In re Paris Industries Corp., Civ. No. 91-0016 B-H.

• Decision Date: 08 October 1991
• Docket Number: Civ. No. 91-0016 B-H.
• Citation: 132 BR 504
• Parties: In re PARIS INDUSTRIES CORPORATION, et al., Debtors. PARIS MANUFACTURING CORPORATION, formerly known as Leander Acquisition Corporation, Plaintiff-Appellee, v. ACE HARDWARE CORPORATION and Hesse Hardware, Inc., Defendants-Appellants, and The United States of America, on behalf of the United States Navy, Defendant.
• Court: U.S. District Court — District of Maine

132 B.R. 504 (1991)

In re PARIS INDUSTRIES CORPORATION, et al., DebtorsPARIS MANUFACTURING CORPORATION, formerly known as Leander Acquisition Corporation, Plaintiff-Appellee, v.ACE HARDWARE CORPORATION and Hesse Hardware, Inc., Defendants-Appellants and The United States of America, on behalf of the United States Navy, Defendant.

Civ. No. 91-0016 B-H.

United States District Court, D. Maine.

October 8, 1991.

Frederick Emery, Asst. U.S. Atty., Portland, Me., for U.S.

John F. Lambert, Jr., Black, Lambert, Coffin, & Rudman, Portland, Me., Timothy V. Hoffman, Sanchez & Daniels, Chicago, Ill., for Ace Hardware.

Barry L. Kroll, Williams & Montgomery, Chicago, Ill., Rubin G. Segal, Portland, Me., for Paris Mfg.

Richard Abbondanza, So. Portland, Me., for Ace Hardware Corp.

Sara Cook, McKenna, Storer, Rowe, White & Farbug, Chicago, Ill., for Hesse Hardware.

MEMORANDUM OF DECISION

HORNBY, District Judge.

This bankruptcy appeal presents the question whether a federal bankruptcy court has the authority to enjoin a state court products liability suit brought against the purchaser of a bankruptcy debtor's assets when the only theory of recovery is successor liability to the debtor.The bankruptcy court(Goodman, J.) here enjoined the action because it had previously ordered that the bankruptcy debtor's assets were sold free and clear of all such claims.Concluding that such an injunction was proper, I AFFIRM the bankruptcy court's Order.

FACTUAL BACKGROUND

On April 10, 1987, Paris Industries Corporation("Debtor") filed for Chapter 11 bankruptcy protection.Appointment of a trustee was approved on May 26, 1987.On August 29, 1987, the bankruptcy court(Johnson, J.) approved the sale of the Debtor's manufacturing division to the Leander Acquisition Corporation("Leander").¹The court found that "due and proper notice had been timely given to all creditors, other parties-in-interest, all Defendants named in the Complaint and all parties entitled to receive notice. . . ."(Order of Sale, August 29, 1987 at ¶ 1).The court ordered:

Leander shall not assume or be liable for any obligation arising from any activities of the Debtor with respect to the property covered hereby, except as specifically provided in the Leander Counteroffer, and any documents executed and delivered in connection therewith. . . .²

The Leander Counteroffer provided that the Debtor's assets were to be sold to Leander "free and clear" of "all claims for product liability (to the extent that such claims are in existence or arise out of products manufactured and sold prior to the closing date)" and that Leander was not responsible for any "product liability claims, actual or contingent, with respect to any inventory sold, shipped or delivered prior to the date of closing."(Leander Amended Counterofferat 15-16).

Between November, 1984 and December, 1985, long prior to the Chapter 11 filing, Mr. and Mrs. Robert Pabst, residents of Illinois, purchased a wooden toboggan from either Ace Hardware Corporation("Ace") or Hesse Hardware, Inc.("Hesse").This toboggan had been manufactured by the Debtor's manufacturing division.On December 15, 1987, after the bankruptcy court-approved sale to Leander, Mrs. Pabst was injured while riding the toboggan.

The Pabsts filed a products liability and negligence complaint on December 28, 1988 in Illinois state court naming as defendants Ace, Hesse, "Paris Manufacturing Corporation, a foreign corporation; and Leander Acquisition Company, D/B/A Paris Manufacturing Company, a foreign corporation."(Leander Complaint for Declaratory Judgment and Injunctive Relief at Exh. C).Ace and Hesse filed third-party complaints for contribution against Leander.Leander moved for summary judgment, denying liability.The Illinois court denied the motion on October 30, 1990.

On October 10, 1990 Leander filed a complaint in the bankruptcy court for a declaratory judgment and injunctive relief.Leander requested that the bankruptcy court declare the Leander purchase of the Debtor's assets to be "free and clear of all of the Pabsts', Ace's and Hesse's state court claims, whether asserted by complaint, third-party complaint or otherwise."(Leander Complaint for Declaratory Judgment and Injunctive Relief).Leander also sought to enjoin the Pabsts, Ace and Hesse from continuing the Illinois state court action against it and from instituting any further actions in connection with the manufacture and sale of products covered by the terms of the August 29, 1987 sale order.

