Zerand-Bernal Group, Inc. v. Cox

• Decision Date: 22 April 1994
• Docket Number: No. 93-3295,ZERAND-BERNAL,93-3295
• Citation: 23 F.3d 159
• Parties: , 25 Bankr.Ct.Dec. 965, Bankr. L. Rep. P 75,862 GROUP, INC., formerly known as Zerand Corporation, Plaintiff-Appellant, v. Ronald L. COX, Beth Anne Cox, Rockwell International Corp., and Rockwell Graphic Systems, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 159

23 F.3d 159

62 USLW 2679, 25 Bankr.Ct.Dec. 965, Bankr.

L. Rep. P 75,862

ZERAND-BERNAL GROUP, INC., formerly known as Zerand Corporation, Plaintiff-Appellant, v. Ronald L. COX, Beth Anne Cox, Rockwell International Corp. and Rockwell Graphic Systems, Inc., Defendants-Appellees.

No. 93-3295.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 14, 1994.

Decided April 22, 1994.

Michael R. Levinson, Gus A. Paloian, Patrice A. Powers, Seyfarth, Shaw, Fairweather & Geraldson, Chicago, IL, Russell J. Ober, Jr. (argued), Patricia L. Dodge, Meyer, Unkovic & Scott, Pittsburgh, PA, for Zerand-Bernal Group, Inc.

Francis J. Carey, Balzarini, Carey & Watson, Pittsburgh, PA, for Ronald L. Cox, Beth Ann Cox.

David S. Curry, N. Neville Reid (argued), Mayer, Brown & Platt, Chicago, IL, Kenneth L. Salmon, Patrick M. Coyne, Katarincic & Salmon, Pittsburgh, PA, for Rockwell Intern. Corp., Rockwell Graphic Systems, Inc.

Jerome Wald, Tishler & Wald, Ltd., Chicago, IL, for Cary Metal Products, Inc.

Before POSNER, Chief Judge, CUDAHY, Circuit Judge, and McDADE, District Judge. ^*

POSNER, Chief Judge.

This appeal requires us to consider the power of a bankruptcy court to enjoin proceedings in other courts after the completion of the bankruptcy proceeding. In 1985 Cary Metal Products, Inc. filed a Chapter 11 bankruptcy proceeding in the bankruptcy court in Chicago. As debtor in possession, Cary then negotiated the sale of its assets to Zerand-Bernal Group, Inc., as it is now known. The sale agreement recites that it is subject to the entry by the bankruptcy court of an order approving the sale "free and clear of any liens, claims or encumbrances of any sort or nature," "confirming all of the terms and conditions of this Agreement," and "reserv[ing in the bankruptcy court] jurisdiction with the power to enjoin ... any products liabilities claims arising prior to the Closing or relating to sales made by Debtor prior to the Closing." On December 23, 1985, the bankruptcy court entered an order approving the sale and "reserv[ing] jurisdiction to enforce the Agreement herein approved in accordance with its terms and conditions." Several months later, the debtor (Cary), jointly with a creditors' committee that included Rockwell Graphic Systems, Inc., filed a plan of reorganization. The plan provided for the complete liquidation of Cary and the creation of a trust fund from the proceeds of the sale of Cary's assets to Zerand, specified how the fund was to be allocated among the creditors, and stated that "the Court shall retain exclusive jurisdiction after confirmation ... to enforce the agreement concerning the sale of assets to Zerand." The bankruptcy court approved the plan on January 22, 1987. The transfer of assets pursuant to the sale agreement was completed shortly afterward and the Cary bankruptcy proceeding then became inactive, although it has never been formally dismissed.

Four and a half years later, Ronald Cox and his wife filed a diversity products liability suit against Cary, Zerand, Rockwell Graphic, and others in a federal district court in Pennsylvania. The suit alleges that in 1989 Mr. Cox had caught his hand in a machine that had been manufactured by Cary and sold by it to Cox's employer. Though Zerand had had nothing to do with the manufacture or sale of the machine--events that had taken place before the bankruptcy sale--the accident had occurred in Pennsylvania and Cox claimed that under the law of that state governing successor liability Zerand was liable for any defect in the Cary machine. Simmers v. American Cyanamid Corp., 394 Pa.Super. 464, 576 A.2d 376, 386 (1990). Not content to defend in the Pennsylvania district court, Zerand filed an adversary complaint in the bankruptcy court in Chicago, seeking to reopen the Cary bankruptcy and asking that the Coxes be enjoined from proceeding against Zerand in Pennsylvania and that Rockwell Graphics be enjoined from filing a cross-claim against Zerand seeking indemnification should Rockwell be held liable to the Coxes for its role (the nature of which is unclear) in the accident. The ground for the relief sought was that the sale agreement between Cary and Zerand had provided for the enjoining of any products liability claims against Zerand that related to equipment sales which had occurred before the sale to it of Cary's assets. The bankruptcy court held that it lacked jurisdiction over the adversary proceeding instituted by Zerand, notwithstanding the reservation of jurisdiction in the orders approving the sale of assets and the plan of reorganization. The district court affirmed the dismissal of the proceeding, 158 B.R. 459.

