR GRANTING LEAVE

TO INTERVENE, AND, IN THE

ALTERNATIVE, INTEREST OF

AMICUS CURIAE

Northbrook petitions for leave to intervene because it has

a Vital interest in not being subjected to conflicting orders, from

two federal courts in different circuits, as to execution rights on

a surety bond Northbrook has issued. In the event that the

Court denies Northbrook leave to intervene to file its petition

for a writ of certiorari, Northbrook files this Brief as amicus

curiae in support of Celotex’s petition.

Northbrook and its parent, Allstate Insurance Company

(jointly “Northbrook”), are authorized to write supersedeas

bonds in all 50 states. They have obtained in excess of

$20 million in bonds on behalf of Celotex and its wholly-owned

subsidiary, Carey Canada Inc. (jointly “Celotex”), to permit

appeals from judgments against Celotex in asbestos cases. At

Celotex’s request, and pursuant to a settlement agreement

resolving an insurance coverage dispute, Northbrook, as surety,

posted a bond to supersede the judgment of Joann and Bennie

Edwards (“Edwards”) against Celotex (the “Edwards Bond’).

Thereafter Celotex filed for protection under Chapter 11

of the Bankruptcy Code in the United States Bankruptcy Court

for the Middle District of Florida (the “bankruptcy court’), and

the bankruptcy court entered an order enjoining execution on

the Celotex bonds (the “Section 105 Injunction”). See generally

5

In re Celotex Corp., 128 B.R. 478 (Bankr. M.D. Fla. 1991); in

re Celotex Corp., 140 B.R. 912 (Bankr. M.D. Fla. 1992). Both

Edwards and Northbrook are defendants in an adversary

proceeding in the bankruptcy court, The Celotex Corp. v.

Allstate, et al., Adv. Pro. No. 92-584, in which Celotex asserts

that 229 bonded claimants, including Edwards, should not be

permitted to execute on the bonds, in whole or in part, because

the punitive damage portions of certain judgments can be voided

and because the bonded claimants — by virtue of the bonds and

their collateralization — are beneficiaries of Celotex asset

transfers that are avoidable as preferences and fraudulent

transfers. See 11 U.S.C. §§ 544, 547, 548, 550.

Edwards did not seek relief in the bankruptcy court from

the Section 105 Injunction and did not seek review of that order

within the Eleventh Circuit. Instead, Edwards went to a court

in another circuit to seek an order permitting what the bankruptcy

court prohibited.

Notwithstanding the Section 105 Injunction, the Fifth

Circuit’s decision permits Edwards to execute against

Northbrook on the Edwards Bond. If Northbrook pays on the

Edwards Bond, however, it risks violation of the bankruptcy

court’s Section 105 Injunction. Yet, Northbrook cannot —

consistent with the Fifth Circuit’s decision — resist payment.

The ramifications of the disagreement between the bankruptcy

court and the Fifth Circuit escalate as others of Celotex’s 229

bonded judgment claimants are emboldened by the Fifth Circuit’ s

decision to attempt execution on their bonds. Northbrook

already has participated in a number of such proceedings

spawned by the Fifth Circuit’s decision.

Northbrook is not filing this Brief to support or oppose

the merits of the Section 105 Injunction. Northbrook never

sought an injunction against execution on the Edwards Bond or

any other bond it provided for Celotex. Northbrook has been,

and is today, willing to pay on the Edwards Bond provided that

payment is not in contravention of court order. Northbrook

has no interest in avoiding payment on the bonds it obtained for

Celotex. Under the terms of a settlement agreement with

Celotex, such payment would simply reduce pro tanto

Northbrook’s insurance settlement obligation to Celotex.

Indeed, pursuant to the May 29, 1992 order of the bankruptcy

court, Northbrook has placed sufficient funds (in excess of

$20,000,000) in a special account to assure payment on the

bonds Northbrook obtained at Celotex’s request. 140 B.R. at

917.

Northbrook files this Brief to emphasize the importance

of adherence to a rule of law that prevents collateral judicial

attack and requires that injunctions be obeyed unless they are

overturned through appropriate appellate process. Without

intervention from this Court, Northbrook and other Celotex

sureties (who collectively issued $70,000,000 in supersedeas

bonds for Celotex) remain caught between conflicting decisions

of two courts in two different circuits.

