Covanta Onondaga Limited Partnership v. Onondaga County Resource Recovery Agency

Citations: 318 F.3d 392; 288 B.R. 392; 2003 U.S. App. LEXIS 1410; 40 Bankr. Ct. Dec. (CRR) 216; 2003 WL 193073Docket: 02-9107

Court: Court of Appeals for the Second Circuit; January 28, 2003; Federal Appellate Court

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The appeal involves Covanta Onondaga Limited Partnership challenging a district court's permanent injunction against it, issued after the court remanded a state court case back to state jurisdiction due to mandatory abstention under 28 U.S.C. § 1334(c)(2). The core issue is whether the district court has the authority to enjoin Covanta, the debtor in a related bankruptcy case, from seeking a stay of the remanded action in the state court. The case traces back to a waste disposal agreement between Covanta and the Onondaga County Resource Recovery Agency (OCRRA), which OCRRA claimed was terminated due to Covanta's alleged breach. Covanta filed a suit in state court for a declaratory judgment against this termination, and subsequently initiated a Chapter 11 bankruptcy petition. Following the removal of the state case to federal court, OCRRA sought remand, which the district court granted on the basis of mandatory abstention. This background sets the stage for the appeal regarding the injunction's validity, ultimately leading to the conclusion that the injunction should be vacated.

The District Court ruled that mandatory abstention was required under 28 U.S.C. § 1334(c)(2) and remanded the case, utilizing the remand authority from 28 U.S.C. § 1452(b). On August 19, 2002, OCRRA informed the District Court about a proof of claim filed with the SDNY Bankruptcy Court earlier that month. On September 5, Covanta initiated an adversary proceeding in the Bankruptcy Court, seeking a declaration regarding the automatic stay under 11 U.S.C. § 362, or alternatively, an injunction under 11 U.S.C. § 105(a) to halt OCRRA's State Court case until a reorganization plan was confirmed. OCRRA subsequently sought a temporary restraining order (TRO) in the Northern District on September 11, which was granted and prohibited Covanta from proceeding with its adversary action. The District Court extended this TRO on September 13 and issued a permanent injunction on September 23, preventing Covanta from pursuing the adversary proceeding and any related actions regarding the automatic stay. Covanta's request for interim relief during the appeal was denied. The appeal primarily concerns whether the District Court acted beyond its discretion under the All Writs Act, 28 U.S.C. § 1651(a), when issuing the permanent injunction. Notably, it was determined that the All Writs Act does not independently confer jurisdiction on federal courts, and OCRRA did not establish a valid jurisdictional basis for the injunction, such as diversity or federal question jurisdiction.

The District Court's entitlement to issue an injunction is based on its jurisdiction over a removed and remanded state court action. It is established that a district court retains the authority to act under section 1651 to protect or aid its jurisdiction while a case remains within its authority. Even after rendering a final judgment, a district court can address collateral matters such as attorney's fees, costs, and sanctions. Moreover, a court with a judgment of continuing effect has some enforcement authority, as illustrated by cases permitting the removal of state court suits to maintain the integrity of consent decrees. However, the challenged injunction does not have jurisdictional validity from these traditional sources, and there is no precedent for a district court issuing an unrelated order after remanding a case to state court. The injunction does not serve to prevent interference with a previous order since the remanded case is not being contested for return to the Northern District. The District Court justified the injunction by citing the need to enforce the res judicata and collateral estoppel effects of its remand order and to prevent indirect appeals of a non-appealable removal order. However, the validity of the collateral attack rationale is questionable due to uncertainties regarding the preclusive effect of the court's order.

The remand order issued by the District Court is deemed unappealable, which diminishes its potential preclusive effect. Citing Health Cost Controls of Illinois, Inc. v. Washington, it is noted that an unappealable ruling cannot be considered res judicata. Additionally, there is significant uncertainty regarding whether the issue for which preclusion is sought was resolved in the adjudication of OCRRA's motion to remand the State Court case. The injunction against Covanta restricts its litigation concerning the automatic stay's applicability to the remanded case, yet the District Court's rationale for remanding does not address section 362 or section 105, which are crucial to understanding the stay's implications. The District Court's findings focus on jurisdiction and abstention rather than the stay, and while it claims to have made an implicit finding regarding the stay's applicability, this does not confer authority to bar Covanta from seeking clarification from the Bankruptcy Court. Furthermore, the treatise by Professor Wright emphasizes that preclusion typically requires a subsequent action where its effects can be asserted. The District Court's reliance on Wood v. Santa Barbara Chamber of Commerce, Inc. is critiqued, as that case does not support a general authority for the District Court to determine the preclusive effect of its prior ruling in the current context.