The bankruptcy jurisdiction of the district courts (including therefore that of the bankruptcy courts, which exercise powers delegated to them by the district courts, 28 U.S.C. Sec. 157(a), (b)) extends to "all civil proceedings arising under title 11 [of the U.S.Code], or arising in or related to cases under title 11." 28 U.S.C. Sec. 1334(b). Taken at its full breadth, this language would allow the bankruptcy court to do what Zerand wants, since the adversary complaint that Zerand filed in the bankruptcy court relates to the bankruptcy sale at which it acquired Cary's assets and thereby exposed itself, it turns out, to the Coxes' suit. But the language should not be read so broadly. The 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 forum. In re Xonics, 813 F.2d 127, 131 (7th Cir.1987). 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. Id.; National Tax Credit Partners, L.P. v. Havlik, 20 F.3d 705, 709 (7th Cir.1994); In re Turner, 724 F.2d 338, 341 (2d Cir.1983) (Friendly, J.). 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, 11 U.S.C. Sec. 105, which complements the automatic stay provision of section 362 of the Code (applicable to suits against the debtor) by permitting the bankruptcy court to "issue any order ... that is necessary or appropriate to carry out the provisions of this title." In re Energy Co-op, Inc., 886 F.2d 921, 929 (7th Cir.1989); In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir.1991); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1002-03 (4th Cir.1986).

The Coxes' products liability suit is not of either character. It is, to begin with, a claim neither by nor against the debtor. For while it names the debtor as a defendant, the debtor (Cary) no longer exists, all its assets having been transferred to Zerand pursuant to the plan of reorganization. For the same reason, the suit cannot possibly affect the amount of property available for distribution to Cary's creditors; all of Cary's property has already been distributed to them.

So the products liability suit, and hence Zerand's adversary complaint, which is its mirror image, are not proceedings "related" to the Cary bankruptcy, within the meaning of section 1334. E.g., In re Turner, supra, 724 F.2d at 341; In re Memorial Estates, Inc., 950 F.2d 1364, 1368 (7th Cir.1991); In re Lemco Gypsum, Inc., 910 F.2d 784, 788 (11th Cir.1990). The next question is whether they can be said to "arise under" the Bankruptcy Code--or "arise in" a bankruptcy proceeding, but that provision of section 1334(b) cannot possibly be applicable to this dispute between two nonparties to the bankruptcy proceeding. Its domain is limited to questions that arise during the bankruptcy proceeding and concern the administration of the bankrupt estate, such as whether to discharge a debtor. In re Wolverine Radio Co., 930 F.2d 1132, 1144 (6th Cir.1991); 1 Collier on Bankruptcy p 3.01(c)(v), at pp. 3-32 to 3-33 (15th ed., Lawrence P. King ed. 1993).

The fact that a claim has a distant federal origin does not confer "arising under" jurisdiction. Gully v. First National Bank, 299 U.S. 109, 118, 57 S.Ct. 96, 100, 81 L.Ed. 70 (1936); McCall-Bey v. Franzen, 777 F.2d 1178, 1185-86 (7th Cir.1985). Copyrights are granted under the authority of federal law and all could be said to originate in the Constitution and the copyright statute, but a dispute over the meaning or validity of an agreement to license a copyright is deemed to arise under state rather than federal law. T.B. Harms Co. v. Eliscu, 339 F.2d 823 (2d Cir.1964) (Friendly, J.). It is the same here. Bankruptcy is a system of entitlements (of both debtors and creditors) created by federal law, but a dispute over the meaning or validity of an agreement between the purchaser at a bankruptcy sale and some third party likewise arises under state rather than federal law. In re Chicago, Rock Island & Pacific R.R., 794 F.2d 1182, 1188 (7th Cir.1986); In re Lemco Gypsum, Inc., supra, 910 F.2d at 789. "Otherwise anyone who could trace his title to a bankrupt could invoke federal jurisdiction to settle disputes affecting that property." In re Xonics, supra, 813 F.2d at 131. And why would that be bad? Because as 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. Here it is extremely weak. The bankruptcy is over and done with. The main dispute is one between a purchaser at the bankruptcy sale and a person who had nothing to do with the bankruptcy over a point of state law. There is a secondary dispute between that purchaser and a creditor of the bankrupt (Rockwell), but...