Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-06277/USCOURTS-ca10-89-06277-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

FILED 

Uaitt'd Stat6.Court of Apptals 

Tenth Cir.cuit 

lJEC 2 6 1990 

ROBERT L. HOECKER 

Clerk 

In re WESTERN REAL ESTATE FUND, INC. I ) 

et al., ) 

) 

Debtors. ) 

) 

) 

) 

LANDSING DIVERSIFIED PROPERTIES-II, ) 

) 

Plaintiff-Appellee, ) 

) 

v. ) No. 89-6277 

) 

THE FIRST NATIONAL BANK AND TRUST ) 

COMPANY OF TULSA, ) 

v. 

KEVIN M. 

) 

Defendant-Appellee, ) 

) 

) 

) 

ABEL; ABEL & BUSCH, INC., ) 

) 

Third-party-defendants- ) 

Appellants. ) 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE WESTERN DISTRICT OF OKLAHOMA 

(D.C. No. 88-2039-W) 

L. Gene Gist (Tim D. DeGiusti with him on the brief), Andrews, 

Davis, Legg, Bixler, Milsten & Price, Oklahoma City, Oklahoma, for 

Plaintiff-Appellee Landsing Diversified Properties-!!. 

Burk E. Bishop (Lance Stockwell and Emily Y. Duensling with him on 

the brief), Boesche, MCDermott & Eskridge, Tulsa, Oklahoma, for 

Defendant-Appellee First National Bank & Trust Company of Tulsa. 

Steven R. Hickman (James E. Frasier on the brief), Frasier & 

Frasier, Tulsa, Oklahoma, for Third-Party Defendants-Appellants. 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 1 
Before BALDOCK, BARRETT, and EBEL, Circuit Judges. 

PER CURIAM. 

Third-party defendants Kevin M. Abel and Abel & Busch, Inc. 

(Abel) appeal from an order of the United States District Court 

for the Western District of Oklahoma affirming a decision of the 

bankruptcy court that (1) approved in limited amount Abel's proof 

of claim for attorney's fees due in connection with servic~s 

rendered under a pre-petition contract with plaintiff Landsing 

Diversified Properties, II (LDP), his former client, and (2) 

enjoined Abel from collecting the remainder of the claimed fee 

from a third party in state court under Oklahoma's attorney's lien 

provisions, Okla. Stat. tit. 5, §§ 6-9 (West 1984). 

The origins of this case reach back to late 1983 and 1984, 

when two transformers maintained by Public Service Company of 

Oklahoma (PSO) exploded, causing substantial damage to an LDP 

facility. LDP retained Abel to pursue litigation against PSO. 

The retainer agreement provided for a hybrid form of compensation, 

consisting of a reduced hourly fee supplemented with a reduced 

contingency fee. In December of 1984, Abel filed suit for LDP 

against PSO and, eventually, obtained a settlement offer of $3 

million. In the meantime, Abel secured his contract fee by filing 

an attorney's lien under state law. 

2 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 2 
In September of 1986, LOP petitioned for bankruptcy under 

Chapter 11. Several months later, LDP filed an adversary 

proceeding against First National Bank and Trust Company of Tulsa 

(FNB), which held a mortgage on the damaged LOP property, to 

determine the relative priority of their rights in any potential 

settlement of the suit against PSO. Abel was subsequently brought 

into the proceeding as a third-party defendant to resolve what 

rights, if any, he would have in PSO settlement proceeds, and his 

outstanding proof of claim against LOP for attorney1 s fees was 

consolidated as well. 

Following a hearing on March 20, 1986, the bankruptcy court 

made several preliminary determinations regarding the existence 

and nature of Abel's attorney's lien and associated fees claim 

against LOP. First, the bankruptcy court held that the lien 

survived the filing of LOP 1 s Chapter 11 petition and would also 

remain intact should LOP formally reject its pre-petition retainer 

agreement with Abel under 11 u.s.c. § 365 (assumption and 

rejection of executory contracts). The court denied LDP 1 S 

objection to Abel's claim for hourly fees under the agreement for 

both pre- and post-petition work, reserving calculations for a 

later time. The court further held that in the event the retainer 

agreement was affirmed by LDP, Abel would also be entitled to 

recover a share of any PSO settlement under the retainer 1 s 

(contingency fee) terms, subject only to objections regarding 

excessiveness under 11 u.s.c. § 502(b)(4). Finally, however, the 

court held that should LDP reject the retainer agreement, Abel's 

recovery, if any, in this regard would be determined (i.e., 

3 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 3 
limited) by quantum meruit principles. Shortly thereafter, LDP 

rejected the retainer agreement and discharged Abel. 