STATEMENT OF THE CASE

This is a case of direct interference by a federal court of

appeals with the continuing injunctive power of a bankruptcy

court in a different circuit.

A. The Underlying Tort Judgment

In April of 1989, the United States District Court for the

Northern District of Texas entered a $281,025.80 judgment in

favor of Edwards and against Celotex for asbestos-related

injuries. The bulk of the jury award, $245,500, was for punitive

damages. Diversity jurisdiction was invoked under 28 U.S.C.

§ 1332.

Celotex appealed the punitive damage award. To stay

execution on the judgment pending appeal, Celotex posted a

supersedeas bond for $294,987.88. Northbrook was surety on

the bond. The bond was secured with insurance proceeds

remaining to be paid to Celotex under a settlement agreement

resolving coverage disputes between Northbrook and Celotex.

In an opinion issued on September 20, 1990, the Fifth

Circuit affirmed Edwards’ judgment against Celotex. Edwards

v. Armstrong World Indus., Inc., 911 F.2d 1151 (Sth Cir. 1990).

On October 12, 1990, the mandate issued. That same day,

Celotex filed a petition for relief under Chapter 11 of the

Bankruptcy Code in the United States Bankruptcy Court for

the Middle District of Florida.

B. The Bankruptcy Court Section 105 Injunction

Celotex is a manufacturer of building and roofing products.

On October 12, 1990, Celotex had over 100 asbestos-related

bodily injury cases on appeal. Celotex had stayed judgments

totalling nearly $70 million by posting supersedeas bonds, for

which it had provided security. See Celotex, 140 B.R. at 913-

14; Celotex, 128 B.R. at 482-83.

On October 17, 1990, on Celotex’s motion, the bankruptcy

court issued an injunction under Section 105 of the Bankruptcy

Code to augment the automatic stay. In pertinent part, the

Section 105 Injunction states that “all Entities are hereby jointly

and severally stayed, restrained and enjoined from commencing

or continuing any judicial, administrative or other proceeding

involving any of the Debtors regardless of ... whether the matter

is On appeal and a supersedeas bond has been posted ....”” (Order

{ 3, A-35.) As stated by the bankruptcy court, the Section 105

Injunction “was for the purpose of precluding, among other

things, judgment creditors from proceeding in various state and

federal courts against supersedeas bonds without first coming

before this Court.” 128 B.R. at 482 (footnote omitted). The

order provided that any party in interest could seek relief from

its restraints upon 30 days’ notice and hearing. (Order { 4,

A-35.)

8

C. Further Bankruptcy Court Proceedings

Concerning Its Injunction

On June 13, 1991, the bankruptcy court reaffirmed the

Section 105 Injunction and made clear that the injunction

prohibits execution on any supersedeas bond even after the

appellate process had concluded:

As to the utilization of Section 105 vis-a-vis the

supersedeas bonds, once the judgment creditor has

been successful throughout the appellate process,

the judgment creditor is not able to proceed against

the supersedeas bond without seeking to vacate the

Section 105 stay in this Court.

* . *

Accordingly, it is:

ORDERED, ADJUDGED AND DECREED that:

* * *

3. Where at the time of filing the petition, the

appellate process between Debtor and the judgment

creditor had been concluded, the judgment creditor

is precluded from proceeding against any

supersedeas bond posted by Debtor without first

seeking to vacate the Section 105 stay entered by

this Court.

128 B.R. at 484, 485; accord Celotex, 140 B.R. at 914.

The bankruptcy court ruled that a supersedeas bond ceases

to be estate property once the appellate process has concluded

in favor of the bonded claimant. 128 B.R. at 482. The court

recognized, however, that the bonded claimants’ judgments and

their rights to execute on the bonds nevertheless could be

avoidable on bankruptcy law grounds and that the punitive

damage awards were subject to subordination and equitable

limitation in bankruptcy:

The Court’s inquiry inio whether the Section

105 stay should continue includes, inter alia,

Debtor’s ability to evoid any final judgment under

the Bankruptcy Code, the necessity of protecting or

disenfranchising Debtor’s sureties, Debtor’s ability

to deal with the asbestos litigation within the

reorganization plan and the effect on that process if

the Section 105 stay were to be lifted, the treatment

of the punitive damage portion of any judgment and

the treatment of joint and several liability,

contribution, and indemnification from co-defendants

in other litigation.

