Appeal from an order of the District Court for the Southern District of New York (Charles L. Brieant, Judge), enjoining a debtor in Chapter 11 reorganization proceedings from seeking relief in any court against any defendant in securities fraud actions consolidated for pretrial proceedings in a multi-district litigation. Injunction vacated.
Before: LUMBARD, MANSFIELD, and NEWMAN, Circuit Judges.
JON O. NEWMAN, Circuit Judge:
This appeal presents, in a somewhat unusual form, a dispute concerning the appropriate sequence of litigation as between two federal courts. Baldwin-United Corporation and its wholly owned subsidiary, D. H. Baldwin company (collectively "Baldwin"), currently in Chapter 11 reorganization proceedings in the Bankruptcy court in the Southern District of Ohio, appeal from an order of the District Court for the southern District of New York (Charles L. Brieant, Judge) enjoining them from seeking any relief in any court against any defendant in a large group of securities fraud actions consolidated for pretrial proceedings in multi-district litigation in the Southern District of New York. The injunction applies to claims that have been or may be asserted in the multi-district proceeding. Fundamentally at issue is whether the Bankruptcy Court in Ohio or the District Court in New York ought to be the first court to determine whether the automatic stay arising from the filing of the Chapter 11 proceedings, see 11 U.S.C. § 362 (1982), applied to indemnity and contribution claims filed against Baldwin after the filing of the Chapter 11 petition but based on facts occurring prior to the filing of that petition. We conclude that the Bankruptcy Court is entitled to determine the applicability of its stay and, under the circumstances of this case, should be permitted to do so. We therefore vacate the injunction.
Baldwin, through its insurance company subsidiaries, has issued to a large number of purchasers throughout the country Single Premium Deferred Annuities ("SPDAs"). Subsequently the insurance subsidiaries were placed in state rehabilitation proceedings in Arkansas and Indiana, creating uncertainty as to the return that policyholders would receive on the annuities they had purchased. These developments led to the filing of involuntary Chapter 11 proceedings against Baldwin on September 26, 1983, in the bankruptcy Court for the Southern District of Ohio. Baldwin consented to the Chapter 11 proceedings the following day. The Chapter 11 proceedings are exceedingly complex, involving approximately $9 billion in assets, $14 billion in claims, and more than 8,000 claimants.
Beginning on September 29, 1983, three days after the filing of the Chapter 11 proceedings, holders of SPDAs sued various broker-dealers that had marketed these policies,*fn1 alleging securities fraud and related claims. One suit was filed by Vincent Erti against Paine Webber Jackson & Curtis, Inc. ("Paine Webber:) and related companies and officials. On February 24, 1984, the Erti suit and 39 similar suits against Paine Webber and other broker-dealers were consolidated for pretrial proceedings in MDL No. 581 by the Judicial Panel on Multidistrict Litigation, see 28 U.S.C. § 1407 (1982), and assigned to Judge Brieant. In re Baldwin-United Corporation Litigation, 581 F. Supp. 739 (J.P.M.D.L. 1984). Many more suits by purchasers of SPDAs have since been consolidate into MDL No. 581. Judge Brieant directed that one consolidated complaint be filed against each broker-dealer, and a class action against Paine Webber has been filed under the caption Erti, et al. v. Paine Webber Jackson & Curtis, Inc., et al., 83 Civ. 9085 (CLB).
On July 24, 1984, Paine Webber filed a proof of claim in the Bankruptcy Court in Ohio pursuant to 11 U.S.C. § 501. The proof of claim, totaling approximately $700 million, asserts claims for indemnity and contribution in connection with the Erti class action, various pending state court actions, and any similar suits that may be filed against Paine Webber in the future. On February 19, 1985, Paine Webber filed a third-party complaint against Baldwin in the Erti class action in the Southern District of New York. The third-party complaint alleged claims for contribution and indemnity similar to those alleged in the proof of claim filed in the Chapter 11 proceedings. With litigation concerning the SPDAs and Baldwin's liability to Paine Webber arising from their sale thus pending in two courts, there ensued the events immediately precipitating the injunction challenged on this appeal.
On March 4, 1985, counsel for Baldwin contacted counsel for Pain Webber to seek agreement to an extension of time for Baldwin to file an answer to the third-party complaint in Erti. The answer was due March 11. Baldwin informed Paine Webber that in Baldwin's opinion the third-party complaint was subject to the automatic stay that arose on September 26, 1983, when the Chapter 11 proceedings were filed. See 11 U.S.C. § 362(a)(1). Baldwin explained that it sought the extension of time to avoid the necessity of seeking from the Bankruptcy Court a temporary restraining order to prevent entry of a default judgment on the third-party complaint in the District Court. Baldwin offered to stipulate to an expedited briefing schedule before the Bankruptcy Court to secure a prompt resolution of the matter, thereby alerting Paine Webber that Baldwin intended to have the Bankruptcy Court determine the applicability of its own stay. On March 5, Paine Webber said that it would agree to extend Baldwin's time to plead to the third-party complaint. Baldwin said it would bring the proposed stipulation to Paine Webster's counsel on the following morning, March 6.
