                      United States Court of Appeals,

                                Fifth Circuit.

                                 No. 94-10497.

                  The Matter of ZALE CORPORATION, Debtor.

Alan D. FELD, and National Union Fire Insurance Company, Inc., of
Pittsburgh, Pennsylvania, Appellants,

                                      v.

                   ZALE CORPORATION, et al., Appellees.

                                Sept. 7, 1995.

Appeals from the United States District Court for the Northern
District of Texas.

Before POLITZ, Chief Judge, and EMILIO M. GARZA and STEWART,
Circuit Judges.

     EMILIO M. GARZA, Circuit Judge:

     Alan    D.    Feld   and   National   Union    Fire   Insurance   Company

("NUFIC"     or    "National    Union")    appeal    the   district    court's

affirmance of the bankruptcy court's approval of a settlement

entered in the bankruptcy proceedings of Zale Corporation and its

affiliates (collectively "Zale" or "the debtor").             We reverse and

remand.

                                       I

     More than two years prior to the approval of the settlement at

issue in this case, Zale filed for protection under Chapter 11 of

the Bankruptcy Code.       See 11 U.S.C. § 1101-1173 (1988 & West Supp.

V   1994).         The    official   creditors'       committees      initiated

investigations of claims that they planned to assert against the

debtor's directors and other third parties.            After the committees

threatened to file suit against the former directors—Irving R.

                                       1
Gerstein,    Charles   F.   Gill,   James   Gillies,   and   Alan   D.   Feld,

settlement    discussions     ensued.       These   negotiations    included

discussion of Zale's directors and officers ("D & O") liability

policies.    CIGNA Insurance Company ("CIGNA") had issued a D & O

Liability and Company Reimbursement Liability Policy to provide

primary insurance coverage for Zale's directors and officers.

CIGNA's policy had a limit of $10 million.             NUFIC had issued an

excess D & O policy to Zale for up to $15 million.1

     Eventually, various parties to the Zale bankruptcy jointly

filed a motion in the bankruptcy court seeking approval of a

settlement agreement between the debtor and three of Zale's former

directors—Gerstein, Gill, and Gillies—on one side and CIGNA, the

primary D & O liability insurer, on the other.               The settlement

agreement included the following relevant provisions:

     1) Gerstein, Gill, and Gillies would agree to a $32 million
     judgment against them,[2] to be satisfied solely out of
     insurance proceeds.[3]

     2) Gerstein, Gill, and Gillies would assign to Zale all rights
     under the insurance policies.

     3) Gerstein, Gill, and Gillies would assign to Zale all rights
     of contribution or indemnification against third parties

     1
      An excess policy provides coverage in excess of the primary
policy limits. Accordingly, such a policy is triggered only upon
the exhaustion of the limits of the primary policy. NUFIC's
policy provided "following form" coverage; that is, it
incorporated the terms and conditions of the primary CIGNA
policy.
     2
      This provision was later modified. Rather than agreeing to
a judgment, the directors agreed to stipulate to certain facts
that would provide the basis for a judgment against them.
     3
      A third company had issued a separate excess D & O policy
for $10 million to cover these three directors.

                                        2
     arising out of their activities as directors of Zale.

     4) CIGNA would pay to Zale $10 million, ostensibly the limits
     of its policy.

     5) CIGNA would sell to Zale all subrogation rights arising out
     of those rights assigned by Gerstein, Gill, and Gillies. Zale
     would pay CIGNA $1.5 million in cash and up to $2.5 million in
     proceeds from suits against other third parties.[4]

     The   bankruptcy   court   scheduled    a    settlement    hearing   to

coincide   with   the   hearing   on   the       confirmation   of   Zale's

reorganization plan.     On the evening of the first day of the

hearing, the settling parties modified the settlement agreement to

include a provision that conditioned the settlement on the grant of

a permanent injunction that would prevent parties from suing the

settling parties for their actions in relation to the settlement.5

The desired injunction stated as follows:

     [I]n order to effectuate the terms of the Settlement
     Agreement, any Person, including without limitation, National
     Union Fire Insurance Company, is forever barred and enjoined
     (1) from filing, commencing, asserting or continuing any and
     all claims, actions, causes of action, proceedings or suits,
     in law or equity (other than an appeal of this Order), against
     CIGNA, the Debtors, the Defendants [Gerstein, Gill, and
     Gillies], Zale Holding Corporation, Reorganized Zale,[6] the




     4
      These suits included claims against Feld's law firm, Akin,
Gump, Hauer, & Feld, and against the law firm of Skadden, Arps,
Slate, Meagher & Flom, both of which had provided legal services
to Zale prior to its bankruptcy.
     5
      One week prior to the hearing, NUFIC had filed a
declaratory judgment action in district court to preserve
coverage-related issues and to obtain release from its
obligations if the settlement closed. NUFIC also sought to
enjoin approval of the settlement.
     6
      "Reorganized Zale" referred to Zale Corporation after it
emerged from bankruptcy.