Celotex, 140 B.R. at 914.

Again, on May 29, 1992, the bankruptcy court reaffirmed

the Section 105 Injunction. 140 B.R. 912. The court made

clear that the purpose of the injunction was to assure its ability

to grant Celotex relief on its avoidance claims, if appropriate,

while at the same time protecting the bonded claimants. /d. at

916. To expedite resolution of any such claims, the court

ordered:

ORDERED, ADJUDGED AND DECREED

that Debtor shall file any preference action or any

fraudulent transfer action or any other action to avoid

or subordinate any judgment creditor’s claim against

any judgment creditor or against any surety on any

10

supersedeas bond within 60 days of the entry of this

Order.

Celotex Corp., 140 B.R. at 917.’

As to Celotex’s compliance with this bankruptcy court

order, Celotex advised the Fifth Circuit:

As required by the second reported Celotex

decision at 140 B.R. 912, the Edwards, all other

bonded claimants and the sureties on such bonds are

presently involved in an omnibus adversary

proceeding in The Celotex Corp. v. Allstate, et al.,

Adv. Pro. No. 92-584, United States Bankruptcy

Court, Middle District of Florida, Tampa Division,

to resolve whether any or a part of the collateral

securing the bonds can be avoided as preferential

payments or fraudulent transfers or equitably

subordinated to the claims of all other unsecured

asbestos victims’ claims. Because the Edwards’

judgment includes punitives and the timing of the

posting of the bond is implicated in the adversary

proceeding, the Edwards’ entitlement to have the

judgment satisfied in full is at issue pursuant to 11

U.S.C. §544 (fraudulent transfer) and 11 U.S.C.

§510(c) (equitable subordination). Certainly

Congress contemplated avoiding preferential

. To protect the bonded claimants, the bankruptcy court ordered

that: (a) the sureties involved, including Northbrook, establish interest-

bearing accounts sufficient to assure full payment of the bonds; (b) Celotex

create an interest-bearing reserve account or increase the face amount of

any supersedeas bond to cover the full amount of judgment through

confirmation; and (c) Celotex provide in any plan that the bonded claimants’

claims be paid in full unless otherwise determined by the Court or agreed

by the claimant. 140 B.R. at 917.

:

$

-

\

i

11

transfers to sureties on supersedeas bonds as

evidenced by 11 U.S.C. §547(d)....

See Celotex’s Suggestion For Rehearing, in the United States

Court of Appeals for the Fifth Circuit, at 7 n.5.

D. Proceedings Below (Within The Fifth Circuit)

1. The Motion in Texas for Release of

the Bond

On May 3, 1991, Edwards filed a motion in the Texas

district court under Fed. R. Civ. P. 65.1 seeking to release the

supersedeas bond against Northbrook. Celotex and Northbrook

(which had been served with the motion) opposed the motion,

asserting that any proceeding to enforce the bond had been

enjoined by the bankruptcy court. Northbrook also urged its

interest in the orderly administration of justice:

Northbrook’s interest here is in the orderly

administration of justice. The status of the bonds is

sub judice in the bankruptcy court that is supervising

the entire Celotex reorganization. Northbrook has

a vital interest in not being subjected to conflicting

court decisions concerning the supersedeas bonds.

It also has an interest in the status of the bonds being

decided economically, efficiently and expeditiously.

Northbrook Property and Casualty Insurance Company

Memorandum In Opposition To Motion For Release of

Supersedeas Bond, filed May 21, 1991 in the Northern District

of Texas, at 6.

Gn February 3, 1992, at the request of the Texas district

court, Celotex, Northbrook and Edwards filed a Joint Status

Report. A-25. They advised the district court of the bankruptcy

court’s June 13, 1991 order and that the bankruptcy court had

12

held that judgment creditors of Celotex are enjoined from

proceeding on any supersedeas bond without first vacating the

October 17, 1990 Section 105 Injunction, which remained in

effect. A-27.