In October of 1987, the PSO litigation settled. PSO paid LDP 

and FNB a sum in excess of its previous offer, unreduced by any 

fee owing to Abel. In return, LDP and FNB agreed to indemnify PSO 

should it be held liable to Abel for ignoring his attorney's lien. 

Abel has since filed suit against PSO in state court pursuant to 

Okla. Stat. tit. 5, §§ 6-9, to recover whatever portion of his fee 

remains unsatisfied in this Chapter 11 proceeding. The injunction 

issued against Abel with respect to this ancillary state court 

action will be taken up following our review of the disposition of 

Abel's claim for fees against LDP. 

The bankruptcy court's final order in this matter was entered 

on August 24, 1988. The court basically adhered to the analysis 

indicated in its preliminary rulings, approving some remaining 

hourly fees sought by Abel but rejecting his contingency fee claim 

to twenty-five percent of either the $3-million settlement offer 

he had obtained from PSO or the actual value of the settlement 

ultimately reached. The latter claim was essentially treated 

instead as a request for an enhancement over the (reduced) hourly 

fee already approved. The court considered the lodestar figure 

reasonable compensation for the services rendered and, 

accordingly, deemed enhancement inappropriate. On appeal, the 

district court concurred in the bankruptcy court's determination 

of Abel 1 S claim and affirmed. Because, as explained in detail 

below, the analytical process followed by the bankruptcy court 

contravened the controlling statutory provisions, we reverse. 

4 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 4 
Underlying the bankruptcy court's approach is the premise 

that the contingency portion of Abel's pre-petition fee contract 

did not survive rejection of the contract by LDP, leaving Abel 

nothing to stand on in this regard except equitable principles. 

But the legal rights and obligations created by the various 

provisions of a contract cannot simply be ignored upon rejection 

by the trustee of any remaining executory portion. On the 

contrary, under 11 u.s.c. § 365(g), the rejection of an executory 

contract "constitutes a breach of that contract" (emphasis added), 

for which damages ordinarily allowed in contract are available. 

See International Bhd. of Teamsters, Chauffeurs, Warehousemen & 

Helpers v. IML Freight, Inc., 789 F.2d 1460, 1463 (lOth Cir. 

1986); Leasing Serv. Corp. v. First Tenn. Bank Nat'l Ass'n, 826 

F.2d 434, 436 (6th Cir. 1987); In re Cochise College Park, Inc., 

703 F.2d 1339, 1351-53 (9th Cir. 1983); In re Murphy, 694 F.2d 

172, 174 (8th Cir. 1982). Since a pre-petition contingency fee 

agreement between the debtor and an attorney is, with one 

exception to be discussed shortly, "like any other contract claim 

against the estate," In re Yerrnakov, 718 F.2d 1465, 1470 (9th 

Cir. 1983), Abel was legally entitled to full contract damages 

rather than the court's discretionary award of an equitable fee. 

The source of allowable contract damages in this context, as 

in bankruptcy in general, is state law. See, e.g., In re Pacific 

Far E. Line, rnc ., 654 F.2d 664, 668-70 (9th Cir. 1981); see also 

In re Community Medical Center, 623 F.2d 864, 866 (3d Cir. 1980). 

See generally In re James E. O'Connell Co., 799 F.2d 1258 , 1260-61 

(9th Cir. 1986). In Oklahoma, contingency fee contracts of fifty 

5 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 5 
percent or less are valid and enforceable. See Okla. Stat. tit. 

5, § 7; see, e.g., State ex rel. Howard v. Oklahoma Corp. Comm'n, 

614 P.2d 45, 49 n.5 {Okla. 1980); Town of Mannford v. Watson, 394 

P.2d 506, 509 (Okla. 1964). More to the point, when a client 

circumvents such an agreement by settling litigation in a manner 

excluding counsel's participation, counsel may still recover his 

contractual contingency fee. See, e.g., Walker v. Telex Corg., 

583 P.2d 482, 484, 485 {Okla. 1978); Mayor v. Wilkerson, 111 P.2d 

1069, 1070-72 (Okla. 1941); Mathews v. Smith, 39 P.2d 48, 49, 53 

(Okla. 1934); Callahan v. Cowley & Riddle, 245 P. 48, 50 (Okla. 