                                   3
     Litigation Entity,[7] their parents, subsidiaries, affiliates,
     shareholders,    directors,   officers,   agents,   employees,
     attorneys, agents, heirs, successors and assigns, or the
     Official Committees or their Professional Persons or the other
     Plan Proponents or their attorneys (collectively, the
     "Protected Parties"), based upon, arising out of or relating
     in any way to the participation of any of the Protected
     Parties in the negotiation, formulation, submission, approval,
     execution or consummation of the Settlement Agreement, or (2)
     from otherwise seeking to collaterally attack the Settlement
     Agreement, this Order, or the subject matter hereof.

The settling parties' stated purpose in seeking the injunction was

to prevent NUFIC and Feld8 from bringing or pursuing claims against

CIGNA for bad faith and breach of contract.9          The settling parties

also modified the settlement agreement to include a provision under

which Zale agreed to indemnify CIGNA for bad faith or other claims

against CIGNA concerning the settlement.

     On   the   second   day   of   the   hearing,   the   bankruptcy   court

confirmed the reorganization plan and two other settlements10 before


     7
      The "Litigation Entity" was created in the reorganization
plan as the entity responsible for pursuing all unresolved
actions against third parties. The Litigation Entity later
evolved as Jewel Recovery, L.P.
     8
      Feld was a former Zale director who had been excluded from
the settlement. CIGNA and Zale state that the Creditors'
Committees refused to include Feld in the settlement.
     9
      See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 138 ("[W]hat
we're seeking to do is to prevent National Union from coming
after Cigna or its professionals or the Committees or its
professionals or any other interested persons, the defendants'
counsel or the defendants themselves, and someway collaterally
attacking the agreement we expect to be and hope to be approved
by this Court...."). CIGNA later broadened the purported scope
of its argument to include Feld.
     10
      These were a $70 million settlement between Zale and its
controlling shareholder, Swarovski International Holding, A.G.,
and a $9.4 million settlement between Zale and its outside
accounting firm, Arthur Andersen.

                                      4
turning its attention to the so-called CIGNA settlement. NUFIC and

Feld11 both challenged the proposed injunction and settlement,

arguing that the issuance of the injunction would deprive them of

certain rights and that the court could not do so because NUFIC and

Feld were not parties to the bankruptcy and had not received proper

notice of the settlement.12 The court refused to entertain argument

or testimony on NUFIC and Feld's tort and contract claims, stating

that these issues were not relevant to "the underlying issues that

the Court has to address in the motion [to approve the settlement].

That is, is the settlement reasonable?"

     Two days later, the bankruptcy court approved the modified

settlement, adding the following language to the injunction:

     [P]rovided, however, that nothing in this paragraph shall
     impair National Union from asserting defensively any issues of
     coverage (which are not otherwise determined by the findings
     of fact and conclusions of law entered by this Court on May
     21, 1993) with respect to any policy of insurance issued by
     National Union or any other Person from defending claims
     against them....

As part of its approval order, the bankruptcy court made several

findings of fact, only two of which are at issue here.   First, the

court found that "CIGNA has acted in good faith pursuant to the

obligations under its policy."   Second, the court found that "the

CIGNA policy will be exhausted through the payment of the policy

     11
      Feld's actual appearance did not occur until the third day
of the hearing.
     12
      All of the parties provided detailed statements of facts
relating to the sufficiency of notice to both NUFIC and Feld.
Because we decide this case on other grounds, we have not
included notice-related facts in this discussion. We also do not
discuss the discovery sanctions levied by the bankruptcy court
against NUFIC as they are not before us on appeal.

                                 5
limit."

      Both NUFIC and Feld appealed the bankruptcy court's settlement

approval order to the district court.                   During the interim period

between the bankruptcy's court's approval and the district court's

resolution of the appeal, the parties to the bankruptcy consummated

the   reorganization        plan.           The   district    court    affirmed     the

bankruptcy court's approval of the settlement in all respects.

NUFIC and Feld now appeal the judgment of the district court on

various grounds.

                                             II

        Feld and NUFIC challenge the entry of the injunction, arguing

that the bankruptcy court exceeded its power under section 105 of

the Bankruptcy Code.            See 11 U.S.C. § 105(a) (1988) ("The court may

issue      any   order,    process,     or    judgment    that   is    necessary     or

appropriate to carry out the provisions of this title.").                          They

also challenge the bankruptcy court's factual findings with respect

to the CIGNA policy.              We review the bankruptcy court's factual

findings for clear error, and we review issues of law de novo.

