Equitable Powers of a Bankruptcy Court Federal All Writs Act and 105 of the Code Part I

Journal Issue

Jun 2006

Column Name

Code to Code

Citation

ABI Journal, Vol. XXV, No. 5, p. 38, June 2006

Bankruptcy Code

105

Topic Tags

Venue/Jurisdiction

Journal HTML Content

In Official Committee of Asbestos Claimants of G-I Holdings Inc. v. Building
Materials Corporation of America (In re G-I Holdings Inc.), 327 B.R.
730 (Bankr. D. N.J. 2005), the U.S. Bankruptcy Court for the District of New
Jersey had the rare opportunity to explore and address the intersection between
two federal provisions arguably conferring equitable powers upon bankruptcy
courts, namely, the federal "All Writs Act," 28 U.S.C. §§1651
and 105 of the Bankruptcy Code. It is traditionally understood that bankruptcy
courts, as courts of equity, have "broad authority" to accomplish
the overriding goals of bankruptcy law and to oversee the proper functioning
of the Code, including the ability to modify the relationships between debtors
and creditors.1 Without question, parties to a bankruptcy proceeding
often rely on §105(a) of the Code "as a means of enlisting the aid
of judicial authority whenever the Bankruptcy Code does not expressly address
a particular situation."2 While disagreement exists generally
with respect to the extent of the powers conferred upon a bankruptcy court by
virtue of §105, bankruptcy courts have nonetheless utilized this section
to craft an "enormous array of orders."3 Perhaps the most
widespread use of §105 has been in the area of injunctive relief in situations
such as an extension of the automatic stay to nondebtor parties, the substantive
consolidation of separate business entities, and the direction for third parties
to either affirmatively act or refrain from taking a prescribed course of action.
However, by its very terms, §105(a) limits a bankruptcy court's equitable
powers, which must and can only be exercised within the confines of the Bankruptcy
Code.4 Section 105 does not authorize a bankruptcy court to create substantive
rights "that are otherwise unavailable under applicable law," and
the provision does not grant a bankruptcy court a "roving commission to
do equity."5 Stated slightly differently, the equitable power conferred
on the bankruptcy court by §105(a) is the power to exercise equity in carrying
out the provisions of the Code, rather than to further the purposes of the Code
generally or "otherwise to do the right thing."6 In light of this
limitation, a bankruptcy court may be called upon to exercise its equitable
powers but find itself powerless to act if the requested remedy cannot be tied
to a specific provision of the Code.

Thus, the question arises as to whether a bankruptcy court can invoke its equitable
powers from any other source.7 28 U.S.C. §1651. The All Writs
Act is the historic precursor to §105 of the Code and provides as follows:
"The Supreme Court and all courts established by Act of Congress may issue
all writs necessary or appropriate in aid of their respective jurisdictions
and agreeable to the usages and principles of law."8 In In
re G-I Holdings Inc., the official committee of asbestos claimants of G-I
Holdings, suing on behalf of the chapter 11 estate of G-I Holdings, filed a
motion against a nondebtor, indirect subsidiary of G-I Holdings seeking to prevent
the subsidiary from paying regularly scheduled debt instruments owed to other
nondebtor parties. The committee premised its injunctive relief upon §105
of the Code and the All Writs Act. Consequently, the U.S. Bankruptcy Court for
the District of New Jersey was called upon to address the scope of the All Writs
Act in relation to the equitable power of a bankruptcy court under §105
of the Code.
Utilizing the In re G-I Holdings Inc. decision as a framework for how
such a contest between §105 and the All Writs Act might arise, this article
explores whether a bankruptcy court has the power to craft equitable relief
under the All Writs Act independent of §105, and if so, in what manner
and to what extent the All Writs Act can be used by a bankruptcy court today
to fashion equitable relief.
Background of In re G-I Holdings Inc.
On Jan. 5, 2001, G-I Holdings filed a voluntary chapter 11 petition. G-I Holdings
is the successor-in-interest to GAF Corp., an entity named in approximately
500,000 asbestos actions prior to merging into G-I Holdings.9 G-I Holdings remains
potentially liable for approximately 150,000 asbestos lawsuits filed, but unresolved,
as of the petition date and for unknown numbers of asbestos claims that will
be filed in the future.10 Building Materials Corp. of America (BMCA) is an indirect
subsidiary of G-I Holdings and is also the primary operating subsidiary and
principal asset of G-I Holdings.11 BMCA is not a debtor in any bankruptcy proceeding.
Established in 1994, BMCA received substantially all the assets of GAF's roofing
products business and expressly assumed $204 million of asbestos liability with
G-I Holdings indemnifying BMCA against any additional asbestos liability.12
Despite the fact that BMCA claims to have never manufactured any products containing
asbestos, the company has been named as an additional defendant in more than
1,000 asbestos bodily injury lawsuits against GAF since September 2000.13 Simply
stated, the claims against BMCA are premised on theories of successor liability
or alter ego status.14