1926). Indeed, as Abel has pointed out, even where circumstances 

beyond the client's control (counsel's death) precluded counsel's 

participation in the conclusion of settlement, contingency fee 

compensation was awarded,. as the reasonable value of counsel 1 S 

services, in City of Barnsdall v. Curnutt, 174 P.2d 596, 600 

(Okla. 1945). 

Considerable additional authority for Oklahoma's recognition 

of contingency fee damages in this context is supplied by 

appellees. They cite White v. American Law Book Co., 233 P. 426 

(Okla. 1924), as the source of Oklahoma's rule that an attorney 

discharged without fault by a client prior to final resolution of 

the subject matter of their relationship is entitled to his 

bargained-for compensation, "even though the agreement was for a 

contingency fee, provided the contingency has taken place." Id. 

at 427. Appellees consider this proposition favorable to them 

because they misread the final conditional phrase as "provided the 

contingency ha[.QJ taken place [prior to the discharge]... But if 

6 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 6 
the contingency must necessarily have occurred prior to the 

discharge for this particular rule to apply, the rule would be 

utterly superfluous--ordinary principles of contractual obligation 

would entitle the fully performing attorney to his fee. Moreover, 

the very case cited by White for the quoted proposition, Doloh v. 

Speckart, 186 P . 32 (Ore. 1920), specifically held that an 

attorney who procured a settlement offer (rejected by the client), 

and who was fired before the client obtained a favorable judgment 

with the assistance of other counsel, was nevertheless entitled to 

a contingency fee. Id. at 35. The same is true of Bartlett v. 

Odd Fellows' Sav . Bank, 21 P. 743, 744 (Cal. 1889), one of the 

"cases cited therein [in Dolph]" derivatively relied upon by 

White. See White, 233 P. at 427. Furthermore, despite appellees' 

attempt to distinguish the similar holding of Okmulgee Bldg. & 

Loan Ass'n v. Cutler, 51 P.2d 709 (Okla. 1935), on the basis of 

facts not relied upon by the court, 1 the case stands as a 

reaffirmation of the controlling principle already established in 

White: "Where an attorney is employed at an agreed [contingent] 

1 In Cutler, the plaintiff's allegations suggested that the 

mere commencement of foreclosure actions, accomplished by counsel 

before his discharge , was the operative condition triggering 

counsel's contingency fee, 51 P.2d at 709, which the court ordered 

paid. However, the evidence actually recounted by the court 

showed that counsel was retained ''to render certain services . . . including the foreclosure of mortgages (a matter not accomplished 

simply by commencing suit], and that his compensation for these 

services should be a sum equal to one-half of the attorney's fee 

provided for by the notes and mortgages upon which he filed suits 

for foreclosure," id. at 710. The "filed suits" language seized 

upon by appellees here evidently and quite reasonably was employed 

to identify which foreclosure actions counsel would be paid on, 

not to specify the (peculiarly premature) moment his contingency 

fees became due and owing. In any event, the distinction drawn by 

appellees was of no apparent concern to the court, which is the 

primary point made above. 

7 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 7 
compensation and fully performs his agreement until discharged 

without cause, the measure of his damages is the compensation 

named in the contract." (Emphasis added.) Id. at 710-11 (quoting 

White, 233 P. at 426 (second headnote of syllabus)). Finally, 

First Nat'l Bank & Trust Co. v. Bassett, 83 P.2d 837 (Okla. 

1938)(quantum meruit compensation sought by and awarded to 

attorney who had worked but secured no settlement offer on cases 

that were reduced to judgment by other counsel thirteen years 

after his discharge by client), is so factually remote that it is 

not of any analytical use here. 

In light of the foregoing authorities, we do not think 

Oklahoma has embraced or will embrace appellees' implausible view 

that a client whose attorney has already secured a favorable 

settlement offer can unilaterally reduce counsel's bargained for 

contingency fee to a (much smaller) hourly "quantum meruit" 

recovery simply by breaching their fee agreement before settling 

the litigation counsel had been employed on. 

That is not the end of the matter, however, since 11 u.s.c. 

§ 502(b)(4) places an outside "reasonable value" limitation on 

Abel's claim for breach of his fee contract with LDP. 2 While, as 

already noted, state law determines the available contract damages 

arising from breach of a legal services agreement for purposes of 

section 365(g), at the subsequent stage in the analysis mandated 

by section 502(b)(4) a federal standard should guide the court in 

2 Section 502(b)(4) 

objection "except to 

services of an insider 

exceeds the reasonable 

provides for the allowance of a claim over 

the extent that . . • if such claim is for 

or attorney of the debtor, such claim 

value of such services." 