Despite the Section 105 Injunction, on May 27, 1992 the

district court granted Edwards’ motion for release of the

supersedeas bond. The court entered a brief order without

written opinion or analysis. A-24.

2. The Fifth Circuit Decision

On November 5, 1993, the Fifth Circuit affirmed. It denied

Celotex’s petitions for rehearing and rehearing en banc on

December 22, 1993.

The Fifth Circuit recognized that this is a case of conflict

between coordinate federal courts (the Florida bankruptcy court

and the Texas district court) as to the same matter. A-2; 6 F.3d

at 314. The Fifth Circuit purported to resolve the conflict; “no

usurpation is intended in this decision ....” Jd. The court focused,

however, on the jurisdiction of the bankruptcy court — and

specifically whether the Section 105 Injunction fell within the

bankruptcy court’s exclusive jurisdiction under 28 U.S.C.

§ 1334(d) (exclusive jurisdiction over debtor’s property and

property of the estate) or the bankruptcy court’s nonexclusive

jurisdiction under 28 U.S.C. § 1334(b) (nonexclusive jurisdiction

over “all civil proceedings arising under title 11, or arising in or

related to cases under title 11”). A-5-6; 6 F.3d at 315.

Since the Florida bankruptcy court had already determined

that bonds outstanding on concluded appeals, like the Edwards

Bond, were not property of the estate, the answer was self-

evident. A-10; 6 F.3d at 317. Bankruptcy court jurisdiction

was not exclusive.

13

The Fifth Circuit, however, did not analyze collateral attack

warfare between two coordinate federal courts when (as here)

both courts have jurisdiction over the same matter. Instead, on

rehearing, the court of appeals merely adverted to the existence

of a court deadlock, with the following statement:

Thus, we have not held that the bankruptcy court in

Florida was necessarily wrong; we have only

concluded that the district court, over which we do

have appellate jurisdiction, was right.

A-20; 6 F.3d at 321.

The bulk of the Fifth Circuit opinion is devoted to the

merits of the Florida bankruptcy court’s exercise of Section 105

equity power.* “We must decide what limits must be placed on

the [Florida] bankruptcy court’s power to insure that both

debtors and creditors remain adequately protected.” A-2; 6

F.3d at 314.

The Fifth Circuit questioned whether the Section 105

Injunction even applied to the present case. In the court’s view,

the order “does not, on its face, reach to third parties.” A-12; 6

F.3d at 318. The court recognized, however, “the bankruptcy

court in this case has ruled that the stay, in its present state,

would apply to enjoin the Edward’s [sic] proceedings against

Northbrook to execute the supersedeas bond.” A-12-13; 6 F.3d

at 318 (citing Celotex, 128 B.R. at 484).

: The court of appeals rejected the argument that the automatic

Stay, under Section 362(a) of the Code, bars execution on the Edwards

Bond. A-6-10; 6 F.2d at 316-17. The court reasoned that the automatic

Stay could not apply because the bond was not estate property and because

execution on the bond was against Northbrook, a non-debtor. /d.

~~ =

14

In light of the bankruptcy court’s construction and

reiteration of its own order, the Fifth Circuit set forth its own

legal analysis of the injunction merits. The Fifth Circuit held

that the Section 105 Injunction constituted an abuse of the

bankruptcy court’s equity power because the injunction defeated

the purpose of the supersedeas bond. “The supersedeas bond

was posted to cover precisely the type of eventuality which

occurred in this case, insolvency of the judgment debtor.” A-14;

6 F.3d at 319. The court expressly rejected the reasoning and

result of the Fourth Circuit’s decision in Willis v. Celotex Corp..,

978 F.2d 146 (4th Cir. 1992), cert. denied, 113 S. Ct. 1846

(1993). “[W]e disagree with the Fourth Circuit’s proposed

solution in Willis.” A-13; 6 F.3d at 319. Willis, as the Fifth

Circuit acknowledged, “decided that the bankruptcy court’s

power was sufficient to stay proceedings against third parties

on supersedeas bonds.” A-11; 6 F.3d at 318.