On November 28, 1990the bankruptcy court conducted a hearing on the preliminary injunction and proceeded to enter a permanent injunction.The court found no remaining issues of material fact and ordered Ace and Hesse³ to dismiss Leander from the state court proceedings.The court also enjoined them from pursuing Leander at any time in connection with the 1987 purchase of the Debtor's assets.Ace and Hesse have appealed.⁴In their appeal, Ace and Hesse challenge the authority of the bankruptcy court to issue its injunction in December, 1990.They argue that there is no jurisdiction in the bankruptcy court to issue such an injunction and that even if there is jurisdiction, the bankruptcy court should not have granted injunctive relief because there is no impact on the Debtor's estate and because it would be inequitable to grant injunctive relief where they had received no notice of the sale or its terms at the time that the order was entered.Finally, they maintain that the bankruptcy court proceeded precipitously to enter the permanent injunction without sufficient notice to them.

Since Ace and Hesse have not challenged the interpretation of the August 29, 1987 Order of Sale, I construe it as an order of the bankruptcy court that did, indeed, provide that Leander purchased the Debtor's assets free and clear of all claims like those Ace, Hesse and the Pabsts seek to assert.

DISCUSSION

I.Bankruptcy Court Jurisdiction

Title 28 U.S.C. § 1334(b) confers upon the United States district courts"original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."Title 28 U.S.C. § 157(a) allows the district courts to refer to bankruptcy judges "any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11. . . ."The "related to" language has been read to require that the proceeding's outcome "could conceivably have any effect on the estate being administered in bankruptcy."In re G.S.F. Corp.,938 F.2d 1467, at 1475, (1st Cir.1991)(potential indemnity claim sufficient), quotingPacor v. Higgins,743 F.2d 984, 994(3rd Cir.1984);1 Collier On Bankruptcy ¶ 3.01at 3-28(1991)(adding that "the courts generally have adopted an expansive interpretation of the concept of `relatedness.'").

The bankruptcy court found jurisdiction in this case on the ground that "these actions are core proceedings arising out of an order of this Court approving the sale of property, and because these proceedings affect the liquidation of the assets of the estate."(Amended Order of December 21, 1990)(citing28 U.S.C. § 157(b)(2)(N), (O)).It also found that allowing actions such as the Illinois suit to proceed would "substantially affect potential sales of assets in all estates arising in bankruptcy and erode the ability of trustees, debtor's sic, or debtor's-in-possession sic to sell estate assets under the authority of the Court. . . ."

I agree that the bankruptcy court had jurisdiction.First, the Illinois action is a direct challenge to the bankruptcy court's 1987 order,⁵ entered in a matter where it had clear core jurisdiction.Second, were Leander found liable in Illinois state court, it would have grounds for seeking rescission of the 1987 sale, having bargained for a sale free and clear of liability.⁶The bankruptcy judge, therefore, could properly find that the Illinois state court action would have an adverse impact on an estate being administered in bankruptcy (no plan has yet been filed), and that this case was consequently "related" to a case under title 11.⁷

Finally, the bankruptcy court also retained ancillary jurisdiction.Bankruptcy courts must have the ability to enforce prior orders and "secure or preserve the fruits and advantages of a judgment or decree rendered therein. . . .The proceeding being ancillary and dependent, the jurisdiction of the court follows that of the original cause. . . ."Local Loan Co. v. Hunt,292 U.S. 234, 239, 54 S.Ct. 695, 697, 78 L.Ed. 1230(1934);seeIn re White Motor Credit Corp.,75 B.R. 944, 947(Bankr. N.D.Ohio1987)("ancillary jurisdiction to interpret and enforce prior orders includes purchasers' actions for declaratory and injunctive relief to enforce orders of sale")⁸See alsoIn re Vincent,68 B.R. 865, 869(Bankr.M.D.Tenn.1987).The 1987 order of sale to Leander was a core proceeding as defined by 11 U.S.C. § 157(b)(2)(N).It explicitly prohibited claims like those Ace and Hesse seek to assert and its validity has not been challenged.The bankruptcy court, therefore, had ancillary jurisdiction to enter its November 26, 1990 injunction preserving the effect of that order.⁹

II.Authority Under 11 U.S.C. § 105(a)

Ace and Hesse argue that even if jurisdiction exists, the bankruptcy court exceeded its authority under 11 U.S.C. § 105(a) and abused its discretion by issuing the injunction.Section 105(a) gives the bankruptcy court the power to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title."11 U.S.C. § 105(a).Ace and Hesse claim that in order for the court to exercise that authority, the bankruptcy estate must be adversely affected.SeeA.H. Robins Co. v. Piccinin,788 F.2d 994, 1003(4th Cir.), cert. denied,479 U.S. 876, 107 S.Ct. 251, 93 L.Ed.2d 177(1986).Since I have already determined that such a showing has...