Matter of Zale Corp.

United States Court of Appeals,
Fifth Circuit.
No. 94-10497.
The Matter of ZALE CORPORATION, Debtor.
Alan D. FELD, and National Union Fire Insurance Company, Inc., of
Pittsburgh, Pennsylvania, Appellants,
v.
ZALE CORPORATION, et al., Appellees.
Sept. 7, 1995.
Appeals from the United States District Court for the Northern
District of Texas.
Before POLITZ, Chief Judge, and EMILIO M. GARZA and STEWART,
Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
Alan D. Feld and National Union Fire Insurance Company
("NUFIC" or "National Union") appeal the district court's
affirmance of the bankruptcy court's approval of a settlement
entered in the bankruptcy proceedings of Zale Corporation and its
affiliates (collectively "Zale" or "the debtor"). We reverse and
remand.
I
More than two years prior to the approval of the settlement at
issue in this case, Zale filed for protection under Chapter 11 of
the Bankruptcy Code. See 11 U.S.C. § 1101-1173 (1988 & West Supp.
V 1994). The official creditors' committees initiated
investigations of claims that they planned to assert against the
debtor's directors and other third parties. After the committees
threatened to file suit against the former directors—Irving R.
1
Gerstein, Charles F. Gill, James Gillies, and Alan D. Feld,
settlement discussions ensued. These negotiations included
discussion of Zale's directors and officers ("D & O") liability
policies. CIGNA Insurance Company ("CIGNA") had issued a D & O
Liability and Company Reimbursement Liability Policy to provide
primary insurance coverage for Zale's directors and officers.
CIGNA's policy had a limit of $10 million. NUFIC had issued an
excess D & O policy to Zale for up to $15 million.1
Eventually, various parties to the Zale bankruptcy jointly
filed a motion in the bankruptcy court seeking approval of a
settlement agreement between the debtor and three of Zale's former
directors—Gerstein, Gill, and Gillies—on one side and CIGNA, the
primary D & O liability insurer, on the other. The settlement
agreement included the following relevant provisions:
1) Gerstein, Gill, and Gillies would agree to a $32 million
judgment against them,[2] to be satisfied solely out of
insurance proceeds.[3]
2) Gerstein, Gill, and Gillies would assign to Zale all rights
under the insurance policies.
3) Gerstein, Gill, and Gillies would assign to Zale all rights
of contribution or indemnification against third parties
1
An excess policy provides coverage in excess of the primary
policy limits. Accordingly, such a policy is triggered only upon
the exhaustion of the limits of the primary policy. NUFIC's
policy provided "following form" coverage; that is, it
incorporated the terms and conditions of the primary CIGNA
policy.
2
This provision was later modified. Rather than agreeing to
a judgment, the directors agreed to stipulate to certain facts
that would provide the basis for a judgment against them.
3
A third company had issued a separate excess D & O policy
for $10 million to cover these three directors.
2
arising out of their activities as directors of Zale.
4) CIGNA would pay to Zale $10 million, ostensibly the limits
of its policy.
5) CIGNA would sell to Zale all subrogation rights arising out
of those rights assigned by Gerstein, Gill, and Gillies. Zale
would pay CIGNA $1.5 million in cash and up to $2.5 million in
proceeds from suits against other third parties.[4]
The bankruptcy court scheduled a settlement hearing to
coincide with the hearing on the confirmation of Zale's
reorganization plan. On the evening of the first day of the
hearing, the settling parties modified the settlement agreement to
include a provision that conditioned the settlement on the grant of
a permanent injunction that would prevent parties from suing the
settling parties for their actions in relation to the settlement.5
The desired injunction stated as follows:
[I]n order to effectuate the terms of the Settlement
Agreement, any Person, including without limitation, National
Union Fire Insurance Company, is forever barred and enjoined
(1) from filing, commencing, asserting or continuing any and
all claims, actions, causes of action, proceedings or suits,
in law or equity (other than an appeal of this Order), against
CIGNA, the Debtors, the Defendants [Gerstein, Gill, and
Gillies], Zale Holding Corporation, Reorganized Zale,[6] the
4
These suits included claims against Feld's law firm, Akin,
Gump, Hauer, & Feld, and against the law firm of Skadden, Arps,
Slate, Meagher & Flom, both of which had provided legal services
to Zale prior to its bankruptcy.
5
One week prior to the hearing, NUFIC had filed a
declaratory judgment action in district court to preserve
coverage-related issues and to obtain release from its
obligations if the settlement closed. NUFIC also sought to
enjoin approval of the settlement.
6
"Reorganized Zale" referred to Zale Corporation after it
emerged from bankruptcy.
3
Litigation Entity,[7] their parents, subsidiaries, affiliates,
shareholders, directors, officers, agents, employees,
attorneys, agents, heirs, successors and assigns, or the
Official Committees or their Professional Persons or the other
Plan Proponents or their attorneys (collectively, the
"Protected Parties"), based upon, arising out of or relating
in any way to the participation of any of the Protected
Parties in the negotiation, formulation, submission, approval,
execution or consummation of the Settlement Agreement, or (2)
from otherwise seeking to collaterally attack the Settlement
Agreement, this Order, or the subject matter hereof.
The settling parties' stated purpose in seeking the injunction was
to prevent NUFIC and Feld8 from bringing or pursuing claims against
CIGNA for bad faith and breach of contract.9 The settling parties
also modified the settlement agreement to include a provision under
which Zale agreed to indemnify CIGNA for bad faith or other claims
against CIGNA concerning the settlement.
On the second day of the hearing, the bankruptcy court
confirmed the reorganization plan and two other settlements10 before
7
The "Litigation Entity" was created in the reorganization
plan as the entity responsible for pursuing all unresolved
actions against third parties. The Litigation Entity later
evolved as Jewel Recovery, L.P.
8
Feld was a former Zale director who had been excluded from
the settlement. CIGNA and Zale state that the Creditors'
Committees refused to include Feld in the settlement.
9
See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 138 ("[W]hat
we're seeking to do is to prevent National Union from coming
after Cigna or its professionals or the Committees or its
professionals or any other interested persons, the defendants'
counsel or the defendants themselves, and someway collaterally
attacking the agreement we expect to be and hope to be approved
by this Court...."). CIGNA later broadened the purported scope
of its argument to include Feld.
10
These were a $70 million settlement between Zale and its
controlling shareholder, Swarovski International Holding, A.G.,
and a $9.4 million settlement between Zale and its outside
accounting firm, Arthur Andersen.
4
turning its attention to the so-called CIGNA settlement. NUFIC and
Feld11 both challenged the proposed injunction and settlement,
arguing that the issuance of the injunction would deprive them of
certain rights and that the court could not do so because NUFIC and
Feld were not parties to the bankruptcy and had not received proper
notice of the settlement.12 The court refused to entertain argument
or testimony on NUFIC and Feld's tort and contract claims, stating
that these issues were not relevant to "the underlying issues that
the Court has to address in the motion [to approve the settlement].
That is, is the settlement reasonable?"
Two days later, the bankruptcy court approved the modified
settlement, adding the following language to the injunction:
[P]rovided, however, that nothing in this paragraph shall
impair National Union from asserting defensively any issues of
coverage (which are not otherwise determined by the findings
of fact and conclusions of law entered by this Court on May
21, 1993) with respect to any policy of insurance issued by
National Union or any other Person from defending claims
against them....
As part of its approval order, the bankruptcy court made several
findings of fact, only two of which are at issue here. First, the
court found that "CIGNA has acted in good faith pursuant to the
obligations under its policy." Second, the court found that "the
CIGNA policy will be exhausted through the payment of the policy
11
Feld's actual appearance did not occur until the third day
of the hearing.
12
All of the parties provided detailed statements of facts
relating to the sufficiency of notice to both NUFIC and Feld.
Because we decide this case on other grounds, we have not
included notice-related facts in this discussion. We also do not
discuss the discovery sanctions levied by the bankruptcy court
against NUFIC as they are not before us on appeal.
5
limit."
Both NUFIC and Feld appealed the bankruptcy court's settlement
approval order to the district court. During the interim period
between the bankruptcy's court's approval and the district court's
resolution of the appeal, the parties to the bankruptcy consummated
the reorganization plan. The district court affirmed the
bankruptcy court's approval of the settlement in all respects.
NUFIC and Feld now appeal the judgment of the district court on
various grounds.
II
Feld and NUFIC challenge the entry of the injunction, arguing
that the bankruptcy court exceeded its power under section 105 of
the Bankruptcy Code. See 11 U.S.C. § 105(a) (1988) ("The court may
issue any order, process, or judgment that is necessary or
appropriate to carry out the provisions of this title."). They
also challenge the bankruptcy court's factual findings with respect
to the CIGNA policy. We review the bankruptcy court's factual
findings for clear error, and we review issues of law de novo.
Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 565 (5th
Cir.1995).13
13
CIGNA and Zale argue initially that NUFIC and Feld lack
standing to appeal because the injunction does not harm them. We
find no merit in this contention—the fact that the injunction
bars NUFIC and Feld in any way gives them standing to appeal it.
See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561-63, 112
S.Ct. 2130, 2137, 119 L.Ed.2d 351 (1992) (noting that when "the
plaintiff is himself an object of the action (or forgone action)
at issue ..., there is ordinarily little question that the action
or inaction has caused him injury, and that a judgment preventing
or requiring the action will redress it").
6
A
Before we address whether the bankruptcy court properly
exercised § 105 power to issue the injunction, we must first
examine whether a basis for the bankruptcy court's subject matter
jurisdiction existed.
Subject matter jurisdiction and power 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.