Walker     v.    Cadle    Co.    (In   re    Walker),    51   F.3d    562,   565   (5th

Cir.1995).13


      13
      CIGNA and Zale argue initially that NUFIC and Feld lack
standing to appeal because the injunction does not harm them. We
find no merit in this contention—the fact that the injunction
bars NUFIC and Feld in any way gives them standing to appeal it.
See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561-63, 112
S.Ct. 2130, 2137, 119 L.Ed.2d 351 (1992) (noting that when "the
plaintiff is himself an object of the action (or forgone action)
at issue ..., there is ordinarily little question that the action
or inaction has caused him injury, and that a judgment preventing
or requiring the action will redress it").

                                              6
                                     A

     Before     we   address   whether   the   bankruptcy    court    properly

exercised § 105 power to issue the injunction, we must first

examine whether a basis for the bankruptcy court's subject matter

jurisdiction existed.

     Subject   matter   jurisdiction   and  power   are   separate
     prerequisites to the court's capacity to act. Subject matter
     jurisdiction is the court's authority to entertain an action
     between the parties before it. Power under section 105 is the
     scope and forms of relief the court may order in an action in
     which it has jurisdiction.

American Hardwoods, Inc. v. Deutsche Credit Corp. (In re American

Hardwoods, Inc.), 885 F.2d 621, 624 (9th Cir.1989) (citations

omitted);      see also Miller v. Kemira, Inc. (In re Lemco Gypsum,

Inc.), 910 F.2d 784, 787 (11th Cir.1990) (noting that first step in

determining the existence of bankruptcy jurisdiction is whether

federal jurisdiction exists in the district court);               United States

Dep't of Air Force v. Carolina Parachute Corp., 907 F.2d 1469, 1475

(4th Cir.1990) (stating that § 105 injunction cannot exceed court's

jurisdiction).14

      Because Feld and NUFIC are not parties to the bankruptcy, the

actions   at    issue   between   noncreditors—NUFIC        and    Feld—and   a

nondebtor—CIGNA—are third-party actions.            Accordingly, we must

determine if these actions are "related to" the bankruptcy case.

See Quattrone Accountants, Inc. v. I.R.S., 895 F.2d 921, 926 (3d


     14
      Very little Fifth Circuit case law exists concerning
injunctions issued by a bankruptcy court to bar claims between
nondebtor third parties. For this reason, we have looked to
cases in other circuits and utilized the other circuits'
reasoning where we have found it persuasive.

                                     7
Cir.1990)      ("Since   we     are    determining    the   bankruptcy   court's

jurisdiction over a case between two non-debtors, we must examine

the "related to' language of Section 1334.").

      The jurisdiction of the bankruptcy courts, like that of other
      federal courts, is grounded in and limited by statute. Title
      28 U.S.C. § 1334(b) provides that "the district courts shall
      have original but not exclusive jurisdiction of all civil
      proceedings arising under title 11, or arising in or related
      to cases under title 11." 28 U.S.C. § 1334(b). The district
      courts may, in turn, refer "any or all proceedings arising
      under title 11 or arising in or related to a case under title
      11 ... to the bankruptcy judges for the district." 28 U.S.C.
      § 157(a).

Celotex Corp. v. Edwards, --- U.S. ----, ----, 115 S.Ct. 1493,

1498,    131   L.Ed.2d    403    (1995).        We   need   not   identify    which

jurisdictional        provision        specifically     applies     because     the

provisions operate in conjunction.              In re Walker, 51 F.3d at 568-

69;   accord Querner v. Querner (In re Querner), 7 F.3d 1199, 1201

(5th Cir.1993);       see also Wood v. Wood (In re Wood), 825 F.2d 90,

93 (5th Cir.1987) ("For the purpose of determining whether a

particular matter falls within bankruptcy jurisdiction, it is not

necessary      to   distinguish       between   proceedings   "arising   under,'

"arising in a case under,' or "related to a case under,' title

11.").   "Instead, to ascertain whether jurisdiction exists, "it is

necessary only to determine whether a matter is at least "related

to" the bankruptcy.' "        In re Walker, 51 F.3d at 569 (quoting In re

Wood, 825 F.2d at 93) (other citations omitted).

      [Section 1334's] reference to cases related to bankruptcy
      cases is primarily intended to encompass tort, contract, and
      other legal claims by and against the debtor, claims that,
      were it not for bankruptcy, would be ordinary stand-alone
      lawsuits between the debtor and others but that section
      1334(b) allows to be forced into bankruptcy court so that all
      claims by and against the debtor can be determined in the same

                                           8
      forum. A secondary purpose is to force into the bankruptcy
      court suits to which the debtor need not be a party but which
      may affect the amount of property in the bankrupt estate.
      Once they are shoehorned into the bankruptcy court on the
      authority of section 1334(b), such suits can then be stayed by
      authority of section 105 of the Bankruptcy Code....