8 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 8 
its judgment regarding the reasonableness of such damages in the 

context of bankruptcy. Cf. In re Hudson Shipbuilders, Inc., 794 

F.2d 1051, 1056-58 (5th Cir. 1986); In re 268 Ltd., 789 F.2d 674, 

675-77 (9th Cir. 1986). But~ In reMorse Tool, Inc., 87 Bankr. 

745, 748-50 (Bankr. D. Mass. 1988)(criticizing 268 Limited; state 

law controls). The cited cases involve determinations by the 

bankruptcy court under provisions authorizing the court's 

calculation of a reasonable fee in the first instance rather than 

its post facto assessment of the reasonablene ss of an already 

fixed fee, compare 11 U.S.C. § 330(a}(1) and§ 506(b) with section 

502(b)(4), but we see no reason to read the cap on allowed claims 

in section 502(b)(4) as peculiarly prescribing the incongruous and 

somewhat circular use of state attorney's fee standards to 

evaluate the bankruptcy appropriateness of claims already 

calculated in connection with the same state principles. 

To summarize, then, the analysis of Abel's claim should have 

proceeded through the following sequence: (1) Acknowledgment of 

LDP's breach of its hybrid hourly/contingency fee contract with 

Abel under section 365(g); (2) assessment of damages under 

applicable Oklahoma law, which would allow not only for the unpaid 

hourly fees but also for loss of the supplementary contingency 

fee; (3) determination, under section 502(b)(4) and attendant 

federal bankruptcy standards, of the reasonableness of the damages 

claim afforded Abel by state law; and (4) reduction of Abel's 

claim by whatever extent, if any, it is deemed excessive. Instead 

of adhering to this model, the bankruptcy court apparently misread 

the effect of section 365(g) on the contingency provision, 

9 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 9 
consequently bypassed the succeeding steps in the analysis, and 

simply determined for itself in the first instance a reasonable 

hourly fee for Abel under the traditional lodestar method. At 

this point, though, one might wonder what is the difference--did 

not the bankruptcy court merely save some time by asking the 

dispositive reasonableness question up front? There is a critical 

difference, however, and it rests on the nature of the 

reasonableness question asked under the two approaches. 

The analytical shortcut taken by the bankruptcy court would 

be permissible if under federal law there were only one reasonable 

fee for any given case. Pursuant to such an assumption, the 

question of whether any fee permitted by state law was (federally) 

reasonable would simply collapse into the question, asked and 

answered by the bankruptcy court, of what is the reasonable fee 

for the services rendered. For those otherwise unable to afford 

representation, however, the matter of funding legal 

representation is not so restrictive. Contingency agreements and 

their hybrid offspring provide reasonable alternatives to the 

hourly retainer, despite the fact that, as a result of their 

contingent and therefore risky nature, such agreements typically 

generate fees (if at all) substantially in excess of their more 

conservative counterparts. 3 Thus, in other settings where the 

3 A vivid illustration of this point may be found in Venegas v. 

Skaggs, 867 F.2d 527 (9th Cir. 1989), aff'd, 110 s. Ct. 1679 

(1990). In that case, a $406,000 contingency fee was enforced in 

favor of plaintiff's counsel even though the corresponding fee 

recovered by plaintiff from defendants under 42 u.s.c. § 1988 was 

only $75,000. Significantly, the Ninth Circuit and the Supreme 

Court both flatly rejected plaintiff's argument that, because of 

its gross (fivefold) discrepancy from the lodestar-based fee 

(continued on next page) 

10 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 10 
bankruptcy court has ignored a debtor's reasonable contingency fee 

obligation and, instead, substituted its own determination of a 

(much lower) reasonable hourly fee, appellate courts have reversed 

and d i rected payment in accordance with the terms of the 

contingency fee agreement. See, e.g., Bost on & Maine Corp. v. 

Sheehan, Phinney, Bass & Green, P.A., 778 F.2d 890, 894-99 (1st 

Cir. 1985); In re Innkeepers of New Castle , I nc., 671 F.2d 221, 

227-30 (7th Cir.), cert. denied, 459 u.s. 908 (1982). 