American Hardwoods, Inc. v. Deutsche Credit Corp. (In re American
Hardwoods, Inc.), 885 F.2d 621, 624 (9th Cir.1989) (citations
omitted); see also Miller v. Kemira, Inc. (In re Lemco Gypsum,
Inc.), 910 F.2d 784, 787 (11th Cir.1990) (noting that first step in
determining the existence of bankruptcy jurisdiction is whether
federal jurisdiction exists in the district court); United States
Dep't of Air Force v. Carolina Parachute Corp., 907 F.2d 1469, 1475
(4th Cir.1990) (stating that § 105 injunction cannot exceed court's
jurisdiction).14
Because Feld and NUFIC are not parties to the bankruptcy, the
actions at issue between noncreditors—NUFIC and Feld—and a
nondebtor—CIGNA—are third-party actions. Accordingly, we must
determine if these actions are "related to" the bankruptcy case.
See Quattrone Accountants, Inc. v. I.R.S., 895 F.2d 921, 926 (3d
14
Very little Fifth Circuit case law exists concerning
injunctions issued by a bankruptcy court to bar claims between
nondebtor third parties. For this reason, we have looked to
cases in other circuits and utilized the other circuits'
reasoning where we have found it persuasive.
7
Cir.1990) ("Since we are determining the bankruptcy court's
jurisdiction over a case between two non-debtors, we must examine
the "related to' language of Section 1334.").
The jurisdiction of the bankruptcy courts, like that of other
federal courts, is grounded in and limited by statute. Title
28 U.S.C. § 1334(b) provides that "the district courts shall
have original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or related
to cases under title 11." 28 U.S.C. § 1334(b). The district
courts may, in turn, refer "any or all proceedings arising
under title 11 or arising in or related to a case under title
11 ... to the bankruptcy judges for the district." 28 U.S.C.
§ 157(a).
Celotex Corp. v. Edwards, --- U.S. ----, ----, 115 S.Ct. 1493,
1498, 131 L.Ed.2d 403 (1995). We need not identify which
jurisdictional provision specifically applies because the
provisions operate in conjunction. In re Walker, 51 F.3d at 568-
69; accord Querner v. Querner (In re Querner), 7 F.3d 1199, 1201
(5th Cir.1993); see also Wood v. Wood (In re Wood), 825 F.2d 90,
93 (5th Cir.1987) ("For the purpose of determining whether a
particular matter falls within bankruptcy jurisdiction, it is not
necessary to distinguish between proceedings "arising under,'
"arising in a case under,' or "related to a case under,' title
11."). "Instead, to ascertain whether jurisdiction exists, "it is
necessary only to determine whether a matter is at least "related
to" the bankruptcy.' " In re Walker, 51 F.3d at 569 (quoting In re
Wood, 825 F.2d at 93) (other citations omitted).
[Section 1334's] reference to cases related to bankruptcy
cases is primarily intended to encompass tort, contract, and
other legal claims by and against the debtor, claims that,
were it not for bankruptcy, would be ordinary stand-alone
lawsuits between the debtor and others but that section
1334(b) allows to be forced into bankruptcy court so that all
claims by and against the debtor can be determined in the same
8
forum. A secondary purpose is to force into the bankruptcy
court suits to which the debtor need not be a party but which
may affect the amount of property in the bankrupt estate.
Once they are shoehorned into the bankruptcy court on the
authority of section 1334(b), such suits can then be stayed by
authority of section 105 of the Bankruptcy Code....
Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 161-62 (7th
Cir.1994) (citations omitted) (emphasis added). Accordingly, when
we define "related to" jurisdiction, we should "avoid the
inefficiencies of piecemeal adjudication and promote judicial
economy by aiding in the efficient and expeditious resolution of
all matters connected to the debtor's estate." In re Lemco Gypsum,
Inc., 910 F.2d at 787.
Nonetheless, "a bankruptcy court's "related to' jurisdiction
cannot be limitless." Celotex, --- U.S. at ----, 115 S.Ct. at
1499. "[A]s a dispute becomes progressively more remote from the
concerns of the body of federal law claimed to confer federal
jurisdiction over it, the federal interest in furnishing the rule
of decision for the dispute becomes progressively weaker." Zerand-
Bernal Group, Inc., 23 F.3d at 162. For the bankruptcy court to
have subject matter jurisdiction, therefore, some nexus must exist
between the related civil proceeding and the Title 11 case. In re
Lemco Gypsum, Inc., 910 F.2d at 787.15 Otherwise, "an overbroad
15
See also Specialty Mills, Inc. v. Citizens State Bank, 51
F.3d 770, 774 (8th Cir.1995) ("For subject matter jurisdiction to
exist in a "related to' action, there must be some nexus between
the civil proceeding and the Title 11 case."); Wisconsin Dep't
of Indus., Labor & Human Relations v. Marine Bank Monroe (In re
Kubly), 818 F.2d 643, 645 (7th Cir.1987) ("[D]isputes among
creditors of a bankrupt come within the federal bankruptcy
jurisdiction only if they involve property of the estate or if
resolving two creditors' intramural squabble will affect the
recovery of some other creditor.").
9
construction of § 1334(b) may bring into federal court matters that
should be left for state courts to decide." In re Lemco Gypsum,
Inc., 910 F.2d at 787-88 (citations omitted).
In In re Wood, 825 F.2d at 93, we adopted the Third Circuit's
test for determining whether a matter is "related to" a bankruptcy
case and held that a matter is "related to" the bankruptcy case for
§ 1334 purposes if " "the outcome of that proceeding could
conceivably have any effect on the estate being administered in
bankruptcy.' " In re Wood, 825 F.2d at 93 (quoting Pacor, Inc. v.
Higgins, 743 F.2d 984, 994 (3d Cir.1984)); accord In re Walker, 51
F.3d at 569. Moreover, " "[a]n 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
bankrupt estate.' " In re Walker, 51 F.3d at 569 (quoting Pacor,
Inc., 743 F.2d at 994). Conversely, the bankruptcy court has no
jurisdiction over a matter that does not affect the debtor. See
Celotex, --- U.S. at ---- n. 6, 115 S.Ct. at 1499 n. 6 (reciting
Pacor test and commenting that "whatever test is used, these cases
make clear that bankruptcy courts have no jurisdiction over
proceedings that have no effect on the debtor").16
We begin our analysis by noting that a large majority of cases
reject the notion that bankruptcy courts have "related to"
jurisdiction over third-party actions. See, e.g., In re Walker, 51
16
Celotex is not dispositive of this case because the Court
decided the case on alternative grounds. Id.10
F.3d at 569; cf. Homsy v. Flood (In re Vitek), 51 F.3d 530, 538 n.
39 (5th Cir.1995) (wondering " "out loud' about the extent, if any,
to which the tools of injunctive relief and settlement (or
"compromise') are appropriate ... in dealing with the rights of
third party creditors of the bankruptcy" and stating that "the
broad latitude afforded bankruptcy courts in fashioning remedies
should not be used in a way that tramples on the rights of
dissenters among creditors or non-parties to the proceedings").
Those cases in which courts have upheld "related to"
jurisdiction over third-party actions do so because the subject of
the third-party dispute is property of the estate,17 or because the
dispute over the asset would have an effect on the estate.18
Conversely, courts have held that a third-party action does not
create "related to" jurisdiction when the asset in question is not
17
See, e.g., In re Wood, 825 F.2d at 93-94 (holding that
"related to" jurisdiction over third-party action existed because
assets at issue in claims against debtor were property of
estate).
18
See, e.g., 8300 Newburgh Rd. Partnership v. Time Constr.,
Inc. (In re Time Constr., Inc.), 43 F.3d 1041, 1045 (6th
Cir.1995) (explicitly applying same standard as Fifth Circuit and
noting in dicta that third-party action was related to bankruptcy
because outcome of action against sole shareholder directly
impacted value of debtor's shares); Abramowitz v. Palmer, 999
F.2d 1274, 1278 (8th Cir.1993) (holding that third-party action
was related to bankruptcy because debtor's rights in jointly-held
property could not otherwise be determined); Kaonohi Ohana, Ltd.
v. Sutherland (In re Kaonohi Ohana, Ltd.), 873 F.2d 1302, 1306-07
(9th Cir.1989) (upholding "related to" jurisdiction over
third-party action because specific performance remedy in
third-party action would reduce damages in breach-of-contract
claim against estate).
11
property of the estate19 and the dispute has no effect on the
estate.20 Shared facts between the third-party action and a
debtor-creditor conflict do not in and of themselves suffice to
19
See, e.g., Eastover Bank for Sav. v. Sowashee Venture (In
re Austin Dev. Co.), 19 F.3d 1077, 1084 (5th Cir.) (holding that
issue of third-party creditor's rights was not "related to"
bankruptcy after third-party lease had been rejected and was not
part of bankruptcy estate), cert. denied, --- U.S. ----, 115
S.Ct. 201, 130 L.Ed.3d 132 (1994); Graziadei v. Graziadei (In re
Graziadei), 32 F.3d 1408, 1410 (9th Cir.1994) (holding that
third-party dispute over property exempt from estate did not come
under bankruptcy court's jurisdiction); In re Edwards, 962 F.2d
641, 643 (7th Cir.1992) (holding that third-party adversary
complaint did not confer jurisdiction where property at issue was
not property of estate); Bobroff v. Continental Bank (In re
Bobroff), 766 F.2d 797, 804 (3d Cir.1985) (rejecting jurisdiction
over debtor's claims against third party because claims arose
postpetition and therefore were not property of the estate).