Zerand-Bernal     Group,   Inc.     v.   Cox,   23   F.3d    159,    161-62   (7th

Cir.1994) (citations omitted) (emphasis added).               Accordingly, when

we   define     "related   to"    jurisdiction,       we    should   "avoid    the

inefficiencies     of   piecemeal    adjudication      and    promote   judicial

economy by aiding in the efficient and expeditious resolution of

all matters connected to the debtor's estate."              In re Lemco Gypsum,

Inc., 910 F.2d at 787.

        Nonetheless, "a bankruptcy court's "related to' jurisdiction

cannot be limitless."        Celotex, --- U.S. at ----, 115 S.Ct. at

1499.      "[A]s a dispute becomes progressively more remote from the

concerns of the body of federal law claimed to confer federal

jurisdiction over it, the federal interest in furnishing the rule

of decision for the dispute becomes progressively weaker." Zerand-

Bernal Group, Inc., 23 F.3d at 162.             For the bankruptcy court to

have subject matter jurisdiction, therefore, some nexus must exist

between the related civil proceeding and the Title 11 case.                   In re

Lemco Gypsum, Inc., 910 F.2d at 787.15               Otherwise, "an overbroad

      15
      See also Specialty Mills, Inc. v. Citizens State Bank, 51
F.3d 770, 774 (8th Cir.1995) ("For subject matter jurisdiction to
exist in a "related to' action, there must be some nexus between
the civil proceeding and the Title 11 case."); Wisconsin Dep't
of Indus., Labor & Human Relations v. Marine Bank Monroe (In re
Kubly), 818 F.2d 643, 645 (7th Cir.1987) ("[D]isputes among
creditors of a bankrupt come within the federal bankruptcy
jurisdiction only if they involve property of the estate or if
resolving two creditors' intramural squabble will affect the
recovery of some other creditor.").

                                         9
construction of § 1334(b) may bring into federal court matters that

should be left for state courts to decide."                     In re Lemco Gypsum,

Inc., 910 F.2d at 787-88 (citations omitted).

        In In re Wood, 825 F.2d at 93, we adopted the Third Circuit's

test for determining whether a matter is "related to" a bankruptcy

case and held that a matter is "related to" the bankruptcy case for

§   1334    purposes     if    "   "the   outcome    of    that    proceeding    could

conceivably have any effect on the estate being administered in

bankruptcy.' "       In re Wood, 825 F.2d at 93 (quoting Pacor, Inc. v.

Higgins, 743 F.2d 984, 994 (3d Cir.1984));                 accord In re Walker, 51

F.3d at 569.       Moreover, " "[a]n action is related to bankruptcy if

the outcome could alter the debtor's rights, liabilities, options,

or freedom of action (either positively or negatively) and ... in

any way      impacts     upon      the   handling   and    administration       of    the

bankrupt estate.' "           In re Walker, 51 F.3d at 569 (quoting Pacor,

Inc., 743 F.2d at 994).              Conversely, the bankruptcy court has no

jurisdiction over a matter that does not affect the debtor.                           See

Celotex, --- U.S. at ---- n. 6, 115 S.Ct. at 1499 n. 6 (reciting

Pacor test and commenting that "whatever test is used, these cases

make    clear     that   bankruptcy       courts    have   no     jurisdiction       over

proceedings that have no effect on the debtor").16

       We begin our analysis by noting that a large majority of cases

reject      the   notion      that    bankruptcy    courts      have   "related       to"

jurisdiction over third-party actions. See, e.g., In re Walker, 51


       16
      Celotex is not dispositive of this case because the Court
decided the case on alternative grounds. Id.

                                            10
F.3d at 569;       cf. Homsy v. Flood (In re Vitek), 51 F.3d 530, 538 n.

39 (5th Cir.1995) (wondering " "out loud' about the extent, if any,

to   which    the    tools    of    injunctive      relief   and   settlement    (or

"compromise') are appropriate ... in dealing with the rights of

third party creditors of the bankruptcy" and stating that "the

broad latitude afforded bankruptcy courts in fashioning remedies

should not be used in a way that tramples on the rights of

dissenters among creditors or non-parties to the proceedings").