The Fifth Circuit acknowledged that “[sJection 105

authorizes a bankruptcy court to enjoin litigants from pursuing

actions pending in other courts that threaten the integrity of a

bankrupt’s estate.” A-15; 6 F.3d at 320 (citation omitted). The

appellate court concluded, however, that “the integrity of the

estate is not implicated in the present case because the debtor

has no present or future interest in this supersedeas bond.” A-

15-16; 6 F.3d at 320 (footnote omitted).

In reaching this conclusion, the Fifth Circuit did not

consider potential rights of Celotex (which Celotex has asserted)

to recover the bond proceeds. The Fifth Circuit did not advert

to or analyze the possibility that execution on the bond could

result in a bonded claimant’s receipt of a preference or fraudulent

transfer as beneficiary of a transfer of the bond collateral. See

11 U.S.C. § 550(a). Nor did it raise the issue of punitive

damages. No mention or analysis was accorded the bankruptcy

court’s May 29, 1992 Order that Celotex file avoidance actions

as to the bonded claimant’s rights, as Celotex has done. (See

supra, at 9-10.)

15

REASONS FOR GRANTING

THE PETITION FOR A WRIT OF CERTIORARI

I. THE FIFTH CIRCUIT’S DECISION TO PERMIT

EXECUTION ON THE EDWARDS BOND IS IN

CONFLICT WITH APPLICABLE PRECEDENT

OF THIS COURT AND OF THE FIFTH CIRCUIT.

This Court has established that “persons subject to an

injunctive order issued by a court with jurisdiction are expected

to obey that decree until it is modified or reversed, even if they

have proper grounds to object to the order.” GTE Sylvania,

Inc. v. Consumers Union of the United States, Inc., 445 U.S.

375, 386 (1980) (citations omitted); accord United States v.

United Mine Workers of America, 330 U.S. 258, 293-94 (1947).

As the Fifth Circuit itself teaches:

Whether the grant of the injunction was

erroneous is not the question here. Error must be

corrected by appeal, and cannot be tested by

disobedience. ... Willful disobedience of an

injunction, however erroneous, issued by a court

having jurisdiction while such injunction is in force

unreversed constitutes contempt of court.

Locke v. United States, 75 F.2d 157, 159 (Sth Cir.) (citations

omitted) (affirming contempt order for defendant’s violation of

injunction, notwithstanding defendant’s assertions as to its

invalidity, where court issuing injunction had jurisdiction and

defendant elected not to seek review of injunction by appeal),

cert. denied, 295 U.S. 733 (1935).

The bankruptcy court here had jurisdiction to issue the

Section 105 Injunction. As shown by the bankruptcy court’s

June 1991 and May 1992 published opinions, the purpose of

the Section 105 Injunction is to assure the Court’s ability to

grant just and effective relief as to avoidance and subordination

16

Claims pertaining to the bonds, the bond collateral and punitive

damage awards, as well as to protect Celotex’s ability to

reorganize. See 140 B.R. at 915-17; 128 B.R. at 482-84.

Whether or not the bankruptcy court abused its discretion in

issuing and maintaining the Section 105 Injunction, its

jurisdiction (i.e., its actual power) to issue the injunction

is unquestionable.

The bankruptcy courts, as adjuncts of the federal district

courts, have broad jurisdiction encompassing all civil proceedings

“arising under title 11, or arising in or related to cases under

title 11 [Bankruptcy Code].” See 28 U.S.C. §1334(b).5 There

is abundant authority holding that suits to enjoin non-debtors

from taking actions that interfere with a debtor’s ability to

maximize the value of its estate and reorganize are core

bankruptcy proceedings. See, e.g., In re Johns-Manville Corp.,

801 F.2d 60, 64 (2d Cir. 1986) (action to enjoin debtor’s

stockholders from prosecuting state court action to compel

debtor to hold shareholders’ meeting). Moreover, temporary

. See also 28 U.S.C. § 157(b)(2), which provides a non-exclusive

listing of core bankruptcy proceedings. As a general matter, a case “arising

under title 11,” i.e., created or determined by a statutory provision of title

11, is acore bankruptcy proceeding. Jn re Wood, 825 F.2d 90, 96 (Sth Cir.

1987). A case “arising in” a bankruptcy proceeding, i.¢., an administrative

matter that arises only in a bankruptcy case, is also a core matter. Id. at 97.

