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
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,
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 Paine 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
On the morning of March 6, however, Paine 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. 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 after the date of the 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 not be pleaded until the third-party plaintiff has been sued by 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 issues 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
The initial issue is whether the District Court has jurisdiction to determine 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 the 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)); NLRB 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 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 B.R. 219 (D.C.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 B.R. 965 (D.C.S.D.N.Y.1983) (same). The court in which the litigation claimed to be stayed is pending has jurisdiction to determine not only its own jurisdiction but also the more precise question whether the proceeding pending before it is subject to the automatic stay.
Though the District Court in the instant litigation had jurisdiction to determine the scope of the stay, its issuance of the injunction challenged on this appeal was a misuse of its equitable power. By prohibiting Baldwin from applying to the Bankruptcy Court in Ohio for any relief against any defendant in MDL No. 581 the injunction improperly interferes with the reorganization proceedings in two significant respects. First, the injunction prevents
Second, the injunction prevents Baldwin from applying to the Bankruptcy Court for a determination of whether the automatic stay applies to Paine Webber's third-party complaint. The District Court has decided that it, rather than the Bankruptcy Court, will determine the applicability of the stay. The injunction order has a two-fold effect in this regard: It prevents the Bankruptcy Court from construing its own stay with respect to any defendant in MDL No. 581,
In addition to the paramount interest of assuring uniformity of decision concerning the reach of the automatic stay in the Chapter 11 reorganization, other factors weigh against the District Court's use of its equitable power. Paine Webber's claim for indemnity and contribution was filed as both a proof of claim in the Bankruptcy Court and as a third-party complaint in the District Court. Even on Paine Webber's view that the third-party complaint is a post-petition claim because it could not have been filed until Paine Webber had been sued by the SPDA purchasers, the original Erti complaint was filed on December 14, 1983. Thereafter, Paine Webber elected to file its proof of claim on July 24, 1984, before it filed its third-party complaint on February 19, 1985. The normal priority to be accorded the court in which proceedings are first initiated, see Meeropol v. Nizer, 505 F.2d 232, 235 (2d Cir.1974), ought to be followed here, at least to the extent of permitting the Bankruptcy Court to give initial consideration to the proof of claim in order to determine whether it is a pre- or post-petition claim for purposes of the automatic stay.
Moreover, the facts indicate that Baldwin was proceeding expeditiously to secure a determination from the Bankruptcy Court as to the reach of the stay and was preempted by Paine Webber's maneuver only because Baldwin informed Paine Webber of its litigating plans. Once informed that a ruling would be sought in the Bankruptcy Court, Paine Webber then acted within 48 hours to have the stay construed (initially, ex parte) in the District Court. Its litigating stance with respect to the reach of the stay reveals few, if any, equities in its favor.
For all of these reasons, we conclude that the injunction issued by the District Court should not have been issued, and it is hereby vacated. The mandate shall issue forthwith.