           Those    cases    in    which   courts    have    upheld   "related   to"

jurisdiction over third-party actions do so because the subject of

the third-party dispute is property of the estate,17 or because the

dispute over the asset would have an effect on the estate.18

Conversely, courts have held that a third-party action does not

create "related to" jurisdiction when the asset in question is not




      17
      See, e.g., In re Wood, 825 F.2d at 93-94 (holding that
"related to" jurisdiction over third-party action existed because
assets at issue in claims against debtor were property of
estate).
      18
      See, e.g., 8300 Newburgh Rd. Partnership v. Time Constr.,
Inc. (In re Time Constr., Inc.), 43 F.3d 1041, 1045 (6th
Cir.1995) (explicitly applying same standard as Fifth Circuit and
noting in dicta that third-party action was related to bankruptcy
because outcome of action against sole shareholder directly
impacted value of debtor's shares); Abramowitz v. Palmer, 999
F.2d 1274, 1278 (8th Cir.1993) (holding that third-party action
was related to bankruptcy because debtor's rights in jointly-held
property could not otherwise be determined); Kaonohi Ohana, Ltd.
v. Sutherland (In re Kaonohi Ohana, Ltd.), 873 F.2d 1302, 1306-07
(9th Cir.1989) (upholding "related to" jurisdiction over
third-party action because specific performance remedy in
third-party action would reduce damages in breach-of-contract
claim against estate).

                                           11
property of the estate19 and the dispute has no effect on the

estate.20   Shared facts between the third-party action and a

debtor-creditor conflict do not in and of themselves suffice to



     19
      See, e.g., Eastover Bank for Sav. v. Sowashee Venture (In
re Austin Dev. Co.), 19 F.3d 1077, 1084 (5th Cir.) (holding that
issue of third-party creditor's rights was not "related to"
bankruptcy after third-party lease had been rejected and was not
part of bankruptcy estate), cert. denied, --- U.S. ----, 115
S.Ct. 201, 130 L.Ed.3d 132 (1994); Graziadei v. Graziadei (In re
Graziadei), 32 F.3d 1408, 1410 (9th Cir.1994) (holding that
third-party dispute over property exempt from estate did not come
under bankruptcy court's jurisdiction); In re Edwards, 962 F.2d
641, 643 (7th Cir.1992) (holding that third-party adversary
complaint did not confer jurisdiction where property at issue was
not property of estate); Bobroff v. Continental Bank (In re
Bobroff), 766 F.2d 797, 804 (3d Cir.1985) (rejecting jurisdiction
over debtor's claims against third party because claims arose
postpetition and therefore were not property of the estate).
     20
      See, e.g., Specialty Mills, Inc., 51 F.3d at 775 (holding
that dispute between third party and debtor's bank did not relate
to bankruptcy and therefore bankruptcy court lacked subject
matter jurisdiction); Zerand-Bernal Group, Inc., 23 F.3d at 162
(holding that products liability suit was not related to
bankruptcy case because suit was neither by nor against debtor,
and suit could not affect estate because bankruptcy had ended);
In re Edwards, 962 F.2d at 643 (holding that adversary complaint
did not confer jurisdiction where determination of dispute would
not impact rights of debtor); Gardner v. United States (In re
Gardner), 913 F.2d 1515, 1519 (10th Cir.1990) (rejecting
jurisdiction over action concerning lien on nonestate property
because it would have no effect on distribution of assets or
administration of estate); Quattrone Accountants, Inc., 895 F.2d
at 926 (holding that tax claim against responsible person was not
related to bankruptcy because debtor's liability was entirely
independent of responsible person's liability, even though such
liability arose from same tax deficiency); Washburn & Kemp, P.C.
v. Committee of Dalkon Shield Claimants (In re A.H. Robins Co.),
846 F.2d 267, 270 (4th Cir.1988) (holding that law firm's action
against insurer for fees was not related to relationship between
insurer and debtor insured, even though law firm represented
debtor on behalf of insurer); National City Bank v. Coopers &
Lybrand, 802 F.2d 990, 994 (8th Cir.1986) (rejecting jurisdiction
over action between debtor's auditors and third-party claimant
because plan was already confirmed and action would have no
possible effect on estate).