In short, then, the bankruptcy court asked and answered the 

wrong reasonableness question (not the right question at the wrong 

time), and its divergence from the statutorily prescribed analysis 

may well have cost Abel the benefi t of his contingency fee 

b . 4 arga.1.n. While - appellate courts generally defer to fee 

determinations by the bankruptcy court, s ee, e.g., Boston & Maine, 

778 F.2d at 894; In re Nucorp Energy, Inc., 764 F.2d 655, 657 (9th 

Cir. 1985), the error identified here involves misapplication of 

statutory provisions, i.e., is one of law, and therefore warrants 

de novo correction even under the otherwise deferential 

authorities cited. See also Bartmann v. Maverick Tube Corp., 853 

F.2d 1540, 1543 (lOth Cir. 1988)(appellate review of legal 

(continued from previous page) 

deemed reasonable with respect to the same services under section 

1988, the contingency fee was excessive. Instead, consistent with 

what we have said above, the cour ts held the much higher 

contingency fee reasonable because it reflected the risk of 

nonrecovery assumed by plaintiff's counsel (and likewise assumed, 

albeit onl y to a partial extent, by Abel here). See id. at 

528-29, 534, aff'd, 110 s. Ct. at 1684. 

4 We say "may well," because we do not foreclose the 

possibility that the bankruptcy court properly could deprive Abel 

of the same benefit under section 502(b)(4) through adherence to 

the prescribed statutory procedure. 

11 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 11 
questions in bankruptcy is de novo); In re Aslan, 909 F.2d 367, 

370 (9th Cir. 1990)(deter.minations concerning the ef=ect of 

contract rejection under section 365 are conclusions of law 

subject to de novo review). Accordingly, we reverse the 

bankruptcy court's direct assessment of a reasonable fee for 

Abel's pre-petition services and remand for a determination of 

Abel's contract damages subject to the ceiling imposed by section 

502(b)(4). 

We turn now to the injunctive relief granted at appellees' 

request against Abel. As noted earlier, and candidly admitted by 

Abel, he has filed a state attorney's lien action against PSO 

under Okla. Stat. tit. 5, §§ 6-9 ·to protect the same 

settlement-fee entitlement ·claimed herein from LDP. There is 

nothing necessarily duplicitous in pursuing such redundant 

remedies. Oklahoma law recognizes the concurrent liability of the 

nonpaying client under common law and the settling adverse party 

under statute in the present context. See Callahan, 245 P. at 

49-50. While these two causes of action may be joined, ~ Mayor, 

111 P.2d at 1070-71, and payment by either defendant in full 

satisfaction of the obligation obviously bars (double) recovery 

against the other, see Callahan, 245 P. at SO, nothing precludes 

assertion of these claims in different legal proceedings. 

The bankruptcy court permanently enjoined Abel from further 

prosecution of his state action against PSO, conditioned only on 

timely payment of the diminished fee claim allowed against LDP. 

The court had to rely upon its broad equitable power under 11 

U.S.C. § 105(a) ("The court may issue any order, process, or 

12 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 12 
judgment that is necessary or appropriate to carry out the 

provisions of (the Bankruptcy Code]") as the source of i ts 

authority to issue the injunction, because LDP was not a party to 

the state action, see 11 U.S.C. § 362(a)(l) (automatic stay of 

proceedings "against the debtor"), LOP's property also was not 

involved, ~ 11 U.S.C. 362 (a)(3) (automatic stay of "any act to 

obtain possession of property of the estate or of property f rom 

the estate or to exercise control over property of the estate "), 

and the injunction was expressly intended to continue in effect 

following conclusion of the bankruptcy proceeding, ~ 11 u.s.c. 

362(c) (automatic stay expires when case is closed, proceeding is 

dismissed, or 

determi ne the 

a discharge is granted or denied). 

pe rmissibility of this exercise 

we must first 

of equitabl e 

authority as it relates to the temporary, interim protection of 

the reorganization process, before moving on to consider the less 

immediate but more important question regarding the validity of 

its contemplated post-confirmation, permanent enforcement. 

It is hornbook law that "(a]ctions and conduct excepted from 

the automatic stay may be subject to specific injunctive relief 

under§ 105(a)." 2 Collier on Bankruptcy par. 105.02 at 105-6 

(15th ed. 1990). Collier observes that "[s]ection lOS(a) has been 

widely utilized in attempts to enjoin court proceedings against 

nondebtor parties that allegedly will have an impact on the 

debtor's bankruptcy case," and comments that such attempts require 

"case by case decisions as to whether any particular action 

excepted from the automatic st ay will result in sufficient harm or 

13 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 13 
interference with the bankruptcy case to warrant the issuance of a 

specific injunction." Id. at 105-7 to -9. 

