Opinion ID: 785878
Heading Depth: 3
Heading Rank: 2

Heading: Application of the collateral attack doctrine

Text: 18 The district court held that Plaintiffs' suit filed in the Western District of Kentucky was an impermissible collateral attack on the bankruptcy court's Confirmation Order. Pratt, 273 B.R. at 116. A collateral attack is a tactic whereby a party seeks to circumvent an earlier ruling of one court by filing a subsequent action in another court. Id. at 114 (citing Willy v. Coastal Corp., 503 U.S. 131, 137, 112 S.Ct. 1076, 117 L.Ed.2d 280 (1992)). As applied to the present case, the district court below believed that Plaintiffs' suit against Ventas in Kentucky was an improper attempt to circumvent the Delaware bankruptcy court's Confirmation Order that enjoined Plaintiffs from pursuing their claims against Ventas. 19 The district court found that the Supreme Court's decision in Celotex Corp. v. Edwards, 514 U.S. 300, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995), controlled the disposition of Plaintiffs' action. In Celotex, Bennie and Joann Edwards won a judgment against Celotex in the District Court for the Northern District of Texas for asbestos-related injuries. Celotex posted a supersedeas bond to stay the execution of the judgment pending its appeal to the Fifth Circuit. Northbrook Property and Casualty Insurance Company served as surety on the bond. The Fifth Circuit affirmed the judgment for the Edwardses, but, on that very day, Celotex filed a Chapter 11 petition for reorganization in the Bankruptcy Court for the Middle District of Florida. An injunction was issued by the bankruptcy court, pursuant to 11 U.S.C. § 105(a), which stayed all actions against Celotex. The district court in Texas nevertheless permitted the Edwardses to enforce the bond against Northbrook. Although the Fifth Circuit affirmed the district court's decision, it was subsequently reversed by the Supreme Court. 20 Because the Supreme Court concluded that the district court's action would seriously undercut[] the orderly process of the law, id. at 313, 115 S.Ct. 1493 it held that the Edwardses would not be permitted to collaterally attack the Florida bankruptcy court's § 105 injunction in the federal courts in Texas. The Court reasoned: 21 It is for the court of first instance to determine the question of the validity of the law, and until its decision is reversed for error by orderly review, either by itself or by a higher court, its orders based on its decision are to be respected. If respondents believed the Section 105 Injunction was improper, they should have challenged it in the Bankruptcy Court, like other similarly situated bonded judgment creditors have done. If dissatisfied with the Bankruptcy Court's ultimate decision, respondents can appeal to the district court for the judicial district in which the bankruptcy judge is serving, see 28 U.S.C. § 158(a), and then to the Court of Appeals for the Eleventh Circuit, see § 158(d). 22 Celotex, 514 U.S. at 313, 115 S.Ct. 1493 (quotation marks and citation omitted). 23 In the present case, the district court found that Celotex was controlling, reasoning as follows: 24 Like the claimants in [ Celotex ], Plaintiffs ... assert that the Bankruptcy Court exceeded its jurisdictional bounds by enjoining post-confirmation suits against a non-debtor third-party for its pre-confirmation action. Celotex reaffirmed the rule that such a challenge cannot be sustained.... 25 . . . 26 [I]f the Confirmation Order was issued in error — whether the result of either fraud or lack of jurisdiction — it remains the responsibility of the Delaware Bankruptcy Court, Delaware District Court, and, if necessary, the Third Circuit, to effect any necessary corrections. 27 Pratt, 273 B.R. at 116 (emphasis added). In Celotex, the Supreme Court reaffirmed 28 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 the order.' 29 514 U.S. at 306, 115 S.Ct. 1493 (quoting GTE Sylvania, Inc. v. Consumers Union, 445 U.S. 375, 386, 100 S.Ct. 1194, 63 L.Ed.2d 467 (1980)) (emphasis added). The bankruptcy court's injunction in Celotex, therefore, was to be honored only if it was acting with jurisdiction. Accordingly, the Celotex court examined whether the Florida bankruptcy court had jurisdiction to enjoin the Edwardses from proceeding against the third-party surety. The Court ultimately held that the Edwardses' action fell within the bankruptcy court's jurisdiction to adjudicate matters that are related to a case under Title 11. Id. at 310, 115 S.Ct. 1493; see 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a). Because the Court found that the bankruptcy court did have jurisdiction, the Edwardses were barred from collaterally attacking the Florida bankruptcy court's injunction in the federal courts of Texas. 30 The district court in the present case, by contrast, expressly decline[d] to consider whether the Bankruptcy Court exceeded its statutory authority in granting injunctive relief to Defendants. Pratt, 273 B.R. at 116. As excerpted above, the district court stated that it was the responsibility of the Delaware bankruptcy court, the Delaware district court, and the Third Circuit to correct any jurisdictional errors. Id. The district court's reliance on Celotex for the proposition that litigants must go through the proper channels of the statutorily-defined appellate process, id. at 116, to challenge a bankruptcy court's judgment was perfectly appropriate. But the district court should not have dismissed the Plaintiffs' case under the collateral attack doctrine without first determining that the Delaware bankruptcy court in fact had jurisdiction to enter the Confirmation Order. Its failure to do so, however, is harmless in light of the Plaintiffs subsequent return to the bankruptcy court for the very purpose of challenging that court's authority to grant Ventas a full release from their claims.