Wood exemplifies a court's authority to terminate repetitive and vexatious lawsuits from a litigant who ignores preclusion defenses. The Ninth Circuit approved an injunction in Wood to prevent ongoing litigation after a decade of disputes, emphasizing the need to curtail "repetitive litigation," rather than adjudicating the preclusive effects of its previous judgments. This ruling does not support the Northern District's injunction against Covanta, as there is no evidence of vexatious behavior in Covanta's actions regarding the Bankruptcy Court. A district court may prevent relitigation even without a history of vexatious suits, as seen in precedents affirming injunctions in both federal and state courts. However, if a court remands a case without adjudicating it on the merits, its authority to enforce preclusion is questionable. The District Court's injunction was also based on the notion of preventing Covanta from indirectly appealing a non-appealable remand order. The remand was likely grounded in 28 U.S.C. § 1452(b), which allows for remand on equitable grounds and specifies that such orders are not subject to appeal. The rationale of preventing an "indirect appeal" poses issues, as the prohibition against review explicitly applies to remand orders related to bankruptcy cases, and Covanta has not attempted to appeal this remand order.

Covanta seeks protection from OCRRA's claims in the State Court, which Judge Munson believes is incompatible with allowing that case to proceed. Section 1452(b) does not prevent a bankruptcy court from ruling on matters within its jurisdiction, even if a district court abstains from a removed state court case. The District Court had subject matter jurisdiction over the State Court case when the removal petition was filed, and the remand under section 1452(b) does not indicate a lack of jurisdiction to decide on remand. Abstention relates to the exercise of jurisdiction, not its existence. Once the District Court remanded the case, its authority to rule on it became questionable. The District Court remanded because it believed it had to refrain from proceeding with the case. Concerns about the District Court's continuing jurisdiction after remand are significant, especially regarding its ability to issue an injunction. Both parties reference Erti v. Paine Webber Jackson, Curtis, Inc. to argue their positions on the appropriateness of the Northern District exercising any potential jurisdiction. In Erti, a district court ruled on the applicability of an automatic stay within its jurisdiction, but the ruling indicated that the bankruptcy court should also have the opportunity to assess the applicability of the stay and exercise its authority under section 105(a) of the Bankruptcy Code.

OCRRA argues that the pending case is better suited for an injunction due to the complexity of the Erti case, which involved both district and bankruptcy court proceedings, while the current State Court case only addresses the validity of an agreement's termination. Covanta counters that an injunction is equally inappropriate here, citing the intricate nature of its Chapter 11 proceedings and the significance of the contract at issue, which is its primary asset. Covanta insists that the Bankruptcy Court should evaluate the applicability of the automatic stay and its section 105(a) authority, highlighting that the injunction in this case was issued by a court without ongoing litigation. The conclusion reached is that the issuance of the injunction exceeded the Northern District Court's discretion, even if some jurisdiction remained after remand. The ruling does not determine the effects of collateral estoppel or res judicata, the applicability of the automatic stay, or the Bankruptcy Court's potential actions. The District Court's injunction is vacated, and the interim injunction issued on December 19 is terminated, with the mandate to issue immediately and no costs awarded. Additionally, Covanta had previously filed a similar suit in the Northern District but dismissed it for lack of diversity jurisdiction. Judge Munson indicated that he would not have remanded the State Court case if he believed the automatic stay applied, although the District Court was not required to resolve the stay's applicability prior to remand.

A decision to abstain under 28 U.S.C. § 1334(c)(2) does not affect the applicability of the automatic stay under 28 U.S.C. § 362 for actions involving the bankruptcy estate's property. This principle is similarly reinforced by 28 U.S.C. § 1334(d), which addresses cases necessitating mandatory abstention. The Supreme Court has ruled that the appeal prohibitions specified in 28 U.S.C. § 1447(d) apply to cases remanded under 28 U.S.C. § 1452(b) and that these limits on appellate review only pertain to remands based on grounds outlined in § 1447(c). The language used in § 1447(d) does not specifically reference appellate courts, unlike the phrasing in §§ 1452(b) and 1334(d). No opinion is offered regarding the impact of § 1447(d) on a bankruptcy court's authority. The prohibition against appellate review established in *Things Remembered, Inc. v. Petrarca* arose in a case previously before a bankruptcy court. It is clarified that a district court's choice to abstain from a case within its subject matter jurisdiction does not negate that jurisdiction; in this instance, jurisdictional concerns for the Northern District stem from the abstention being followed by a remand to state court.