. See also In re Stadium Management Corp., 95 B.R. 264, 267

(D. Mass. 1988) (action to enjoin bank from foreclosing on property owned

by debtor’s subsidiary); Jn re Deltacorp., Inc., 111 BR. 419, 420 (Bankr.

S.D.N.Y. 1990) (action to enjoin government from appointing receiver for

S & L owned by a holding company of which the debtor is the 53% parent);

In re Monroe Well Serv., Inc., 67 B.R. 746, 753-54 (Bankr. E.D. Pa. 1986)

(action to compel initial purchasers of oil from debtor (i) to comply with

“division orders” which established how proceeds of oil were to be divided

up and (ii) not to pay sums to lien creditors of debtor who had valid lien

against oil and its proceeds; according to court, this proceeding involved

“non-estate funds held by third-parties”).

17

and permanent Section 105 injunctions barring suit against non-

debtors, issued as core matters and often as part of a Plan, are

an accepted aspect of large corporate reorganization.’

Given the bankruptcy court’s jurisdiction to enter and keep

in place the Section 105 Injunction, the only method for review

of the validity of the injunction is by appeal to the United States

District Court for the Middle District of Florida and then the

Eleventh Circuit. See Locke, 75 F.2d at 159. As this Court

explained in Howat v. State of Kansas, 258 U.S. 181, 189-90

(1922) (emphasis added; citations omitted):

An injunction duly issuing out of a court of general

jurisdiction with equity powers, upon pleadings properly

invoking its action, and served upon persons made

parties therein and within the jurisdiction, must be obeyed

by them, however erroneous the action of the court

may be, even if the error be in the assumption of the

validity of a seeming, but void law going to the merits

of the case. It is for the court of first instance to

determine the question of the validity of the law, and

until its decision is reversed for error by orderly review,

? See, e.g., In re A.H. Robins Co., 880 F.2d 694, 702 (4th Cir.)

(affirming power of bankruptcy court to enjoin suits against non-debtors,

where there existed certain indemnification rights against the debtor), cert.

denied, 493 U.S. 959 (1989); MacArthur Co. v. Johns-Manville Corp.,

837 F.2d 89 (2d Cir.) (permanent injunction may be issued against actions

against an insurer as part of settlement incorporated in a Chapter 11 plan),

cert. denied, 488 U.S. 868 (1988); Willis v. Celotex Corp., 978 F.2d 146

(4th Cir. 1992) (upholding validity of bankruptcy court’s Section 105 stay

of execution against surety on supersedeas bonds), cert. denied, 113 S.Ct.

1946 (1993); In re Myerson & Kuhn, 121 B.R. 145, 153-54 (Bankr. $.D.N.Y.

1990) (Section 105 grants power to enjoin actions against debtor’s partners,

where such actions would significantly interfere with debtor’s ability to

formulate a plan); Jn re Otero Mills, Inc., 21 B.R. 777 (Bankr. D. N. Mex.)

(granting §105 injunction to prevent creditor from proceeding on judgment

against debtor's president), aff'd, 25 B.R. 1018 (D.N. Mex. 1982).

18

either by itself or by a higher court, its orders based on

its decision are to be respected, and disobedience of

them is contempt of its lawful authority, to be punished.

Accord Pasadena City Bd. of Educ. v. Spangler, 427 U.S. 424,

439-40 (1976) (“[T]hose who are subject to the commands of

an injunctive order must obey those commands, notwithstanding

eminently reasonably and proper objections to the order, until it

is modified or reversed.”).

The Fifth Circuit’s decision, permitting Edwards to ignore

the bankruptcy court’s injunction, conflicts with clear precedent

of this Court and of the Fifth Circuit itself.

I. THE FIFTH CIRCUIT’S COLLATERAL

ATTACK ON, AND INTERFERENCE WITH,

THE BANKRUPTCY COURT’S INJUNCTION

VIOLATES ESTABLISHED PRINCIPLES OF

COMITY AND FEDERAL JURISDICTION AND

CALLS FOR AN EXERCISE OF THIS COURT’S

POWER OF SUPERVISION.

Both Northbrook and Edwards are subject to conflicting

court orders. If the Edwards take further steps to execute on

the bond, they face contempt sanctions in the Florida bankruptcy

court. If Northbrook refuses to pay on the bond, it faces

enforcement process in the Northern District of Texas. No

litigant in the federal system should be confronted with such

choices. Exercise of this Court’s supervisory power is necessary

to break the deadlock.