                               12
make    the   third-party   action   "related   to"   the   bankruptcy.21

Moreover, judicial economy alone cannot justify a court's finding

jurisdiction over an otherwise unrelated suit.         In re Boone, 52

F.3d at 961;     In re Lemco Gypsum, Inc., 910 F.2d at 789;       Pacor,

Inc., 743 F.2d at 994;       see also In re Kubly, 818 F.2d at 645

("Like other federal courts, a bankruptcy tribunal is one of


       21
      See Community Bank of Homestead v. Boone (In re Boone), 52
F.3d 958, 961 (11th Cir.1995) (holding that debtor's tort suit
against creditor was not related to bankruptcy because "although
the claim ... will share the common factual issue [with a
bankruptcy proceeding]," the common issue did not invoke
jurisdiction); Specialty Mills, Inc., 51 F.3d at 774 ("There may
be some convergence between [the debtor's] affairs and the
dispute between [the third party] and [the debtor's bank].
However, that possibility does not impart "related to'
jurisdiction unless the dispute also affects [the debtor's]
bankruptcy estate or the allocation of assets."); United States
v. Dos Cabezas Corp., 995 F.2d 1486, 1492 (9th Cir.1993)
(declining to extend stay to funds that were not property of
estate because "[t]he mere fact that the [third party's] claim
against the [nondebtor] shares a similar legal and factual nexis
with the [third-party's] claim against the [debtor] is not
sufficient ground for extending the automatic stay."); In re
Lemco Gypsum, Inc., 910 F.2d at 789 ("Overlap between the
bankrupt's affairs and another dispute is insufficient unless its
resolution also affects the bankrupt's estate or the allocation
of assets among creditors." (citations omitted)); Home Ins. Co.
v. Cooper & Cooper, Ltd., 889 F.2d 746, 748-49 (7th Cir.1989)
(concerning action by insurance company and rejecting
jurisdiction over claims against insureds other than the debtor,
because "[a]lthough the request ... has a nexus with the
bankruptcy—in the sense that it would be convenient, and promote
consistency, to resolve all questions concerning the policy at
one go—it does not necessarily have a financial effect on the
estate (or the apportionment among its creditors)."); In re
Xonics, 813 F.2d at 131 ("The bankruptcy jurisdiction is designed
to provide a single forum for dealing with all claims to the
bankrupt's assets. It extends no farther than its purpose. That
two creditors have an internecine conflict is of no moment, once
all disputes about their stakes in the bankrupt's property have
been resolved."); Pacor, Inc., 743 F.2d at 994 ("[T]he mere fact
that there may be common issues of fact between a civil
proceeding and a controversy involving the bankruptcy estate does
not bring the matter within the scope of [§ 1334(b) ].").

                                     13
limited jurisdiction.      Its power must be conferred, and it may not

be enlarged by the judiciary because the judge believes it wise to

resolve the dispute.").      Accordingly, the district court's desire

to "foster and encourage and then preserve settlement in federal

court" does not in and of itself confer jurisdiction.

      While it is true that the bankruptcy court has jurisdiction to

determine whether a settlement between the debtor and other parties

is fair and equitable,22 "looking only to the fairness of the

settlement as between the debtor and the settling claimant [and

ignoring     third-party   rights]      contravenes    a   basic    notion   of

fairness."    In re Aweco, Inc., 725 F.2d at 298;          see also F.D.I.C.

v.   Jones   (In   re   Jones),   966    F.2d   169,   173   (5th    Cir.1992)

(discussing § 105(a) and court's duty to avoid unfairness and

      22
      "The bankruptcy court derives its authority to approve
settlements from Bankruptcy Rule 9019(a)." United States v.
Aweco, Inc. (In re Aweco, Inc.), 725 F.2d 293, 297 (5th Cir.),
cert. denied, 469 U.S. 880, 105 S.Ct. 244, 83 L.Ed.2d 182 (1984).
"A court may approve such a compromise or settlement only when it
is "fair and equitable.' The words "fair and equitable' are
terms of art—they mean that "senior interests are entitled to
full priority over junior ones.' " Id. at 298 (quoting S.E.C. v.
American Trailer Rentals Co., 379 U.S. 594, 85 S.Ct. 513, 13
L.Ed.2d 510 (1965)) (internal citations omitted); see also
Continental Airlines, Inc. v. Air Line Pilots Ass'n (In re
Continental Airlines Corp.), 907 F.2d 1500, 1508 (5th Cir.1990)
(noting that "fair and equitable" means that senior creditors
have priority over junior creditors); American Can Co. v. Herpel
(In re Jackson Brewing Co.), 624 F.2d 605, 608 (5th Cir.1980)
(requiring court to ensure that compromise is fair and equitable
and "in the best interest of the estate"); Momentum Mfg. Corp.
v. Employee Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d
1132, 1136 (2d Cir.1994) ("It is well settled that bankruptcy
courts are courts of equity, empowered to invoke equitable
principles to achieve fairness and justice in the reorganization
process."); In re Energy Coop., Inc., 886 F.2d 921, 927 (7th
Cir.1989) ("The benchmark for determining the propriety of a
bankruptcy settlement is whether the settlement is in the best
interests of the estate.").

                                        14
injustice);     Cullen v. Riley (In re Masters Mates & Pilots Pension

Plan), 957 F.2d 1020, 1026, 1031 (2d Cir.1992) (holding that "where

the rights of one who is not a party to a settlement are at stake,

the fairness of the settlement to the settling parties is not

enough to earn the judicial stamp of approval," and requiring

determination     that   "no   one   has   been   set   apart   for   unfair

treatment").