20
See, e.g., Specialty Mills, Inc., 51 F.3d at 775 (holding
that dispute between third party and debtor's bank did not relate
to bankruptcy and therefore bankruptcy court lacked subject
matter jurisdiction); Zerand-Bernal Group, Inc., 23 F.3d at 162(holding that products liability suit was not related to
bankruptcy case because suit was neither by nor against debtor,
and suit could not affect estate because bankruptcy had ended);
In re Edwards, 962 F.2d at 643 (holding that adversary complaint
did not confer jurisdiction where determination of dispute would
not impact rights of debtor); Gardner v. United States (In re
Gardner), 913 F.2d 1515, 1519 (10th Cir.1990) (rejecting
jurisdiction over action concerning lien on nonestate property
because it would have no effect on distribution of assets or
administration of estate); Quattrone Accountants, Inc., 895 F.2d
at 926 (holding that tax claim against responsible person was not
related to bankruptcy because debtor's liability was entirely
independent of responsible person's liability, even though such
liability arose from same tax deficiency); Washburn & Kemp, P.C.
v. Committee of Dalkon Shield Claimants (In re A.H. Robins Co.),
846 F.2d 267, 270 (4th Cir.1988) (holding that law firm's action
against insurer for fees was not related to relationship between
insurer and debtor insured, even though law firm represented
debtor on behalf of insurer); National City Bank v. Coopers &
Lybrand, 802 F.2d 990, 994 (8th Cir.1986) (rejecting jurisdiction
over action between debtor's auditors and third-party claimant
because plan was already confirmed and action would have no
possible effect on estate).
12
make the third-party action "related to" the bankruptcy.21
Moreover, judicial economy alone cannot justify a court's finding
jurisdiction over an otherwise unrelated suit. In re Boone, 52
F.3d at 961; In re Lemco Gypsum, Inc., 910 F.2d at 789; Pacor,
Inc., 743 F.2d at 994; see also In re Kubly, 818 F.2d at 645
("Like other federal courts, a bankruptcy tribunal is one of
21
See Community Bank of Homestead v. Boone (In re Boone), 52
F.3d 958, 961 (11th Cir.1995) (holding that debtor's tort suit
against creditor was not related to bankruptcy because "although
the claim ... will share the common factual issue [with a
bankruptcy proceeding]," the common issue did not invoke
jurisdiction); Specialty Mills, Inc., 51 F.3d at 774 ("There may
be some convergence between [the debtor's] affairs and the
dispute between [the third party] and [the debtor's bank].
However, that possibility does not impart "related to'
jurisdiction unless the dispute also affects [the debtor's]
bankruptcy estate or the allocation of assets."); United States
v. Dos Cabezas Corp., 995 F.2d 1486, 1492 (9th Cir.1993)
(declining to extend stay to funds that were not property of
estate because "[t]he mere fact that the [third party's] claim
against the [nondebtor] shares a similar legal and factual nexis
with the [third-party's] claim against the [debtor] is not
sufficient ground for extending the automatic stay."); In re
Lemco Gypsum, Inc., 910 F.2d at 789 ("Overlap between the
bankrupt's affairs and another dispute is insufficient unless its
resolution also affects the bankrupt's estate or the allocation
of assets among creditors." (citations omitted)); Home Ins. Co.
v. Cooper & Cooper, Ltd., 889 F.2d 746, 748-49 (7th Cir.1989)
(concerning action by insurance company and rejecting
jurisdiction over claims against insureds other than the debtor,
because "[a]lthough the request ... has a nexus with the
bankruptcy—in the sense that it would be convenient, and promote
consistency, to resolve all questions concerning the policy at
one go—it does not necessarily have a financial effect on the
estate (or the apportionment among its creditors)."); In re
Xonics, 813 F.2d at 131 ("The bankruptcy jurisdiction is designed
to provide a single forum for dealing with all claims to the
bankrupt's assets. It extends no farther than its purpose. That
two creditors have an internecine conflict is of no moment, once
all disputes about their stakes in the bankrupt's property have
been resolved."); Pacor, Inc., 743 F.2d at 994 ("[T]he mere fact
that there may be common issues of fact between a civil
proceeding and a controversy involving the bankruptcy estate does
not bring the matter within the scope of [§ 1334(b) ].").
13
limited jurisdiction. Its power must be conferred, and it may not
be enlarged by the judiciary because the judge believes it wise to
resolve the dispute."). Accordingly, the district court's desire
to "foster and encourage and then preserve settlement in federal
court" does not in and of itself confer jurisdiction.
While it is true that the bankruptcy court has jurisdiction to
determine whether a settlement between the debtor and other parties
is fair and equitable,22 "looking only to the fairness of the
settlement as between the debtor and the settling claimant [and
ignoring third-party rights] contravenes a basic notion of
fairness." In re Aweco, Inc., 725 F.2d at 298; see also F.D.I.C.
v. Jones (In re Jones), 966 F.2d 169, 173 (5th Cir.1992)
(discussing § 105(a) and court's duty to avoid unfairness and
22
"The bankruptcy court derives its authority to approve
settlements from Bankruptcy Rule 9019(a)." United States v.
Aweco, Inc. (In re Aweco, Inc.), 725 F.2d 293, 297 (5th Cir.),
cert. denied, 469 U.S. 880, 105 S.Ct. 244, 83 L.Ed.2d 182 (1984).
"A court may approve such a compromise or settlement only when it
is "fair and equitable.' The words "fair and equitable' are
terms of art—they mean that "senior interests are entitled to
full priority over junior ones.' " Id. at 298 (quoting S.E.C. v.
American Trailer Rentals Co., 379 U.S. 594, 85 S.Ct. 513, 13
L.Ed.2d 510 (1965)) (internal citations omitted); see also
Continental Airlines, Inc. v. Air Line Pilots Ass'n (In re
Continental Airlines Corp.), 907 F.2d 1500, 1508 (5th Cir.1990)
(noting that "fair and equitable" means that senior creditors
have priority over junior creditors); American Can Co. v. Herpel
(In re Jackson Brewing Co.), 624 F.2d 605, 608 (5th Cir.1980)
(requiring court to ensure that compromise is fair and equitable
and "in the best interest of the estate"); Momentum Mfg. Corp.
v. Employee Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d
1132, 1136 (2d Cir.1994) ("It is well settled that bankruptcy
courts are courts of equity, empowered to invoke equitable
principles to achieve fairness and justice in the reorganization
process."); In re Energy Coop., Inc., 886 F.2d 921, 927 (7th
Cir.1989) ("The benchmark for determining the propriety of a
bankruptcy settlement is whether the settlement is in the best
interests of the estate.").
14
injustice); Cullen v. Riley (In re Masters Mates & Pilots Pension
Plan), 957 F.2d 1020, 1026, 1031 (2d Cir.1992) (holding that "where
the rights of one who is not a party to a settlement are at stake,
the fairness of the settlement to the settling parties is not
enough to earn the judicial stamp of approval," and requiring
determination that "no one has been set apart for unfair
treatment").
Moreover, the "fair and equitable" determination does not
give the bankruptcy court jurisdiction over settlement conditions
that do not bear on the court's duties to preserve the estate and
protect creditors. In re Continental Airlines Corp., 907 F.2d at
1508-09.23
[W]e must establish independently that a dispute is part of a
bankruptcy case; the existence of power within the bankruptcy
case does not imply an expansion of jurisdiction beyond it.
To the contrary, it suggests that courts must be particularly
careful in ascertaining the source of their power, lest
bankruptcy courts displace state courts for large categories
of disputes in which some[one] ... may be bankrupt.
In re Kubly, 818 F.2d at 645. Accordingly, a bankruptcy court may
potentially include an injunction as part of a settlement only
"once jurisdiction is established." In re Davis, 730 F.2d 176,
183-84 (5th Cir.1984).
23
See also Commonwealth Oil Ref. Co. v. U.S.E.P.A. (In re
Commonwealth Oil Ref. Co.), 805 F.2d 1175, 1188 n. 16 (5th
Cir.1986) ("[T]he powers of a court [to grant equitable relief]
are not unlimited."), cert. denied, 483 U.S. 1005, 107 S.Ct.
3228, 97 L.Ed.2d 734 (1987); Gallucci v. Grant (In re Gallucci),
931 F.2d 738, 742 (11th Cir.1991) (discussing turnover action as
normally a core proceeding, but "[i]f the action does not involve
property of the estate, then not only is it a noncore proceeding,
it is an unrelated matter completely beyond the bankruptcy
court's subject matter jurisdiction").
15
The bankruptcy court did have jurisdiction over CIGNA because
CIGNA, through its participation in the settlement, is "related to"
the estate and the debtor. However, "it is the relation of dispute
to estate, and not of party to estate, that establishes
jurisdiction." Elscint, Inc. v. First Wis. Fin. Corp. (In re
Xonics), 813 F.2d 127, 131 (7th Cir.1987). The "disputes" in
question are Feld and NUFIC's tort and contract claims against
CIGNA, the litigation of which the injunction purports to prevent.
Consequently, the issue before us is not whether the bankruptcy
court had jurisdiction over the settlement and CIGNA, but whether
the bankruptcy court had jurisdiction over an attempt to enjoin
actions between Feld and CIGNA and between NUFIC and CIGNA.
We can divide the actions against CIGNA that are at issue in
this case into two categories: (1) the tort claims, such as bad
faith, and (2) the contract claims concerning the CIGNA D & O
policy. We address the tort claims first.
1
Feld and NUFIC argue that their bad faith claims against
CIGNA do not relate to the bankruptcy because the claims are not
property of the estate and they have no effect on the estate. We
agree. If either Feld or NUFIC were to prevail on a bad faith
claim against CIGNA, compensation would derive not from the Zale D
& O policy proceeds, but from CIGNA's other assets. Because CIGNA
proposes only to contribute the $10 million policy limit to the
estate and the maximum amount that the estate could claim from
CIGNA with respect to the policy is that same $10 million, any
16
outlays outside of that fund do not affect the estate.