The Fourth Circuit has evolved a fairly well-developed 

approach to section 105(a) stays requested by debtors seeking to 

restrain extra-bankruptcy actions against third parties on the 

ground that the bankruptcy process will somehow be burdened or 

impaired as a consequence thereof. Under this approach, such 

factors as a unity of interest between the debtor and the 

threatened third party, an indemnification obligation owing from 

the former to the latter, or simply the debtor's inevitable, 

burdensome involvement in the ancillary litigation can justify 

preemptive injunctive relief. See, e.g., In re A.H. Robbins Co., 

828 F.2d 1023, 1025-26 (4th Cir. 1987), cert. denied, 485 u.s. 969 

(1988)~ A.H. Robbins Co. v. Piccinin, 788 F.2d 994, 999-1002 (4th 

Cir.), cert. denied, 479 U.S. 876 (1986). Some other circuits 

have indicated or implied basic agreement with the Fourth 

Circuit's approach, while noting certain case-specific 

reservations. See, e.g., In re American Hardwoods, Inc., 885 F.2d 

621, 622-23, 624-27 (9th Cir. 1989)~ Dennis v. A.H. Robbins Co., 

860 F.2d 871, 872-73 (8th Cir. 1988). But see Lynch v. 

Johns-Manville Sales Corp., 710 F.2d 1194, 1196-1200 (6th Cir. 

1983)(pre-Piccinin case denying stay under similar circumstances 

despite recognition that claims for indemnification and 

contribution against debtor could arise out of nonstayed 

litigation). Still other courts have cited section 105(a) and 

similarly recognized its 

alternative or supplemental 

broad protective purpose as an 

rationale when staying litigation 

14 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 14 
against a debtor's liability insurer primarily under section 

362(a)(3) (the insurance policy being considered the requisite 

"property of the estate" for invocation of the latter, more 

specific statutory authority). See , e .g. , MacArthur Co. v. 

Johns-Manville Corp., 837 F.2d 89, 93-94 (2d Cir.), cert. denied, 

488 u.s. 868 (1988); In re Davis, 730 F.2d 176, 183-84 (5th Cir. 

1984) . 

Appellees argue 

sufficient to justify 

that 

the 

LOP's agreement to indemnify PSO is 

stay issued below. However, LOP's 

obligation in this regard is not exclusive or complete. The 

parties' settlement agreement actually requires FNB to reimburse 

PSO for sixty percent of any recovery Abel obtains in the state 

suit. The authorities discussed above do not support the issuance 

of an injunction with respect to state proceedi ngs brought against 

a nondebtor who simply may seek indemnification from yet another 

nondebtor. 

Accordingly, while a temporary injunction against Abel's 

pursuit of PSO funds subject to indemnification by LDP may be 

warranted during pendency of this bankruptcy proceeding, this 

relief should not extend to litigation over sums for which PSO may 

look to FNB for reimbursement. Whatever minor involvement, if 

any, LDP might have in such an isolated, limited context is not 

the kind of substantial burden sufficient to justify a stay 

against Abel's enforcement of his statutory rights against PSO. 

Cf. In re A.H. Robbins Co., 828 F.2d at 1026; See generally 

Dennis, 860 F.2d at 872-73. 

15 

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In addition to relieving the perceived burden on LDP, the 

bankruptcy court granted the stay to prevent Abel from getting a 

"second bite at the apple 11 on his fees entitlement, which the 

court concluded "would be in derogation of this court's 

determination in this regard [and] would undermine the policies 

and provisions of the Bankruptcy Code permitting and requiring the 

determination of such issues by this court. . " Bankruptcy 

Court Order Filed August 24, 1988, at 18 (R. Vol. 2, Doc. 68). 

However, Abel's pursuit of the balance of his unpaid contingency 

fee under his statutory lien against PSO should not in any way 

undercut or involve a redetermination of the bankruptcy court's 

decision to limit Abel's allowed claim against the debtor unde.r 

section 502(b)(4), a matter that is plainly beyond the bounds of 

state court authority or concern. Consequently, the only viable 

justification for the temporary injunction rests on the need to 

protect LDP during preparation and confirmation of a 

reorganization plan and, as we have seen, this rationale is 

limited to that portion of Abel's potential recovery from PSO for 

which LDP may be held responsible. 