          Moreover, the "fair and equitable" determination does not

give the bankruptcy court jurisdiction over settlement conditions

that do not bear on the court's duties to preserve the estate and

protect creditors.       In re Continental Airlines Corp., 907 F.2d at

1508-09.23

     [W]e must establish independently that a dispute is part of a
     bankruptcy case; the existence of power within the bankruptcy
     case does not imply an expansion of jurisdiction beyond it.
     To the contrary, it suggests that courts must be particularly
     careful in ascertaining the source of their power, lest
     bankruptcy courts displace state courts for large categories
     of disputes in which some[one] ... may be bankrupt.

In re Kubly, 818 F.2d at 645.        Accordingly, a bankruptcy court may

potentially include an injunction as part of a settlement only

"once jurisdiction is established."          In re Davis, 730 F.2d 176,

183-84 (5th Cir.1984).


     23
      See also Commonwealth Oil Ref. Co. v. U.S.E.P.A. (In re
Commonwealth Oil Ref. Co.), 805 F.2d 1175, 1188 n. 16 (5th
Cir.1986) ("[T]he powers of a court [to grant equitable relief]
are not unlimited."), cert. denied, 483 U.S. 1005, 107 S.Ct.
3228, 97 L.Ed.2d 734 (1987); Gallucci v. Grant (In re Gallucci),
931 F.2d 738, 742 (11th Cir.1991) (discussing turnover action as
normally a core proceeding, but "[i]f the action does not involve
property of the estate, then not only is it a noncore proceeding,
it is an unrelated matter completely beyond the bankruptcy
court's subject matter jurisdiction").

                                      15
      The bankruptcy court did have jurisdiction over CIGNA because

CIGNA, through its participation in the settlement, is "related to"

the estate and the debtor.       However, "it is the relation of dispute

to   estate,   and    not   of   party    to   estate,   that    establishes

jurisdiction."       Elscint, Inc. v. First Wis. Fin. Corp. (In re

Xonics), 813 F.2d 127, 131 (7th Cir.1987).               The "disputes" in

question are Feld and NUFIC's tort and contract claims against

CIGNA, the litigation of which the injunction purports to prevent.

Consequently, the issue before us is not whether the bankruptcy

court had jurisdiction over the settlement and CIGNA, but whether

the bankruptcy court had jurisdiction over an attempt to enjoin

actions between Feld and CIGNA and between NUFIC and CIGNA.

     We can divide the actions against CIGNA that are at issue in

this case into two categories:        (1) the tort claims, such as bad

faith, and (2) the contract claims concerning the CIGNA D & O

policy.    We address the tort claims first.

                                      1

         Feld and NUFIC argue that their bad faith claims against

CIGNA do not relate to the bankruptcy because the claims are not

property of the estate and they have no effect on the estate.             We

agree.     If either Feld or NUFIC were to prevail on a bad faith

claim against CIGNA, compensation would derive not from the Zale D

& O policy proceeds, but from CIGNA's other assets.             Because CIGNA

proposes only to contribute the $10 million policy limit to the

estate and the maximum amount that the estate could claim from

CIGNA with respect to the policy is that same $10 million, any


                                     16
outlays outside of that fund do not affect the estate.

     CIGNA argues, however, that the bad faith claims will affect

the estate because Zale has agreed to indemnify CIGNA for any such

claims.     Although indemnification has brought otherwise unrelated

actions within the scope of a bankruptcy court's jurisdiction in

other cases,24 the claims at issue in those cases involved the

debtor's behavior, thereby providing a basis for the debtor's

obligation that was independent of the indemnification agreement.

In those cases, the purpose of the indemnification agreement was to

eliminate the necessity for a formal suit against the debtor;

therefore, the indemnification agreement satisfied a procedural

goal, not a substantive one.

     In the present case, the bad faith claims involve a creditor's

behavior.       The only relation of those claims to the estate rests on

Zale's agreement to indemnify CIGNA for claims that NUFIC and Feld

could     not    bring   against   Zale    even   indirectly.   Absent   the


     24
      See, e.g., In re Wood, 825 F.2d at 94 (holding that claim
against third party was related to bankruptcy because any
liability would be shared by estate and third party); see also
In re G.S.F., 938 F.2d at 1476 (holding that bankruptcy court had
jurisdiction over third-party action because creditor who was
defendant in third-party action would have substantial
contribution claim against debtor if creditor lost); Michigan
Employment Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine
Radio Co.), 930 F.2d 1132, 1143 (6th Cir.1991) (holding that
third-party action related to bankruptcy because debtor had
agreed pursuant to reorganization plan to indemnify creditor, and
distinguishing cases where third-party claimant had no
indemnification agreement, and where claimant was not a
creditor), cert. dismissed, 503 U.S. 978, 112 S.Ct. 1605, 118
L.Ed.2d 317 (1992); Robinson v. Michigan Consol. Gas Co., 918
F.2d 579, 583-84 (6th Cir.1990) (holding that suit against
trustee was related to bankruptcy because if suit was successful,
trustee would require reimbursement from the estate).