CIGNA argues, however, that the bad faith claims will affect
the estate because Zale has agreed to indemnify CIGNA for any such
claims. Although indemnification has brought otherwise unrelated
actions within the scope of a bankruptcy court's jurisdiction in
other cases,24 the claims at issue in those cases involved the
debtor's behavior, thereby providing a basis for the debtor's
obligation that was independent of the indemnification agreement.
In those cases, the purpose of the indemnification agreement was to
eliminate the necessity for a formal suit against the debtor;
therefore, the indemnification agreement satisfied a procedural
goal, not a substantive one.
In the present case, the bad faith claims involve a creditor's
behavior. The only relation of those claims to the estate rests on
Zale's agreement to indemnify CIGNA for claims that NUFIC and Feld
could not bring against Zale even indirectly. Absent the
24
See, e.g., In re Wood, 825 F.2d at 94 (holding that claim
against third party was related to bankruptcy because any
liability would be shared by estate and third party); see also
In re G.S.F., 938 F.2d at 1476 (holding that bankruptcy court had
jurisdiction over third-party action because creditor who was
defendant in third-party action would have substantial
contribution claim against debtor if creditor lost); Michigan
Employment Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine
Radio Co.), 930 F.2d 1132, 1143 (6th Cir.1991) (holding that
third-party action related to bankruptcy because debtor had
agreed pursuant to reorganization plan to indemnify creditor, and
distinguishing cases where third-party claimant had no
indemnification agreement, and where claimant was not a
creditor), cert. dismissed, 503 U.S. 978, 112 S.Ct. 1605, 118
L.Ed.2d 317 (1992); Robinson v. Michigan Consol. Gas Co., 918
F.2d 579, 583-84 (6th Cir.1990) (holding that suit against
trustee was related to bankruptcy because if suit was successful,
trustee would require reimbursement from the estate).
17
indemnification agreement, CIGNA has no independent claim against
Zale for indemnification because it is CIGNA 's actions, not Zale
's, that are at issue. Consequently, the question is whether,
alone, Zale's consent to the indemnification provision in the
settlement can establish bankruptcy jurisdiction over the unrelated
third-party claims.
In In re Gallucci, the Eleventh Circuit addressed the question
of whether a compromise or settlement could establish bankruptcy
jurisdiction over property of a third party not otherwise subject
to the bankruptcy court's authority. In that case, the debtor had
no interest in property owned by his mother.25 The bankruptcy
trustee, however, claimed that the property belonged to the estate
because of a compromise the trustee entered into with a third
party. In the compromise, the third party had quitclaimed the
property to the trustee. Based on the quitclaim deed, the
bankruptcy court ordered the debtor's mother to turn the property
over to the estate.
The debtor's mother appealed, challenging the bankruptcy
court's jurisdiction to order the turnover. She argued that
because the third party had no authority to quitclaim her interest
in the property, the compromise alone could not create
jurisdiction. The trustee argued that the court could not look
into the basis of the trustee's title, contending that the
quitclaim deed "established jurisdiction by compromise, insulating
25
The title was in her name, and the debtor did not occupy
the property.
18
from inquiry the nature of the property and its connection with the
bankruptcy estate prior to settlement." Id. at 743.
The Eleventh Circuit rejected the trustee's argument. The
court held that the bankruptcy court had "relied entirely upon the
compromise," id., for its jurisdictional basis, and that the
bankruptcy court had a duty to inquire into the compromise and
determine if it actually impacted property of the estate or merely
affected unrelated property. Id. at 744. Because the property had
no effect on the estate absent the compromise, the court held that
the compromise failed to establish a basis for jurisdiction. Id.Thus, the court held that parties could not accomplish through
settlement what they could not attain directly—that is, bankruptcy
court jurisdiction over the property. See id. at 743 n. 16 (noting
that if the trustee had brought action against the debtor's mother
directly, "the bankruptcy court clearly would not have had
jurisdiction" over the property).
We find the reasoning of the Eleventh Circuit persuasive and
applicable to the facts of this case. Because CIGNA, Feld, and
NUFIC are not debtors and because the property at issue—the bad
faith claims—is not property of the estate, the bankruptcy court
would have no jurisdiction over the tort claims absent the
indemnification provision in the settlement. Moreover, the tort
claims do not implicate an independent obligation of Zale in favor
of CIGNA. Once we look past the indemnification agreement, In re
Gallucci, 931 F.2d at 744, no substantive basis for indemnification
exists. For these reasons, the settlement cannot provide the basis
19
for jurisdiction over the bad faith claims. Id. at 743-744
(rejecting attempt to establish jurisdiction by compromise because
compromise had no effect on estate prior to settlement).26
Accordingly, CIGNA and Zale's attempt to establish jurisdiction
fails,27 and the bankruptcy court had no jurisdiction over Feld's
and NUFIC's tort actions against CIGNA.28
26
Moreover, Zale had no authority to act on Feld or NUFIC's
behalf; therefore, Zale could not jeopardize their interests
through its consent. See Local No. 93 v. City of Cleveland, 478
U.S. 501, 529, 106 S.Ct. 3063, 3079, 92 L.Ed.2d 405 (1986) ("Of
course, parties who choose to resolve litigation through
settlement may not dispose of the claims of a third party, and a
fortiori may not impose duties or obligations on a third party,
without that party's agreement. A court's approval of a consent
decree between some of the parties therefore cannot dispose of
the valid claims of nonconsenting intervenors...."); Browning v.
Navarro, 743 F.2d 1069, 1076 n. 20 (5th Cir.1984) (noting that "a
district court, or a bankruptcy court, exceeds its power if it
enters a consent decree to which there was not actual consent or
which was contrary to the public interest or was the result of a
jurisdictional defect"); see also In re G.S.F., 938 F.2d at 1472
(declining to enjoin entity that had not been a party to earlier
stipulation because "the court lacked jurisdiction").
27
Because we hold that the bankruptcy court lacked
jurisdiction, we do not reach CIGNA's argument that the
injunction is harmless because no cause of action for bad faith
exists in Texas. This is an argument on the merits of the claim,
and only becomes relevant if there is jurisdiction. We therefore
do not address the merits of Feld's and NUFIC's bad faith claims.
See In re Vitek, 51 F.3d at 538 (expressing "no view as to
whether Texas law recognizes [a] cause of action [for breach of
good faith]" because issue decided on procedural grounds).
28
This result is consistent with the policy that bankruptcy
should benefit only the debtor. See Pacor, Inc., 743 F.2d at 996
("Bankruptcy jurisdiction, however, was not conferred for the
convenience of those not in bankruptcy."). Otherwise, creditors
would have too much incentive to push a failing enterprise into
bankruptcy not for the debtor's sake, but for their own
interests. We decline to create such a rule because:
"[I]t could discharge the debts of nondebtors ... as
well as of debtors even if the creditors did not
consent.... If the court could do all these nice
20
2
We turn now to the contract claims.29 CIGNA and Zale suggest
that no contract rights have been impaired by the issuance of the
injunction. Indeed, the bankruptcy court believed that the
protective language it added to the injunction accomplished
precisely that result—that is, no impairment of contract rights.30
Protection of defensive rights, however, does not encompass all
things the result would indeed be to make the property
of bankrupts more valuable than other property—more
valuable to the creditors, ... [and] the result would
not only be harm to third parties, such as the [tort
claimants], but also a further incentive to enter
bankruptcy for reasons that have nothing to do with the
purposes of bankruptcy law."
Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 163 (7th
Cir.1994).
29
Briefly, Feld claims that the insurance policy entitles
him to coverage, and NUFIC claims that CIGNA has improperly
bypassed the limits on its policy and has shifted liability to
NUFIC's excess policy.
30
See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 156 ("[T]he
relief requested [from] the Court is not intended to in any way
prejudice National Union's rights to raise coverage issues....
So it seems to me that where the record stands now is that there
is in effect an agreement by the moving parties that National
Union's rights to [assert] coverage issues will be unaffected by
the court order on the motion to approve the settlement."); Id.
at 216-17 ("Any parties who are not parties to the settlement
will be protected. The settlement will not prejudice their
abilities to defend themselves if there is any action sought
against them."); Order on Mot. for Reh'g, 9 Bankr.Ct.R. at 1534
("Feld is not a party to the settlement and has not settled with
these bankruptcy estates. Although the court used broad
injunction language, Feld reads that language too broadly. The
Court did not enjoin Feld from asserting contract rights, if any,
he may have with Cigna or anyone else. Nor did the court enjoin
Feld from having a judgment, if any, obtained against him by the
debtors reduced by the amounts paid to the estates in this
settlement, if appropriate. Feld's contract rights, if any, are
unaffected.").
21
rights Feld and NUFIC may have with respect to the policy. NUFIC's
declaratory judgment action, for example, exerted an offensive
right. Because the injunction explicitly deprives NUFIC and Feld
of any offensive contract rights they may have,31 the injunction
impairs their rights. We therefore examine the bankruptcy court's
jurisdiction over CIGNA and Zale's request for the type of
injunctive relief the bankruptcy court granted.
Feld and NUFIC argue that the bankruptcy court lacked
jurisdiction because the insurance policy is not property of the
estate. An insurance policy frequently is property of the estate,32
31
See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 216-17 ("There
was also an issue raised regarding injunction against offensive
litigation against parties to the settlement because of the facts
that they reached a settlement, how they went about negotiating
it. The Court will enter that injunction.... Frankly, it's
going to involve anyone else who's not a party to the
settlement.... [T]hey will not be able to bring offensive action
against parties as a result of the settlement."); Order on Mot.
for Reh'g, 9 Bankr.Ct.R. at 1534 ("The injunction does bar Feld
from commencing litigation to recover on claims, if any, arising
from any persons' participation in the settlement.").