The second and more serious problem with the injunction is 

its explicitly permanent nature. The injunction was not issued 

merely to limit and simplify the legal entanglements of the debtor 

during development and evaluation of a reorganization plan, but 

also clearly to control in perpetuity the post-confirmation status 

of Abel's claim against PSO. By permanently enjoining Abel's 

action against PSO, the bankruptcy court, in essence, discharged 

PSO's liability to Abel under state lien law as effectively as it 

16 

Appellate Case: 89-6277 Document: 01019615777 Date Filed: 12/28/1990 Page: 16 
discharged LOP's contractual debt to Abel under federal bankruptcy 

law. For the reasons that follow, we hold such a permanent 

injunction precluding Abel's attempt to recover any unpaid portion 

of his fee from PSO to be improper, regardless of who has agreed 

to indemnify PSO. The significance of LDP's partial obligation in 

this regard is limited solely to the question of the bankruptcy 

court's authority to issue a temporary injunction against Abel to 

protect the debtor and the bankruptcy process until confirmation 

of a reorganization plan--after which LOP's obligation will be 

discharged and LDP protected by the nfresh start" injunctive 

provision of 11 u.s.c. § 524(a), which basically prevents anyone 

from pursuing the debtor on a discharged debt, including third 

parties such as PSO who may seek reimbursement from the debtor 

through indemnification, contribution, subrogation, etc., for 

their satisfaction of the same debt. 5 

While section 524(a) thus affords broad benefits to the 

debtor, "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). Obviously, it is the 

debtor, who has invoked and submitted to the bankruptcy process, 

that is entitled to its protections; Congress did not intend to 

5 See, e.g., In re Harris, 85 Bankr. 858, 863 n.7 and 

accompanying text (Bankr. D. Colo. 1988); In re Constantino, 80 

Bankr. 865, 866-70 {Bankr. N.D. Ohio 1987); In re Rentas, 80 

Bankr. 25, -26 (Bankr. S.D.N.Y. 1987)(though violat ion of section 

524(a) deemed nonwillful for purposes of contempt sanctions); In 

re Santos, 24 Bankr. 688, 689-91 (Bankr. D. R.I. 1982). See 

generally L.F. Rothschild & Co. v. Angier, 84 Bankr. 274, 276-77 

(D . Mass. 1988)(citing numerous cases for ~ppl ication of discharge 

injunction [section 524(a)] and automatic stay [section 362(a)] to 

various claims for indemnification and contribution arising out of 

debtors' pre-petition conduct). 

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extend such benefits to third-party bystanders. See 3 Collier on 

Bankruptcy par. 524.01[3] at 524-16 (1st ed. 1990)(citing S. Rep. 

No. 989, 95th Cong., 2d Sess. 80-81, reprinted in 1978 U.S. Code 

Cong. & Admin. News 5787, 5866-67)~ see also In re Bracy, 449 

F. Supp. 70, 71 (D. Mont. 1978)("it is the policy of the law to 

discharge the bankrupt but not to release from liability those who 

are liable with him"). "What is important to keep in mind is that 

a discharge in bankruptcy does not extinguish the debt itself but 

merely releases the debtor from personal liability The 

debt still exists, however, and can be collected from any other 

entity that may be liable." In re Lembke, 93 Bankr. 701, 702 

(Bankr. D. N.D. 1988). The courts have reconfirmed this basic 

principle in case after case permitting creditors whose claims 

have been discharged vis-a-vis the bankrupt to recover on the same 

claims from third parties in a variety of settings. 6 

At oral argument, counsel for appellees maintained that 

confirmation of LDP's reorganization plan would somehow bind Abel 

to refrain from pursuing his independent statutory lien claim 

against PSO. The Code and case law plainly belie this position. 

Under 11 u.s.c. § 1141(a), "the provisions of a confirmed plan 

6 See, e.g., United States v. Anderson, 366 F.2d 569, 571 (lOth 

Cir. 1966}(suit against debtor's guarantor); In re Jet Florida 

Sys., Inc., 883 F.2d 970, 973 (11th Cir. 1989)(suit against 

debtor's insurance carrier); In re Sandy Ridge Dev. Corp., 881 

F.2d 1346, 1351 (5th Cir. 1989)(suit against debtor's guarantor); 

In re Pappas, 106 Bankr. 268, 270-71 (D. Wyo. 1989)(suit against 

debtor's insurance carrier); United States v. Quinones, 36 Bankr. 

77, 79 (D.P.R. 1983)(suit against comaker of note); United States 

v. Hass, 152 F. Supp. 715, 716 (E.D.N.Y 1957){same); In re Passe, 

40 Bankr. 198, 199-200 (Bankr. D. Colo. 1984)(suit against state 

"Recovery Fund" established for satisfaction of judgments 

recovered against bankrupt real estate brokers and salesmen). 