Several days after filing for chapter 11 relief, G-I Holdings moved pursuant
to §105(a) of the Code seeking a preliminary injunction prohibiting the
filing or prosecution of present and future asbestos claims against BMCA, pending
confirmation of a plan of reorganization for G-I Holdings or the issuance of
a declaratory judgment as to whether BMCA bears successor liability or alter
ego liability for asbestos claims.15 According to G-I Holdings, an injunction
was necessary to protect the value of the estate, because otherwise BMCA would
itself be forced into bankruptcy.16
The U.S. Bankruptcy Court for the District of New Jersey granted the relief
requested by G-I Holdings and entered a preliminary injunction enjoining any
asbestos claimants from prosecuting pending actions and future actions against
either G-I Holdings or BMCA.17 Moreover, the preliminary injunction
order permitted BMCA to continue to operate its business in the ordinary course
as a nondebtor, but required BMCA to make certain disclosures to the official
committee of asbestos claimants with respect to its operations and financing,
and prohibited BMCA from engaging in certain specified transactions without
first providing 30-days' notice to the committee.18 Significantly,
the transactions subject to this notice requirement included the refinancing
or replacement of BMCA's then-existing credit facility, as well as the making
of any pre-payments on BMCA's outstanding public notes.19
In accordance with the terms of the preliminary injunction order, G-I Holdings
subsequently alerted the committee of its intent to issue approximately $150
million of new senior secured notes.20 The proceeds generated from the issuance
of these notes would be used to redeem outstanding senior notes with higher
interest rates.21 In response to G-I Holdings's proposal to issue new notes,
the committee filed a motion requesting that the preliminary injunction order
be modified in order to permit the committee to commence an adversary proceeding
as the representative of G-I Holdings' bankruptcy estate for the purposes of
(1) avoiding and recovering the transfer of GAF Corp.'s roofing business to
BMCA, (2) avoiding certain liens imposed on the assets of the roofing business
in connection with a previous refinancing, and (3) avoiding and recovering payments
made under color of those liens after the filing of G-I Holdings's bankruptcy
case.22 The committee proposed to challenge the transfer of the business as
a fraudulent transfer under state law pursuant to §544(b) of the Code,
suing BMCA as the initial transferee under §550(a)(1) of the Code and joining
the syndicate of banks and the outstanding noteholders as mediate or immediate
transferees under §550(a)(2) of the Code.23 The bankruptcy court granted
the committee's motion and permitted it to file the proposed adversary proceeding
against BMCA and its outstanding noteholders.24

Subsequent to the filing of its adversary proceeding, the committee filed a
motion seeking the entry of an order pursuant to §105(a) of the Code directing
that BMCA pay into escrow $150 million due to be paid in the near future to
certain holders of notes issued by BMCA.25 According to the committee, the looming
repayment of $150 million to certain of the noteholders threatened the bankruptcy
court's jurisdiction by rendering the estate's claims against them in the adversary
proceeding moot before the court had the opportunity to adjudicate the merits
of those claims.26 The committee maintained as follows:
<blockquote>
The looming repayment of $150 million in principal to the... [n]oteholders
threatens to impair the court's jurisdiction by rendering the estate's claims
against them moot before the court can adjudicate the merits of those claims.
Fortunately, §105(a), the "All Writs" provision of the Bankruptcy
Code, authorizes the court to take any action necessary or appropriate to
preserve the G-I [Holdings] estate's avoidance claims and to protect the court's
own effective jurisdiction over this matter. In order to preserve the court's
jurisdiction and to maintain the status quo, it is imperative that this court
order that the $150 million in principal payments...be held in escrow pending
final adjudication of the merits of the claims asserted herein. 
Section 105(a) of Title 11 is the "All Writs" provision of the
Bankruptcy Code. It serves the same functions in bankruptcy cases that §1651
of the Judicial Code plays in civil litigation outside of bankruptcy. Under
its "All Writs" powers, this court "may issue any order, process
or judgment that is necessary or appropriate to carry out the provisions of"
the Bankruptcy Code. Another recognized function of "All Writs"
jurisdiction, both in and out of the bankruptcy context, is to protect the
effective jurisdiction of the courts by preventing matters that come before
them from becoming moot before judgment can be rendered on the merits. Here,
these proper uses of §105(a) combine to give this court ample authority
to enjoin the payment and redemption of BMCA's outstanding ...notes, to preserve
the estate's interest in claims and causes of action against the...noteholders,
and to safeguard the jurisdiction of this court over this adversary proceeding.27