On the morning of March 6, however, Pain Webber sought and obtained from Judge Brieant ex parte a temporary restraining order barring Baldwin from applying to the Bankruptcy Court in Ohio "for declaratory or injunctive relief which would purport to determine, affect or interfere, directly or indirectly with [the District] Court's jurisdiction over the third-party complaint against Baldwin . . . ." Paine Webber argued to Judge Brieant that its third-party complaint against Baldwin was not subject to the automatic stay of section 362. Baldwin was not subject to the automatic stay of section 362. Reliance was placed on the Third Circuit's recent decision in Avellino & Bienes v. M. Frenville Co. (In re M. Frenville Co.) 744 F.2d 332 (3d Cir. 1984), cert. denied, 469 U.S. 1160, 105 S. Ct. 911, 83 L. Ed. 2d 925 (1985). Frenville held that third-party claims for non-contractual contribution and indemnity filed for non-contractual contribution and indemnity filed after the date of the Chapter 11 petition and indemnity filed after the date of Chapter 11 petition are post-petition claims, not subject to the automatic stay, even though based on facts occurring pre-petition, if under state law the third-party claims may no be pleaded until the third-party plaintiff has been sued by the primary plaintiff and if the primary plaintiff and if the primary suit is filed post-petition.
On March 11, Judge Brieant held a brief hearing on Paine Webber's application for a preliminary injunction. In the course of the hearing, Judge Brieant expressed the view that the District Court, rather than the Bankruptcy Court, was the appropriate court to determine the scope of the automatic stay, that Frenville was correct in ruling that a third-party complaint for contribution and indemnity filed after a Chapter 11 petition was a post-petition claim beyond the scope of the automatic stay, that the Second Circuit would agree with the Frenville decision, and that it would be an "unnecessary and improper intrusion on the jurisdiction" of the District Court if the Bankruptcy Court were to determine that the stay applied to Paine Webber's third-party complaint. Accordingly, he issued a preliminary injunction, set forth in a written order on March 26, 1985, prohibiting Baldwin or the Trustee for Baldwin "from applying for injunctive, declaratory or other relief from any Court other than [the District] Court, against any defendant in any action presently before or hereafter assigned or transferred to [the District] Court . . . for inclusion in . . . MDL-581 . . . with respect to claims asserted or which might be asserted in any action which is part of MDL-581 . . . ." Then, expressing concern that the reorganization of the debtor not be unduly burdened, Judge Brieant stayed, pending further order of the Court, both the time within which Baldwin must answer the third-party complaint and all discovery of Baldwin by any party to MDL No. 581. This appeal was taken from the March 26 order.
The parties sharply differ not only as to the correctness of the injunction but also as to the issue that ought to be resolved in determining its correctness. Baldwin urges us to rule that the District Court lacks jurisdiction to determine the scope of the automatic stay. Paine Webber urges us to turn immediately to the merits and rule that the automatic stay does not apply to the third-party complaint. Our analysis steers a course between the extreme positions urged upon us by the parties, though we conclude, in agreement with Baldwin, that the District Court's injunction should not have been issued.
The initial issue is whether the District Court has jurisdiction the applicability of the automatic stay. We conclude that it does. Baldwin does not dispute that the Erti class action, including the third-party complaint against Baldwin, would unquestionably be within the subject matter jurisdiction of the District Court if the automatic stay did not exist. Whether the stay applies to litigation otherwise within the jurisdiction of a district court or court of appeals is an issue of law within the competence of both the court within which th litigation is pending. see, e.g., SEC v. First Financial Group of Texas, 645 F.2d 429, 436-40 (5th Cir. 1981) (approving District Court's determination that pending litigation was exempted from the automatic stay by exception for actions by governmental unit to enforce police or regulatory power, 11 U.S.C. § 362(b)(4)); NLRA v. Evans Plumbing Co. 639 F.2d 291 (5th Cir. 1981) (determining that enforcement proceeding in Court of Appeals was exempted from stay by section 362 (b)(4)), and the bankruptcy court supervising the reorganization, see, e.g., Avellino & Bienes v. M. Frenville Co. (In re M. Frenville Co.), supra (recognizing authority of Bankruptcy authority of Bankruptcy Court to determine the reach of its stay but disagreeing on the merits); Johns-Manville Corp. v. Asbestos Litigation Group (in re Johns-Manville Corp), 40 Bankr. 219 (S.D.N.Y. 1984) (affirming Bankruptcy court's determination of applicability of stay); Commercial Union Insurance Co. v. Johns-Manville Corp. (In re Johns-Manville Corp.), 31 Bankr. 965 (S.D.N.Y. 1983) (same). ...