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bind the debtor . and any creditor, 11 but, consistent with the 

above discussion of sections 524(a) and 524(e), "the confirmation 

of a plan • • . discharges the debtor [not anyone else] from any 

debt that arose before the date of such confirmation [such as that 

owed Abel under section 365(g)]." 11 U.S.C. § 114l(d)(l)(A) 

(emphasis added). See United States v. Stribling Flying Serv., 

Inc., 734 F.2d 221, 223 (5th Cir. 1984). Neither the confirmation 

of a plan nor the creditor's recovery (of partial satisfaction) 

thereunder bars litigation against third parties for the remainder 

of the discharged debt. Id. at 223; Union Carbide Corp. v. 

Newboles, 686 F.2d 593, 595 (7th Cir. 1982); see, e.g., In re Jet 

Florida Sys., Inc., 883 F.2d at 972-73; In re Sandy Ridge Dev. 

Corp., 881 F.2d at 1350-51·; Beconta, Inc. v. Schneider, 41 Bankr. 

878, 879-80 (E.D. Mich. 1984). 7 The same holds true specifically 

where, as here, the creditor's bankruptcy claim is based on an 

executory contract that is both rejected under section 365(a) and 

subject to limitation in amount by the bankruptcy court pursuant 

to section 502(b). See In re Modern Textile, Inc., 900 F.2d 1184, 

1191-92 (8th Cir. 1990)(trustee's rejection of sublease under 

section 365(a) did not extinguish debtor's unpaid obligation 

thereon, and cap imposed by section 502(b){6) on sublessor's 

resulting breach of contract claim against debtor did not cut off 

7 Indeed, in keeping with the narrow breadth of section 524(a) 

and the mandate of section§ 524(e), the fact that the debtor may 

be involved in the ensuing litigation, even named as a defendant 

where necessary to enable recovery against a codefendant (such as 

a liability insurer) , does not permit invocation of section 524(a) 

to preclude a creditor's post-bankruptcy pursuit of a discharged 

claim against a third party. See, e.g., In re Jet Florida Sys., 

Inc. , 883 F.2d at 973; In re Pappas, 106 Bankr. at 270-71; In re 

Fasse, 40 Bankr. 198, 200 (Bankr. D. Colo. 1984). 

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sublessor 1 s right to recover balance of the obligation from 

debtor's guarantor). 

All of the principles discussed above are pertinent to the 

availability of special injunctive relief pursuant to section 

105(a), since a bankruptcy court's supplementary equitable powers 

thereunder may not be exercised in a manner that is inconsistent 

with the other, more specific provisions of the Code. See 

Official Committee of Equity Sec. Holders v. Mabey, 832 F.2d 299, 

302 (4th Cir. 1987), cert. denied, 485 U.S. 962 (1988); In re 

Golden Plan of Cal., Inc., 829 F.2d 705, 713 (9th Cir. 1986); 

Johnson v. First Nat 1 l Bank, 719 F.2d 270, 273 (8th Cir. 1983), 

cert. denied, 465 u.s. 1012 (1984). See generally Norwest Bank 

Worthington v. Ahlers, 485 u.s. 197, 206 (1988)("whatever 

equitable powers remain in the bankruptcy courts must and can only 

be exercised within the confines of the Bankruptcy Code"). 

Accordingly, we follow the Ninth Circuit's lead in In re American 

Hardwoods, Inc., 885 F.2d 621 and hold that while a temporary stay 

prohibiting a creditor's suit against a nondebtor (in American 

Hardwoods, the bankrupt's guarantor) 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) outlined above, 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. See id. at 625; see also In re Rohnert Park Auto Parts, 

Inc., 113 Bankr. 610, 615-17 (9th Cir. BAP 1990)(following 

American Hardwoods). Not only does such a permanent injunction 

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improperly insulate nondebtors in violation of section 524(e), it 

does so without any countervailing justification of debtor 

protection--as discussed earlier, the discharge injunction 

provided for in section 524(a) already frees the debtor from 

potential derivative claims, such as indemnification or 

subrogation, that might arise from the creditor's 

post-confirmation attempts to recover the discharged debt from 

others. 

To sum up, the bankruptcy court's determination of Abel's 

contract claim for pre-petition fees is REVERSED and the cause is 

REMANDED for reconsideration in light of the principles set out 

herein. The injunction issued against Abel is AFFIRMED only 

insofar as it temporarily precludes, during the pendency of this 

bankruptcy proceeding, the pursuit of fees that are subject to 

indemnification by LDP; in all other respects the injunction is 

VACATED. 

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