</blockquote>
Consequently, the argument raised by the committee in support of its motion
for injunctive relief summoned the court to address the intersection between
the All Writs Act and §105 of the Code.

The Federal All Writs Act 
As previously noted, the All Writs Act provides as follows: "The Supreme
Court and all courts established by Act of Congress may issue all writs necessary
or appropriate in aid of their respective jurisdictions and agreeable to the
usages and principles of law."28 The All Writs Act "invests a court
with a power that is essentially equitable and, as such, not generally available
to provide alternatives to other, adequate remedies at law.29 The basic purpose
of §1651(a) is to assure the various federal courts the power to issue
appropriate writs and orders of an auxiliary nature in aid of their respective
jurisdictions as conferred by other provisions of law.30 Despite the express
language "in aid of...jurisdictions" contained within the statute,
the All Writs Act empowers federal courts to issue injunctions or other orders
to protect or effectuate their judgments.31 In permitting the federal courts
to protect "their respective jurisdictions," the All Writs Act enables
them "to safeguard not only ongoing proceedings, but potential future proceedings,
as well as already-issued orders and judgments."32

The All Writs Act does not create any substantive federal jurisdiction. Rather,
"it is a codification of the federal courts' traditional, inherent power
to protect the jurisdiction they already have, derived from some other source."33
As contemplated by the U.S. Supreme Court in Pennsylvania Bureau of Correction
v. United States Marshals Service,34 the All Writs Act "is
a residual source of authority to issue writs that are not otherwise covered
by statute. Where a statute specifically addresses the particular issue at hand,
it is that authority, and not the All Writs Act, that is controlling."35
Moreover, while the All Writs Act empowers federal courts to "fashion extraordinary
remedies when the need arises, it does not authorize them to issue ad hoc
writs whenever compliance with statutory procedures appears inconvenient or
less appropriate."36 Notably, writs issued pursuant to the All
Writs Act may be directed to not only the immediate parties to a proceeding,
but to "'persons who, though not parties to the original action or engaged
in wrongdoing, are in a position to frustrate the implementation of a court
order or the proper administration of justice, and...even those who have not
taken any affirmative action to hinder justice.'"37 The power
conferred upon federal courts by operation of §1651(a) may be granted or
withheld in the sound discretion of the court.38 Further, application
of the All Writs Act "is entirely permissive in nature; it in no way mandates
a particular result or the entry of a particular order."39 The
authority granted to a federal court pursuant to the All Writs Act is to be
utilized sparingly, and only in the most critical and exigent circumstances.40

Author's Note: Part II of this article will examine §105 of
the Code, address the legal and theoretical intersection of §105 and the
All Writs Act, discuss the conclusions reached by the court in In re G-I
Holdings Inc. and suggest a framework for harmonizing both statutory provisions.
<hr>
<h3>Footnotes</h3>

1 United States v. Energy Res. Co., 495 U.S. 545, 549, 110 S.Ct. 2139,
2142, 109 L.Ed.2d 580 (1990). 
2 Leal, Manuel D., "The Power of the Bankruptcy Court: §105,"
29 S. Tex. L. Rev. 487, 489 (1988).

3 Bogart, Daniel B. "Resisting the Expansion of Bankruptcy Court Power
Under §105 of the Bankruptcy Code: The All Writs Act and an Admonition
from Chief Justice Marshall," 35 Ariz. St. L.J. 793, 794 (2003). 
4 New England Dairies Inc. v. Dairy Mart Convenience Stores Inc. (In
re Dairy Mart Convenience Stores Inc.), 351 F.3d 86, 92 (2d Cir. 2003) (citations
omitted). 
5 Id. (quoting United States v. Sutton, 786 F.2d 1305, 1308 (5th
Cir. 1986)). 
6 Id.

7 For purposes of this article, any "inherent" powers possessed by
a bankruptcy court, sitting as a court of equity, to fashion equitable relief
outside the province of §105(a) of the Code will not be addressed. 
8 28 U.S.C.A. §1651(a) (1994). 
9 327 B.R. at 734. 
10 Id. 
11 Id. 
12 Id. 
13 Id. at 734-35.