32
See, e.g., Houston v. Edgeworth (In re Edgeworth), 993
F.2d 51, 56 (5th Cir.1993) (listing casualty, collision, life and
fire insurance as policies whose proceeds are property of estate,
whereas malpractice policies are not property of estate); St
Clare's Hosp. & Health Ctr. v. Insurance Co. of N. Am. (In re St.
Clare's Hosp. & Health Ctr.), 934 F.2d 15, 18-19 (2d Cir.1991)
(noting that insurance policies are property of debtor's estate,
when debtor is insurer's insured); National Union Fire Ins. Co.
v. Titan Energy, Inc. (In re Titan Energy, Inc.), 837 F.2d 325,
329-30 (8th Cir.1988) (finding related-to jurisdiction because
insurance policy was property of estate); MacArthur Co. v.
Johns-Manville Corp., 837 F.2d 89, 92 (2d Cir.) (holding that
products liability policies were property of estate), cert.
denied, 488 U.S. 868, 109 S.Ct. 176, 102 L.Ed.2d 145 (1988);
Tringali v. Hathaway Mach. Co., 796 F.2d 553, 560 (1st Cir.1986)
(holding that products liability policy is property of estate,
because debtor has right to have insurer satisfy claims against
debtor); A.H. Robins Co. v. Piccinin (In re A.H. Robins Co.),
788 F.2d 994, 1001-02 (4th Cir.) (holding that products liability
22
because the insurance policy usually indemnifies the debtor.33 We
have excluded the proceeds of director and officer liability
policies from property of the estate, however, when those proceeds
directly paid the individual officers and not the debtor.34 Feld
and NUFIC argue that we should likewise exclude the $10 million in
proceeds from the policy at issue in this case. CIGNA and Zale
argue that the policy and its proceeds are property of the estate
because the policy includes a reimbursement element, under which
policies are property of debtor because policies reimburse debtor
for claims against debtor), cert. denied, 479 U.S. 876, 107 S.Ct.
251, 93 L.Ed.2d 177 (1986).
33
See In re Edgeworth, 993 F.2d at 55 ("Insurance policies
are property of the estate because, regardless of who the insured
is, the debtor retains certain contract rights under the policy
itself. Any rights the debtor has against the insurer, whether
contractual or otherwise, become property of the estate.").
The overriding question when determining whether
insurance proceeds are property of the estate is
whether the debtor would have a right to receive and
keep those proceeds when the insurer paid on a claim.
When a payment by the insurer cannot inure to the
debtor's pecuniary benefit, then that payment should
neither enhance nor decrease the bankruptcy estate. In
other words, when the debtor has no legally cognizable
claim to the insurance proceeds, those proceeds are not
property of the estate.
Id. at 55-56.
34
See In re Vitek, 51 F.3d at 533-34 (noting that proceeds
of D & O policies were not part of bankruptcy estate (citing
Louisiana World Exposition, Inc. v. Federal Ins. Co. (In re
Louisiana World Exposition, Inc.), 832 F.2d 1391 (5th
Cir.1987))); In re Louisiana World Exposition, Inc., 832 F.2d at
1399-1400 (holding that proceeds of D & O policies are not
property of estate because D & O policies do not reimburse
corporation); cf. Minoco Group v. First State Underwriters
Agency (In re Minoco Group), 799 F.2d 517, 519 (9th Cir.1986)
(holding that D & O indemnity policy was property of estate
because it indemnified debtor against claims by directors and
officers).
23
CIGNA pays Zale for certain expenses. We need not decide whether
the proceeds are property of the estate, if we find that the
disputes over the CIGNA policy can have an effect on the estate.
Feld and NUFIC argue that the contract claims had no effect
on the estate. They correctly state that the effect must be on the
estate, not merely on the debtor. In re Wood, 825 F.2d at 94 ("To
fall within the court's jurisdiction, the plaintiffs' claims must
affect the estate, not just the debtor.").35 Feld and NUFIC argue
that because the creditors approved and confirmed the plan prior to
the settlement approval, they assumed that the estate did not
include any insurance proceeds and therefore the settlement cannot
have affected the estate. We disagree. The disclosure statement
explicitly stated that:
The Proponents believe that recoveries from third party claims
could be substantial. However, the Proponents are presently
unable to predict the precise amount of such recoveries.
Therefore, the Proponents of the Plan do not make any
representation or warranty whatsoever as to the value, if any,
of th[ose recoveries].
Disclosure Statement, Bankr.Ct.R. at 568. Thus, we infer that the
creditors approved the plan on the assumption that some amount of
proceeds from CIGNA would flow into the estate. Moreover, the plan
intertwines these claims with other provisions of the plan.36 Suits
35
See also In re Boone, 52 F.3d at 961 (holding that
"related to" jurisdiction required an effect on the estate not
merely on the debtor).
36
In the disclosure statement for its reorganization plan,
Zale stated that:
"The Proponents believe that potential claims are
covered by the directors and officers insurance and
that the insurers may well be liable for all or most of
24
over the CIGNA policy will tie up the policy assets and other
assets of the Litigation Entity due to the litigation and its
attendant expenses.37 For these reasons, we hold that Feld and
NUFIC's contract claims had an effect on the estate.38 Accordingly,
the bankruptcy court had "related to" subject-matter jurisdiction
over the contract claims.
Feld and NUFIC argue that, even if the court had jurisdiction
the policy limits. In this regard, the Proponents
intend to preserve to the fullest extent the ability to
make claims under such policies. To that end, the
Proponents have reached a tentative agreement with
representatives of certain officers and directors to
settle all outstanding director and officer claims,
conditional upon the agreement of the carriers to fund
such settlement. As of the date of the filing of this
Disclosure Statement, the insurers have not responded
to the request by the directors and officers that the
insurers fund the agreement. A response is expected,
however, in the near future. Failure to reach an
agreement with the insurers may result in a
restructuring of the agreement with the directors and
officers.").
Disclosure Statement, 5 Bankr.Ct.R. at 525; see also id. at
567 ("At the present time, the Proponents have identified
potential claims against third parties as discussed further
in other sections of this Disclosure Statement, including
... certain current and former directors and officers; ...
and various directors' and officers' liability insurance
carriers.").
37
See American Hardwoods, Inc. v. Deutsche Credit Corp. (In
re American Hardwoods, Inc.), 885 F.2d 621, 624 (9th Cir.1989)
(holding that related-to jurisdiction existed for third-party
claim against debtor's guarantor, because guarantor would make
claim against officers' stock and interfere with critical
officers' participation in management of reorganization plan).
38
Because this holding involves a reorganization plan, we
make no prediction as to whether the result would be different in
a Chapter 7 case. See Celotex, --- U.S. at ----, 115 S.Ct. at
1500 (comparing Chapter 11 and Chapter 7 cases and noting that
"[t]he jurisdiction of bankruptcy courts may extend more broadly
in the former case than in the latter").
25
over their contract claims generally, that jurisdiction extended
only to a temporary injunction, not a permanent one. They contend
that a permanent injunction is outside the bankruptcy court's
jurisdiction because the contract claims will have no effect on the
estate after confirmation of the plan. The confirmation of a
reorganization plan or the close of a bankruptcy estate regularly
results in the dismissal of related claims,39 because the nexus
between the related claim and the bankruptcy estate no longer
exists.40 However, we distinguish "between the determination of the
existence of jurisdiction at the outset of [the dispute] and the
determination of whether "related' claims should be dismissed with
the dismissal of the bankruptcy case." In re Smith, 866 F.2d at
39
See Querner v. Querner (In re Querner), 7 F.3d 1199, 1201
(5th Cir.1993) ("[A]s a general rule the dismissal or closing of
a bankruptcy should result in the dismissal of related
proceedings."); Smith v. Commercial Banking Corp. (In re Smith),
866 F.2d 576, 580 (3d Cir.1989) ("As a general rule, the
dismissal of a bankruptcy case should result in the dismissal of
"related proceedings' because the court's jurisdiction of the
later depends, in the first instance, upon the nexus between the
underlying bankruptcy case and the related proceedings."). See
In re Querner, 7 F.3d at 1201 ("Notwithstanding the general rule,
however, nothing in the statute governing bankruptcy jurisdiction
mandates automatic dismissal of related proceedings upon
termination of the underlying bankruptcy case."); Carraher v.
Morgan Elec., Inc. (In re Carraher), 971 F.2d 327, 328 (9th
Cir.1992) ("[B]ankruptcy courts are not automatically divested of
jurisdiction over related cases when the underlying bankruptcy
case is dismissed.").
40
In re Querner, 7 F.3d at 1201 ("The general rule favors
dismissal because the court's jurisdiction over the related
proceedings depends upon the nexus between the underlying
bankruptcy case and the related proceeding."); In re Lemco
Gypsum, Inc., 910 F.2d at 789 ("The fact that property was once
owned by a bankrupt does not supply federal jurisdiction of all
future disputes concerning the property."). This is not an
automatic rule, however.
26
580.41 Accordingly, because jurisdiction existed at the time of the
settlement hearing, the bankruptcy court had jurisdiction over the
request for injunctive relief on the contract claims.
B
Feld and NUFIC argue nonetheless that, even if the bankruptcy
court had jurisdiction to enjoin their contract claims, the
bankruptcy court had no power to enter the permanent injunction at
issue. Section 105 provides that a bankruptcy court "may issue any
order, process, or judgment that is necessary or appropriate to
carry out the provisions of [the Bankruptcy Code]." 11 U.S.C. §
105(a). Although we interpret § 105 liberally, Momentum Mfg. Corp.
v. Employee Creditors Committee (In re Momentum Mfg. Corp.), 25
F.3d 1132, 1136 (2d Cir.1994), a § 105 injunction must be
consistent with the rest of the Bankruptcy Code, see Chiasson v. J.
