Celotex Corp. v. Edwards

Decision Date19 April 1995
Docket Number931504
Citation115 S.Ct. 1493,514 U.S. 300,131 L.Ed.2d 403
PartiesCELOTEX CORPORATION, Petitioner, v. Bennie EDWARDS et ux
CourtU.S. Supreme Court
Syllabus *

The United States District Court for the Northern District of Texas entered a judgment in favor of respondents and against petitioner Celotex Corp. To stay execution of the judgment pending appeal, petitioner posted a supersedeas bond, with an insurance company (Northbrook) serving as surety. After the Fifth Circuit affirmed the judgment, Celotex filed for Chapter 11 bankruptcy in the Bankruptcy Court for the Middle District of Florida. Exercising its equitable powers under 11 U.S.C. § 105(a), the Bankruptcy Court issued an injunction, which, in pertinent part, prohibited judgment creditors from proceeding against sureties without the Bankruptcy Court's permission. Respondents thereafter filed a motion pursuant to Federal Rule of Civil Procedure 65.1 in the Northern District of Texas seeking permission to execute against Northbrook on the bond. The District Court granted the motion. The Fifth Circuit affirmed and later denied Celotex' petition for rehearing, rejecting the argument that its decision allowed a collateral attack on the Bankruptcy Court order.

Held: Respondents must obey the Bankruptcy Court's injunction. The well-established rule that "persons subject to an injunctive order issued by a court with jurisdiction are expected to obey that decree until it is modified or reversed, even if they have proper grounds to object to that order," GTE Sylvania, Inc. v. Consumers Union of United States, Inc., 445 U.S. 375, 386, 100 S.Ct. 1194, 1201, 63 L.Ed.2d 467, applies to bankruptcy cases, Oriel v. Russell, 278 U.S. 358, 49 S.Ct. 173, 73 L.Ed. 419. A bankruptcy court has jurisdiction over proceedings "arising under," "arising in," or "related to" a Chapter 11 case. 28 U.S.C. §§ 1334(b) and 157(a). The "related to" language must be read to grant jurisdiction over more than simple proceedings involving the debtor's property or the estate. Respondents' immediate execution on the bond is at least a question "related to" Celotex' bankruptcy. While the proceeding against Northbrook does not directly involve Celotex, the Bankruptcy Court found that allowing respondents and other bonded judgment creditors to execute immediately on the bonds would have a direct and substantial adverse effect on Celotex' ability to undergo a successful Chapter 11 reorganization. The fact that Federal Rule of Civil Procedure 65.1 provides an expedited procedure for executing on supersedeas bonds does not mean that such a procedure cannot be stayed by a lawfully entered injunction. Board of Governors v. MCorp Financial, 502 U.S. 32, 112 S.Ct. 459, 116 L.Ed.2d 358, distinguished. The issue whether the Bankruptcy Court properly issued the injunction need not be addressed here. Since it is for the court of first instance to determine the question of the validity of the law, and since its orders are to be respected until its decision is reversed, respondents should have challenged the injunction in the Bankruptcy Court rather than collaterally attacking the injunction in the Texas federal courts. Pp. __.

6 F.3d 312, reversed.

REHNQUIST, C.J., delivered the opinion of the Court, in which O'CONNOR, SCALIA, KENNEDY, SOUTER, THOMAS, and BREYER, JJ., joined. STEVENS, J., filed a dissenting opinion, in which GINSBURG, J., joined.

Jeffrey W. Warren, Tampa, FL, for petitioner.

Brent M. Rosenthal, Dallas, TX, for respondents.

Chief Justice REHNQUIST delivered the opinion of the Court.

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

I

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

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

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

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

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

Celotex appealed, and the Fifth Circuit affirmed. Edwards (Edwards II) v. Armstrong World Industries, Inc., 6 F.3d 312 (1993). It first held that, because the appellate process for which the supersedeas bond was posted had been completed, Celotex no longer had a property interest in the bond and the automatic stay provisions of 11 U.S.C. § 362 therefore did not prevent respondents from executing against Northbrook. Edwards II, supra, at 315-317. The Court then acknowledged that "[t]he jurisdiction of bankruptcy courts has been extended to include stays on proceedings involving third parties under the auspices of 28 U.S.C. § 1334(b)," 6 F.3d, at 318, and that the Bankruptcy Court itself had ruled that the Section 105 In junction enjoined respondents' proceeding against Northbrook to execute on the supersedeas bond. Ibid. The Fifth Circuit nevertheless disagreed with the merits of the Bankruptcy Court's Section 105 Injunction, holding that "the integrity of the estate is not implicated in the present case because the debtor has no present or future interest in this supersedeas bond." Id., at 320. The Court reasoned that the Section 105 Injunction was "manifestly unfair" and an "unjust result" because the supersedeas bond was posted "to cover precisely the type of eventuality which occurred in this case, insolvency of the judgment debtor." Id., at 319. In concluding that the Section 105 Injunction was improper, the Fifth Circuit expressly disagreed with the reasoning and result of Willis v. Celotex Corp., 978 F.2d 146 (CA4 1992), cert. denied, 507 U.S. ----, 113 S.Ct. 1846, 123 L.Ed.2d 470 (1993), where the Court of Appeals for the Fourth Circuit, examining the same Section 105 Injunction, held that the Bankruptcy Court had the power under 11 U.S.C. § 105(a) to stay proceedings against sureties on the supersedeas bonds. 6 F.3d, at 320.

Celotex filed a petition for rehearing, arguing that the Fifth Circuit's decision allowed a collateral attack on an order of the Bankruptcy Court sitting under the jurisdiction of the Court of Appeals for the Eleventh

Circuit. The Fifth Circuit denied the petition, stating in part that "we have not held that the bankruptcy court in Florida was necessarily wrong; we have only concluded that the district court, over which we do have appellate jurisdiction, was right." Id., at 321. Because of the conflict between the Fifth Circuit's decision in this case and the Fourth Circuit's decision in Willis, we granted certiorari. 511 U.S. ----, 114 S.Ct. 2099, 128 L.Ed.2d 661. We now reverse.

II

Respondents acknowledge that the Bankruptcy Court's Section 105 Injunction prohibited them from attempting to execute against Northbrook on the...

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