14 Id. at 735. 
15 Id. 
16 Id. 
17 Id. at 736.

18 Id. 
19 Id. 
20 Id. at 737. 
21 Id. 
22 Id.

23 Id. at 738. 
24 Id. 
25 Id. at 739. 
26 Id.

27 Id. 
28 28 U.S.C.A. §1651(a) (1994). The All Writs Act originally was codified
in §14 of the Judiciary Act of 1789 and provided that "all the...courts
of the United States shall have power to issue writs of scire facias,
habeas corpus and all other writs not specifically provided for by statute,
which may be necessary for the exercise of their respective jurisdictions, and
agreeable to the principles and usages of law." See Pa. Bureau
of Corr. v. United States Marshals Serv., 474 U.S. 34, 40-41, 106 S.Ct.
355, 360, 88 L.Ed.2d 189 (1985). Black's Law Dictionary defines a "writ"
as a "written judicial order to perform a specified act, or giving authority
to have it done, as in a writ of mandamus or certiorari, or as
in an 'original writ' for instituting an action at common law." Black's
Law Dictionary 1608 (6th Ed. 1990).

29 Clinton v. Goldsmith, 526 U.S. 529, 537, 119 S.Ct. 1538, 1543, 143
L.Ed.2d 720 (1999). 
30 Edgerly v. Kennelly, 215 F.2d 420, 422 (7th Cir. 1954), cert. denied,
348 U.S. 938, 75 S.Ct. 359, 99 L.Ed. 735 (1955), overruled on other grounds
by Stone v. Morris, 546 F.2d 730 (7th Cir. 1976). See, also, ITT Cmty.
Dev. Corp. v. Barton, 457 F.Supp. 224, 232 (M.D. Fla. 1978) ("The All
Writs Act provides a federal court with those writs necessary to the preservation
or exercise of its subject matter jurisdiction. Power under the All Writs Act
is limited to that necessary to facilitate a federal court's effort to manage
a case to judgment"). 
31 Wesch v. Folsom, 6 F.3d 1465, 1470 (11th Cir. 1993) (citations omitted).

32 Klay v. United Healthgroup Inc., 376 F.3d 1092, 1099 (11th Cir. 2004)
(citing Folsom, 6 F.3d at 1470).

33 Id. (citing Procup v. Strickland, 792 F.2d 1069, 1074 (11th
Cir. 1986) (en banc)). 
34 474 U.S. 34, 106 S.Ct. 355, 88 L.Ed.2d 189 (1985). 
35 Id. at 43, 106 S.Ct. at 361, 88 L.Ed.2d 189. 
36 Id.

37 Klay, 376 F.3d at 1100 (quoting United States v. New York Tel. Co.,
434 U.S. 159, 174, 98 S.Ct. 364, 373, 54 L.Ed.2d 376 (1977)). 
38 Roche v. Evaporated Milk Ass'n., 319 U.S. 21, 25, 63 S.Ct. 938, 941,
87 L. Ed. 1185 (1943). See, also, Padilla ex rel. Newman v. Bush, 233
F. Supp.2d 564, 603 (S.D.N.Y. 2003) (noting that the decision whether to grant
or withhold an order under the All Writs Act lies within the sound discretion
of the court), rev'd. on other grounds, Rumsfeld v. Padilla, 542 U.S.
426, 124 S.Ct. 2711, 159 L.Ed.2d 513 (2004); Morrow v. Dist. of Columbia,
417 F.2d 728, 738 (D.C. Cir. 1969) ("The Supreme Court has stressed the
theme that the issuance of the writ is a matter of sound discretion").

39 Application of the United States of Am. in the Matter of an Order Authorizing
the Use of a Pen Register or Similar Mech. Device, 538 F.2d 956, 961 (2d Cir.
1976), rev'd. on other grounds sub nom., United States v. New York
Tel. Co., 434 U.S. 159, 98 S.Ct. 364, 54 L.Ed.2d 376 (1977).

40 Wisconsin Right to Life Inc. v. Fed. Election Comm'n., 542 U.S.
1305, 1306, 125 S.Ct. 2, 3, 159 L.Ed.2d 805 (2004) (citation omitted).

Journal Authors

Michael D. Sousa

Journal Date

Thursday, June 1, 2006 - 12:00

Bankruptcy Rule

2006

none