Louis Matherne & Assocs. (In re Oxford Mgmt., Inc.), 4 F.3d 1329,
1334 (5th Cir.1993) ("[T]he powers granted by that statute must be
exercised in a manner that is consistent with the Bankruptcy
Code."). A § 105 injunction cannot alter another provision of the
code. Id. (holding that § 105 injunction was improper because it
purported to alter other Code provision).42
41
See also In re Querner, 7 F.3d at 1201 (addressing
existence of jurisdiction "while the [bankruptcy] case was
proceeding"); In re Morris, 950 F.2d 1531, 1534 (11th Cir.1992)
(looking to whether the dispute "was related to the bankruptcy
case at the time of its commencement").
42
See also Landsing Diversified Props. v. First Nat'l Bank &
Trust Co. (In re Western Real Estate Fund, Inc.), 922 F.2d 592,
601 (10th Cir.1990) ("[A] bankruptcy court's supplementary
equitable powers [under § 105(a) ] may not be exercised in a
manner that is inconsistent with the other, more specific
27
Feld and NUFIC argue that the injunction was improper,
contending that the injunction eradicated any liability of CIGNA
for contract debts to Feld or NUFIC and therefore violated § 524 of
the Bankruptcy Code.43 Section 524 prohibits the discharge of debts
of nondebtors.44 Accordingly, we must overturn a § 105 injunction
if it effectively discharges a nondebtor. See In re Vitek, 51 F.3d
at 536 n. 27 ("[N]on-debtor property thus should not ordinarily be
shielded by the powers of the bankruptcy court.").
provisions of the Code."); Southern Ry. Co. v. Johnson Bronze
Co., 758 F.2d 137, 141 (3d Cir.1985) ("[S]ection 105 does not
authorize the bankruptcy court to create rights not otherwise
available under applicable law."); cf. United States v. Sutton,
786 F.2d 1305, 1308 (5th Cir.1986) (holding that § 105 "does not
authorize the bankruptcy courts to create substantive rights that
are otherwise unavailable under applicable law, or constitute a
roving commission to do equity").
43
Section 524(e) provides that "discharge of a debt of the
debtor does not affect the liability of any other entity on, or
the property of any other entity for, such debt." 11 U.S.C. §
524(e).
44
See In re Edgeworth, 993 F.2d at 53 (holding that § 524(e)
discharges only the debtor's liability); Citizens Bank & Trust
v. Case (In re Case), 937 F.2d 1014, 1025 (5th Cir.1991) (holding
that bankruptcy court can only determine dischargeability of
debts owed by debtor, not those owed by third party); see also
First Fidelity Bank v. McAteer, 985 F.2d 114, 118 (3d Cir.1993)
("While it is true that the bankruptcy court's confirmation of
the plan binds the debtor and all creditors vis-a-vis the debtor,
it does not follow that a discharge in bankruptcy alters the
right of a creditor to collect from third parties. Section
524(e) specifically limits that discharge."); McAteer, 985 F.2d
at 118 (noting that although bankruptcy court can and does alter
obligations of debtor, the Code does not have the same effect on
the obligations of nondebtors); In re Western Real Estate Fund,
Inc., 922 F.2d at 600 (rejecting permanent injunction against
third party because it effectively discharged nondebtor); In re
Western Real Estate Fund, Inc., 922 F.2d at 600 ("Congress did
not intend to extend [fresh-start] protection" to third parties);
In re American Hardwoods, 885 F.2d at 625-26 (accepting argument
that permanent injunction improper because would effectively
discharge nondebtor, an effect prohibited by § 524).
28
[W]hile a temporary stay prohibiting a creditor's suit against
a nondebtor ... during the bankruptcy proceeding may be
permissible to facilitate the reorganization process in accord
with the broad approach to nondebtor stays under section
105(a) ..., the stay may not be extended post-confirmation in
the form of a permanent injunction that effectively relieves
the nondebtor from its own liability to the creditor. Not
only does such a permanent injunction improperly insulate
nondebtors in violation of section 524(e), it does so without
any countervailing justification of debtor protection....
In re Western Real Estate Fund, Inc., 922 F.2d at 601-02; see also
In re American Hardwoods, 885 F.2d at 626 (concluding that "the
specific provisions of section 524 displace the court's equitable
powers under section 105 to order the permanent relief sought").
CIGNA and Zale argue that courts have upheld permanent
injunctions against third-parties in other cases. In those cases,
however, the courts upheld permanent injunctions of third-party
claims because while the injunction permanently enjoined the
lawsuits, it also channeled those claims to allow recovery from
separate assets and thereby avoided discharging the nondebtor. See
S.E.C. v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham
Lambert Group, Inc.), 960 F.2d 285, 293 (2d Cir.1992) (approving
settlement that excluded class from sharing in recovery fund
because class would receive fair amount from other funds), cert.
dismissed, --- U.S. ----, 113 S.Ct. 1070, 122 L.Ed.2d 497 (1993);
MacArthur Co., 837 F.2d at 94 (holding that injunction did not
discharge creditor because third-party interest could be asserted
against settlement fund); cf. Cullen v. Riley (In re Masters Mates
& Pilots Pension Plan), 957 F.2d 1020, 1032 (2d Cir.1992)
(rejecting settlement bar that eliminated creditor's debt because
settlement did not fairly compensate third party for lost rights).
29
The injunction at issue in this case provided no alternative means
for Feld and NUFIC to recover from CIGNA for their offensive
contract rights. Accordingly, because the permanent injunction as
entered improperly discharged a potential debt of CIGNA, a
nondebtor, the bankruptcy court exceeded its powers under § 105.
The impropriety of a permanent injunction does not
necessarily extend to a temporary injunction of third-party
actions. Such an injunction may be proper under unusual
circumstances. See Patton v. Bearden, 8 F.3d 343, 349 (6th
Cir.1993) ("Some courts have held that the debtor's stay may be
extended to non-bankrupt parties in "unusual circumstances.' "
(citing Robins, 788 F.2d 994)); Teachers Ins. & Annuity Ass'n v.
Butler, 803 F.2d 61, 65 (2d Cir.1986) ("Several courts have held
that under specific circumstances nondebtors may be protected by
the automatic stay—even though such protection may be temporary—if
it contributes to the debtor's efforts to achieve
rehabilitation."). These circumstances include 1) when the
nondebtor and the debtor enjoy such an identity of interests that
the suit against the nondebtor is essentially a suit against the
debtor, and 2) when the third-party action will have an adverse
impact on the debtor's ability to accomplish reorganization.45 When
45
See Patton, 8 F.3d at 349 ("Such circumstances usually
include when the debtor and the non-bankrupt party are closely
related or the stay contributes to the debtor's
reorganization."); In re Drexel Burnham Lambert Group, Inc., 960
F.2d at 293 ("In bankruptcy cases, a court may enjoin a creditor
from suing a third party, provided the injunction plays an
important part in the debtor's reorganization plan." (citing
Robins )); In re A.H. Robins Co., 788 F.2d at 999 (describing
"unusual situation" in which enjoining third parties might be
30
either of these circumstances occur, an injunction may be
warranted. See In re Drexel Burnham Lambert, Inc., 960 F.2d at 293
(approving of injunction because settlement was "unquestionably an
essential element" of reorganization and injunction a "key
component" of settlement). If not, a bankruptcy court may not
enjoin the third-party action.46
Feld and NUFIC argue that this case does not involve "unusual
circumstances" and that, even if it did, the bankruptcy court did
not make the required findings to that effect. If the bankruptcy
court does not determine that unusual circumstances exist, the
court may not enter an injunction of the third-party actions. See
In re American Hardwoods, 885 F.2d at 626-27 (distinguishing Robins
because in that case injunction would only affect fraction of
creditors and court had made finding that injunction was essential
to plan and entire reorganization hinged on injunction); O'Malley
Lumber Co. v. Lockard (In re Lockard), 884 F.2d 1171, 1179 (9th
appropriate as "when there is such identity between the debtor
and the third-party defendant that the debtor may be said to be
the real party defendant and that a judgment against the
third-party defendant will in effect be a judgment or finding
against the debtor."); id. at 1003-06 (stating that § 105
injunction may be appropriate where proceeding would have an
adverse impact on debtor's ability to reorganize or deplete
property of estate).
46
See Oklahoma Federated Gold & Numismatics, Inc. v.
Blodgett, 24 F.3d 136, 141-42 (10th Cir.1994) (refusing to extend
stay to third party because "unusual situations" exception did
not apply where claims against third party were "separate and
independent from the claims asserted against [the debtor]");
International Bus. Machs. v. Fernstrom Storage & Van Co. (In re
Fernstrom Storage & Van Co.), 938 F.2d 731, 736 (7th Cir.1991)
(refusing to extend stay to debtor's insurer because Robins test
not met and suit would not "cause the debtor, the bankruptcy
estate, or the reorganization plan "irreparable harm' ").
31
Cir.1989) (noting that, even if Robins rule were adopted, unusual
situation had not been shown); cf. MacArthur Co., 837 F.2d at 93
(noting that court had made factual finding that suits would
"adversely affect property of the estate and would interfere with
reorganization").
In this case, the bankruptcy court found that:
The relationship to other motions to settle other litigation
is before the Court, and the relationship to the prospect of
either litigating or otherwise resolving other causes of
action which belonged to the estate originally, or which now
belong to the estate as resolved at confirmation of the
proponents' plan. Those last two factors should not be
minimized. There is a significant and substantial
relationship between this settlement and other settlements
that have been presented to the Court. Those settlements
considered globally will result in substantial consideration
being paid to the bankruptcy estate. This settlement fits
within the fabric of the other settlements that have been
reached which are very important to the creditors of these
estates. Further, the ownership of whatever subrogation
rights CIGNA may have will enable the estate to proceed to
offer global settlements to other persons. That is consistent
with the plan that the court has just confirmed, a key
provision of which was to gather all causes of action, both
those of the estate and those of others, in one place so that
any persons subject to litigation would be able to settle
globally at one time.... [T]hat is a very valuable
consideration.