The decision of the Fifth Circuit constitutes a radical

departure from the accepted and usual course of judicial

proceedings. Comity and orderly administration of justice dictate

that coordinate federal courts not hear the same matter

simultaneously. Kerotest Mfg. Co. v. C-O-Two Fire Equip.

Co., 342 U.S. 180 (1952). Actions to vacate an injunction should

19

be brought to the rendering court or by appeal from the rendering

court, not by original action in a coordinate federal court. See

Lapin v. Shulton, Inc., 333 F.2d 169 (9th Cir.), cert. denied,

379 U.S. 404 (1964). “[C]onsiderations of comity and orderly

administration of justice demand that the non-rendering court

should decline jurisdiction of such an action and remand the

parties for their relief to the rendering court, so long as it is

apparent that a remedy is available there.” Jd. at 172.°

The instant collateral attack on the Florida bankruptcy

court is unseemly. Already collateral attack has resulted in two

directly opposite federal appellate decisions (Willis and Edwards)

as to the correctness of the Section 105 Injunction — neither

from the Eleventh Circuit, the only federal circuit with appellate

jurisdiction over the bankruptcy court. Under 28 U.S.C.

§ 158(a), an appeal from the bankruptcy court “shall be taken

only to the district court for the judicial district in which the

bankruptcy judge is serving.” Accordingly, the United States

District Court for the Middle District of Florida has exclusive

appellate jurisdiction here. Further appeal is to the United States

Court of Appeals for the Eleventh Circuit. See 28 U.S.C.

§ 158(a).

. Numerous federal decisions respect this principle. See, e.g.,

Carter v. United States, 733 F.2d 735, 736 (10th Cir. 1984) (one district

court is without jurisdiction to grant relief from an injunction entered by a

district court sitting in another circuit), cert. denied, 469 U.S. 1161 (1985);

accord Carter v. Attorney General of the United States, 782 F.2d 138, 142

(10th Cir. 1986) (same); Treadaway v. Academy of Motion Picture Arts

and Sciences, 783 F.2d 1418, 1421-22 (9th Cir. 1986) (considerations of

comity provide ample justification for district court’s dismissal of action to

set aside bankruptcy court order confirming sale); Feller v. Brock, 802

F.2d 722, 727-28 (4th Cir. 1986) (“Prudence requires that whenever possible,

coordinate courts should avoid issuing conflicting orders.”); Mann Mfg.,

Inc. v. Hortex, Inc., 439 F.2d 403, 407-08 (Sth Cir. 1971) (for reasons of

comity and sound judicial administration, one federal district court must

not issue injunction that interferes with ability of another federal district

court to supervise its Own injunction).

20

A system that permits appeal from one federal trial judge

to another in a different circuit — as has happened here —

ultimately impugns the entire appellate system. It encourages

forum shopping and evasion of the rules and statutes governing

federal appeals.

The Florida bankruptcy court is performing its judicial

duties in accordance with applicable statutes and rules. Unless

and until that court’s injunctive orders are reversed on appeal,

they should be obeyed. See Howat v. State of Kansas, 258

U.S. 181, 190 (1922) (until the injunction-rendering court’s

“decision is reversed for error by orderly review, either by itself

or by a higher court, its orders based on its decision are to be

respected”’); Ellicott Mach. Corp. v. Modern Welding Co., Inc.,

502 F.2d 178 (4th Cir. 1974) (review of district court order is

by appeal to the appropriate circuit court, not by collateral attack

to another federal trial judge).

CONCLUSION

For the foregoing reasons this petition for leave to intervene

and petition for writ of certiorari should be granted. In the

alternative, the petition for writ of certiorari filed by The Celotex

Corporation should be granted.

Respectfully submitted,

ROBERT B. MILLNER

(Counsel of Record)

LORIE A. CHAITEN

Sonnenschein Nath & Rosenthal

8000 Sears Tower

Chicago, IL 60606-6404

Counsel for Petitioner

Northbrook Property and

Casualty Insurance Company

Dated: March 22, 1994

aS