Confirmation Hearing, 3 Bankr.Ct.R. at 197-98. We hold that this
language under the circumstances satisfies the "unusual
circumstances" requirement because it clearly identifies the
settlement as providing "substantial consideration" to the estate
and constituting part of a "key provision" of the plan.
Accordingly, the bankruptcy court had power under § 105 to enjoin
temporarily the contract claims.
C
Feld and NUFIC further argue that the injunction was improper
32
because the court failed to follow the procedures required by the
Bankruptcy Code for the entry of a § 105 injunction. They contend
that the bankruptcy court erred in granting the injunction without
conducting a full adversary proceeding. Under Rule 7001, a
proceeding to obtain an injunction requires an adversary
proceeding. Lyons v. Lyons (In re Lyons), 995 F.2d 923, 924 (9th
Cir.1993) (holding that, when a Rule 7001 category was at issue,
the movant "may obtain the authority he seeks only through an
adversary proceeding").47 Rule 7001 matters incorporate much of the
Federal Rules of Civil Procedure, In re Haber Oil Co., 12 F.3d at
437 (noting that adversary proceeding rules "generally "either
incorporate or are adaptations of most of the Federal Rules of
Civil Procedure.' " (quoting Fed.R.Bankr.P. 7001 adv. comm.
note)),48 and they equate to full-blown lawsuits, see Toma Steel
Supply, Inc. v. Transamerican Natural Gas Corp. (In re
Transamerican Natural Gas Corp.), 978 F.2d 1409, 1416 (5th
Cir.1992) (describing adversary proceedings as " "full blown
federal lawsuits within the larger bankruptcy case,' ... which are
governed by all of the rules in Part VII of the Bankruptcy
47
See also Fed.R.Bankr.P. 7001 ("An adversary proceeding is
... a proceeding in a bankruptcy court ... (7) to obtain an
injunction or other equitable relief."); Haber Oil Co. Inc. v.
Swinehart (In re Haber Oil Co.), 12 F.3d 426, 437 (5th Cir.1994)
("A proceeding "to recover money or property' is an adversary
proceeding, as are proceedings ... "to obtain an injunction or
other equitable relief.' " (quoting Fed.R.Bankr.P. 7001)).
48
See also id. at 438 (describing requirements of adversary
proceeding as including "a complaint in compliance with Federal
Rule of Civil Procedure 3," "a summons in keeping with Bankruptcy
Rule 7004," "an allegation of jurisdiction," and "a statement
that the proceeding was "core or non-core.' ").
33
Rules...." (quoting Matter of Wood & Locker, Inc., 868 F.2d 139,
142 (5th Cir.1989))), cert. dismissed, --- U.S. ----, 113 S.Ct.
1892, 123 L.Ed.2d 646 (1993). In contrast, contested matters49
require fewer procedural protections. In re Transamerican Natural
Gas Corp., 978 F.2d at 1416 ("[C]ontested matters are "subject to
the less elaborate procedures specified in Bankruptcy Rule 9014.'
Contested matter proceedings are generally designed for the
adjudication of simple issues, often on an expedited basis."
(quoting Matter of Wood & Locker, Inc., 868 F.2d at 142)).
In order to initiate an adversary proceeding, a party seeking
the equitable relief must file a complaint and serve each affected
party. See Village Mobile Homes, Inc. v. First Gibraltar Bank (In
re Village Mobile Homes, Inc.), 947 F.2d 1282, 1283 (5th Cir.1991)
(stating that while a motion suffices for contested matters, an
adversary proceeding requires filing a complaint in keeping with
Bankruptcy Rule 7003); In re Perkins, 902 F.2d 1254, 1258 (7th
Cir.1990) (stating that an adversary proceeding "must be commenced
by a properly filed and served complaint" and a Rule 7001 matter
initiated by motion rather than by complaint "fail[s] on procedural
grounds"). We find no evidence in the record that CIGNA and Zale
filed a complaint for an adversary proceeding to demand injunctive
relief. Instead, they simply added the injunction to the
settlement agreement. Including a matter governed by Rule 7001 in
another matter already before the court, however, does not satisfy
49
Contested matters are those issues for which Rule 7001
does not require an adversary proceeding.
34
the procedural rules required by Rule 7001. See Brady v. Andrew
(In re Commercial Western Finance Corp.), 761 F.2d 1329, 1337 (9th
Cir.1985) (requiring party to comply with adversary proceeding
requirements rather than dispose of third party's claim in
reorganization plan); In re McKay, 732 F.2d 44, 48 (3d Cir.1984)
(holding that party cannot merely include Rule 7001 matter in
reorganization plan, but must "fil[e] a complaint seeking
[resolution of the matter] with the bankruptcy court and serv[e] a
copy of it on each [affected] creditor"). Accordingly, CIGNA and
Zale failed to initiate properly their request for injunctive
relief.
CIGNA and Zale argue that NUFIC and Feld waived their rights
to an adversary proceeding.50 "We have recognized that such a
50
CIGNA argues first that NUFIC waived the adversary
proceeding requirement by failing to raise it in the courts
below. We disagree. At the settlement hearing, NUFIC moved for
a continuance "on the grounds that they have not had adequate
time to prepare for this hearing, have not been provided adequate
information to go to a full evidentiary hearing on this matter at
the sole request of the Court." Tr. Confirmation Hr'g, 3
Bankr.Ct.R. at 112. NUFIC moved that they "be given at least
three weeks time in which to prepare for the hearing." Id. The
court denied the motion, stating that:
What I'm trying to figure out is notwithstanding the
lack of documents and notwithstanding any notice
issues, I've still got a bottom line question I'm being
asked, and that is whether the agreed judgment in
Cigna's business is what Cigna agreed to constitute a
reasonable agreement of those claims. I've got to
assume that notice notwithstanding, there's really no
reason to delay the hearing one way or the other.
Id. at 116. NUFIC also stated that it had already initiated
a declaratory action in the district court and that such
action was an adversary proceeding. Id. at 158 ("[W]e have
filed a complaint in federal court. That has been noticed
and removed to this Court, and we just want that on the
35
waiver is possible," In re Haber Oil Co., 12 F.3d at 440(discussing whether party "waived compliance with the requisites of
an adversary proceeding"); see also In re Village Mobile Homes,
947 F.2d at 1283 ("Compliance with the requisites of an adversary
proceeding may be excused by waiver of the parties."), but only if
"the parties are apprised of and have a chance to address all the
issues being decided." In re Haber Oil Co., 12 F.3d at 440.
Accordingly, parties have waived their right to protest the lack of
an adversary proceeding when the court afforded them all the
protections of an adversary proceeding yet they knowingly failed to
litigate a Rule 7001 issue which they had an opportunity to
litigate. Halverson v. Estate of Cameron (In re Mathiason), 16
F.3d 234, 238 (8th Cir.1994).
CIGNA and Zale argue that NUFIC had a full opportunity to
litigate the issues surrounding its contract claims. We disagree.
Indeed, the court frequently prevented NUFIC and Feld from
addressing the issues,51 calling them a "sideshow,"52 a "side
record because we think that is part of an adversary
[proceeding] that we have already initiated.").
51
After first asking: ("But if you're not a party to [the
settlement] and I got creditors and officers and affiliates and
insiders, so forth, of this case are willing, want to come into
court to make a stipulation, should I even consider a non-party
to the settlement and a non-creditor position."), Tr.
Confirmation Hr'g, 3 Bankr.Ct.R. at 120, the court denied NUFIC's
attempts. See id. at 127 (denying motion for continuance for
"total lack of standing," after discussing standing issue with
National Union, basing its denial on grounds that "National Union
contend[s] that it is not a party-in-interest in this bankruptcy
case"); id. at 141 (overruling objection to factual findings,
stating that "I'm not here to determine and make specific
findings on the underlying merits of the claims. I'm here to
determine why the creditors have struck the deal that the
36
issue,"53 and "irrelevant."54 Moreover, the settlement proponents
themselves argued that NUFIC and Feld's claims were not before the
court at the settlement hearing. Confirmation Hearing, 3
Bankr.Ct.R. at 122 (arguing that continuance unnecessary because
"National Union['s] submission in this matter does not oppose the
fairness or reasonableness of the transaction from the perspective
of debtor's estates [and] [t]hat is the only issue before Your
Honor...."). Also, the bankruptcy court refused to permit
testimony such as an adversary hearing would require.55 We
creditors have struck and on what understandings and then to
determine if that's within a range of reasonableness."); id. at
143 ("[T]he Court recognizes it's not here to make any findings
of the underlying disputes that give rise to the settlement, but
rather is called upon to determine that this settlement is
reasonable.").
52
See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 109 ("All this
question of who was told what and what happened where and what
went on is a total sideshow to the underlying issues that the
Court has to address in the motion. That is, is the settlement
reasonable?"); id. at 220 (instructing that, on the issue of bad
faith, it would allow "no more side shows").
53
See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 243 (calling
bad faith question "a side issue to a settlement between certain
persons in the bankruptcy estate").
54
See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 232 ("[T]he
Court will not address, I'll say it again, will not address those
underlying issues that are irrelevant in the settlement.").
55
See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 154 ("With
this state of the record, it seems to me we do not need to go
into many of the other issues underlying factual disputes, and it
also seems to me appropriate to continue in the process that we
have done, and that is to permit a directed testimony by proffer
and then offer of cross examination.").
We do not intend to hold that a bankruptcy court can
never reach conclusions in an adversary proceeding without a
full-blown evidentiary hearing, but such an abbreviated
review is appropriate only where a party "d[oes] not present
37
consequently find no waiver on NUFIC's part.
CIGNA and Zale also argue that Feld waived his right to an
adversary proceeding by leaving the hearing. The court, however,
had already made it clear that it would not permit full litigation
of NUFIC and Feld's claims. Accordingly, Feld would not have had
an opportunity to raise his contentions effectively, and his
counsel's departure cannot have waived his rights. Once Feld
learned that the bankruptcy court had actually decided the issue,
he moved for rehearing to correct the unanticipated errors. Feld's
motion for rehearing further prevented a waiver. See In re Village
Mobile Homes, 947 F.2d at 1283 (holding that party did not waive
adversary proceeding protections when, although not present after
given notice of hearing, party filed motion for rehearing).
Alternatively, CIGNA and Zale contend that the settlement
hearing essentially was an adversary proceeding. Calling it an
adversary proceeding, however, does not make it one. See In re
Haber Oil Co., 12 F.3d at 438 n. 1 ("Ordinary claims litigation is
not transformed into an adversary proceeding simply by labelling it
as one."). When third parties are affected, we scrutinize
carefully the fairness of the hearing afforded. In re Masters
Mates, 957 F.2d at 1031 ("[T]hird party participation in an
evidentiary fairness hearing and court approval of the settlement
bar are necessary to protect the rights of third parties.").
significant questions of disputed facts in its offer of
proof." American Imaging Servs., Inc. v. Eagle-Picher
Indus., Inc. (In re Eagle-Picher Indus., Inc.), 963 F.2d
855, 859 (6th Cir.1992). Such is not the case here—NUFIC
and Feld raised several disputed factual issues.
38
In this case, the court did not conduct an adversary
proceeding. The bankruptcy court itself acknowledged that proper
resolution of these issue required a separate hearing that it was
not conducting at that time.56 As discussed above, the parties did
not fully litigate the issues, nor did they even approximate
compliance with the procedural requirements. Moreover, we find no
indication in the record that the bankruptcy court conducted the
proper analysis and made the requisite findings for entry of a
preliminary injunction. See Commonwealth Oil Ref. Co. v.
U.S.E.P.A. (In re Commonwealth Oil Ref. Co.), 805 F.2d 1175, 1188-
89 (5th Cir.1986) ("[T]he legislative history of § 105 makes clear
that stays under that section are granted only under the usual
rules for the issuance of an injunction."), cert. denied, 483 U.S.
1005, 107 S.Ct. 3228, 97 L.Ed.2d 734 (1987); In re Eagle-Pitcher
Indus., Inc., 963 F.2d at 858 ("When issuing a preliminary
injunction pursuant to its powers set forth in section 105(a), a
56
See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 152 ("I
understand that there is going to be an underlying dispute
between the estate and National Union about coverage. We're not
here to resolve that today. And that testimony under oath at the
time whenever that is resolved and whatever forum will decide
that question and will thereby fix parties' rights."); id. at
195-96 ("I need not decide the coverage and corresponding bad
faith denial coverage issues. They have not been fully litigated
before the Court. I understand from the parties they will be
raised in other litigation and at other times. They are not ripe
for decision and the Court does not decide it."); id. at 226-27
( "[T]he Court won't make any findings of coverage and/or bad
faith, simply reserve those for when raised dealing with the
merits of whatever would be sought for National Union."); id. at
187 ("I haven't reviewed that complaint. I haven't even seen it.
It may have coverage issues which would not be prejudiced by the
injunction. It may have other issues which may be ended by the
injunction. I just can't make any determination on that.").
39
bankruptcy court must consider the traditional factors governing
preliminary injunctions issued pursuant to Federal Rule of Civil
Procedure 65.").
The four prerequisites to the issuance of a preliminary
injunction are: (1) a substantial likelihood that the movant
will prevail on the merits; (2) a substantial threat that the
movant will suffer irreparable injury if the injunction is not
granted; (3) that the threatened injury to the movant
outweighs the threatened harm an injunction may cause the
party opposing the injunction; and (4) that the granting of
the injunction will not disserve the public interest.
In re Commonwealth Oil Ref. Co., 805 F.2d at 1189 (internal
citations omitted); accord In re Eagle-Picher Indus., Inc., 963
F.2d at 858. Because the bankruptcy court focused only on the
fairness of the settlement to the estate,57 it failed to address
these issues, that is, whether CIGNA and Zale had satisfied the
Rule 65 prerequisites. We therefore hold that there was no
compliance with Rule 7001, constructive or otherwise. Moreover, we
feel this case demonstrates the "difficulties that are apt to arise
if the bankruptcy court too easily permits parties to circumvent
the rules governing adversary proceedings." In re Haber Oil Co.,
12 F.3d at 440. CIGNA and Zale failed to follow the rules. The
bankruptcy court compounded their failure by excusing their lapse
and preventing NUFIC and Feld's attempts to salvage the situation.
CIGNA and Zale cannot now benefit from their own mistake. See Bear
v. Coben (In re Golden Plan of Calif., Inc.), 829 F.2d 705, 712
(9th Cir.1986) (reversing determination of issue covered by Rule
7001 because party seeking determination had failed to initiate an
57
See supra nn. 51-54 and accompanying text.
40
adversary proceeding and commenting that party's failure to comply
improperly imposed on affected party the "burden of challenging
[the] action and thus contravened Rule 7001"); In re Commercial W.
Fin. Corp., 761 F.2d at 1337 (stating that if a party wants the
benefits of the Bankruptcy Code, it "must carry the burden of
following the mandated procedures"). Accordingly, we hold that the
district court's injunction against NUFIC's and Feld's contract
claims was improper.
Given that the district court had either no jurisdiction, no
power, or used improper procedures to enjoin NUFIC's and Feld's
claims, the question remains what remedy this Court should
order—affirm a modified settlement that lacks the injunction or
vacate the settlement entirely. NUFIC and Feld argue that we can
affirm the settlement approval without the injunction. CIGNA
contends that it would not have settled absent the injunction and
accordingly affirming a modified settlement would be unfair.58 We
decline to speculate whether the bankruptcy court, which was
intimately familiar with this bankruptcy case, would have approved
58
CIGNA's counsel stated at the settlement hearing that:
The biggest incentive of paying your limits and going
home instead of just paying lawyers to defend the
lawsuit is you want to avoid litigation. And if this
settlement simply means more litigation for CIGNA and
its officers and its directors and its employees and
lawyers and its lawyers' law firm, then at that point
it doesn't make any sense for CIGNA to do it because
what it will mean is that we just simply bought
ourselves another lawsuit which will not deplete our
limits.
Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 179-80.
41
the settlement without the injunction. Accordingly, we believe it
more appropriate to reverse the approval order, vacate the entire
settlement, and remand to the district court for reassessment of
the settlement.
D
NUFIC and Feld also challenge the district court's factual
findings that (1) the settling parties had acted in good faith and
(2) the settlement exhausted CIGNA's policy limits. They contend
that CIGNA is already arguing in other proceedings that these
findings preclude NUFIC and Feld from arguing otherwise in future
actions.59 Given that we vacate the settlement, these findings no
longer have any legal effect. Accordingly, we need not address the
arguments on this issue.
Moreover, the res judicata and collateral estoppel effect of
the bankruptcy court's findings is not a question for this Court.
CIGNA is not asking us to give the findings preclusive effect in
this case. Accordingly, we leave this issue for a future court to
decide.60
59
See Br. in Support of CIGNA Insurance Company's Mot. for
Contempt Against National Union Fire Insurance Company, B.Ct.R.
at 1548 (asserting in proceeding brought by National Union that
settlement injunction acts as a bar against action and against
litigation of issues of bad faith).
60
We comment, however, that such findings could have
preclusive effect against third parties only where the bankruptcy
court had jurisdiction over their claims. Latham v. Wells Fargo
Bank, 896 F.2d 979, 983 (5th Cir.1990) (requiring that " "the
prior judgment must have been rendered by a court of competent
jurisdiction' " (quoting Nilsen v. City of Moss Point, 701 F.2d
556, 559 (5th Cir.1983) (en banc)); Latham, 896 F.2d at 983
("[T]he preclusive effect of a bankruptcy decree must reflect the
reality of its limited jurisdiction."). We also note for future
42
III
The bankruptcy court lacked jurisdiction over CIGNA and Zale's
request to enjoin NUFIC's and Feld's tort claims against CIGNA.
The bankruptcy court also lacked power under § 105 to permanently
enjoin NUFIC's and Feld's contract claims against CIGNA. Lastly,
the bankruptcy court failed to conduct an adversary proceeding as
required by Rule 7001 for the entry of a § 105 temporary
injunction. For these reasons, we REVERSE the judgment of the
district court and REMAND for the district court to (1) vacate the
approval of the settlement between Zale and its three former
directors and CIGNA, and (2) conduct further proceedings consistent
with this opinion.61
reference that the legal standard in a settlement hearing differs
from that applicable in an adversary proceeding or state court
trial. Copeland v. Merrill Lynch & Co., 47 F.3d 1415, 1423 (5th
Cir.1995) ("Examining whether a particular settlement is fair or
equitable and in the best interest of the estate and creditors is
a different inquiry, driven by different policies, than
litigation of the actual claim."). Consequently, we doubt that
the findings of the bankruptcy court in a settlement hearing
would have preclusive effect in adversary proceedings or state
court trials. Id. at 1422 ("Collateral estoppel does not
preclude litigation of an issue unless both facts and the legal
standard used to assess them are the same in both proceedings."
(citing Recoveredge L.P. v. Pentecost, 44 F.3d 1284, 1291 (5th
Cir.1995); Brister v. A.W.I., Inc., 946 F.2d 350, 354 & n. 1
(5th Cir.1991))).
61
Because we reach our conclusion on jurisdictional and
procedural grounds, we need not and do not address the parties'
remaining arguments.
43