                                          17
indemnification agreement, CIGNA has no independent claim against

Zale for indemnification because it is CIGNA 's actions, not Zale

's, that are at issue.                 Consequently, the question is whether,

alone, Zale's consent to the indemnification provision in the

settlement can establish bankruptcy jurisdiction over the unrelated

third-party claims.

       In In re Gallucci, the Eleventh Circuit addressed the question

of whether a compromise or settlement could establish bankruptcy

jurisdiction over property of a third party not otherwise subject

to the bankruptcy court's authority.                 In that case, the debtor had

no interest in property owned by his mother.25                         The bankruptcy

trustee, however, claimed that the property belonged to the estate

because of a compromise the trustee entered into with a third

party.       In the compromise, the third party had quitclaimed the

property      to   the   trustee.         Based     on    the    quitclaim    deed,   the

bankruptcy court ordered the debtor's mother to turn the property

over to the estate.

       The    debtor's        mother    appealed,    challenging      the     bankruptcy

court's jurisdiction to order the turnover.                          She argued that

because the third party had no authority to quitclaim her interest

in     the    property,        the     compromise        alone    could     not   create

jurisdiction.       The trustee argued that the court could not look

into    the   basis      of    the     trustee's    title,       contending    that   the

quitclaim deed "established jurisdiction by compromise, insulating


       25
      The title was in her name, and the debtor did not occupy
the property.

                                            18
from inquiry the nature of the property and its connection with the

bankruptcy estate prior to settlement."            Id. at 743.

     The Eleventh Circuit rejected the trustee's argument.                  The

court held that the bankruptcy court had "relied entirely upon the

compromise," id., for its jurisdictional basis, and that the

bankruptcy court had a duty to inquire into the compromise and

determine if it actually impacted property of the estate or merely

affected unrelated property. Id. at 744.            Because the property had

no effect on the estate absent the compromise, the court held that

the compromise failed to establish a basis for jurisdiction.                Id.

Thus, the court held that parties could not accomplish through

settlement what they could not attain directly—that is, bankruptcy

court jurisdiction over the property.          See id. at 743 n. 16 (noting

that if the trustee had brought action against the debtor's mother

directly,      "the   bankruptcy     court   clearly   would   not   have   had

jurisdiction" over the property).

     We find the reasoning of the Eleventh Circuit persuasive and

applicable to the facts of this case.              Because CIGNA, Feld, and

NUFIC are not debtors and because the property at issue—the bad

faith claims—is not property of the estate, the bankruptcy court

would   have    no    jurisdiction    over   the   tort   claims   absent   the

indemnification provision in the settlement.              Moreover, the tort

claims do not implicate an independent obligation of Zale in favor

of CIGNA.      Once we look past the indemnification agreement, In re

Gallucci, 931 F.2d at 744, no substantive basis for indemnification

exists. For these reasons, the settlement cannot provide the basis


                                       19
for jurisdiction over the bad faith claims.              Id. at 743-744

(rejecting attempt to establish jurisdiction by compromise because

compromise   had   no   effect   on    estate   prior   to   settlement).26

Accordingly, CIGNA and Zale's attempt to establish jurisdiction

fails,27 and the bankruptcy court had no jurisdiction over Feld's

and NUFIC's tort actions against CIGNA.28

     26
      Moreover, Zale had no authority to act on Feld or NUFIC's
behalf; therefore, Zale could not jeopardize their interests
through its consent. See Local No. 93 v. City of Cleveland, 478
U.S. 501, 529, 106 S.Ct. 3063, 3079, 92 L.Ed.2d 405 (1986) ("Of
course, parties who choose to resolve litigation through
settlement may not dispose of the claims of a third party, and a
fortiori may not impose duties or obligations on a third party,
without that party's agreement. A court's approval of a consent
decree between some of the parties therefore cannot dispose of
the valid claims of nonconsenting intervenors...."); Browning v.
Navarro, 743 F.2d 1069, 1076 n. 20 (5th Cir.1984) (noting that "a
district court, or a bankruptcy court, exceeds its power if it
enters a consent decree to which there was not actual consent or
which was contrary to the public interest or was the result of a
jurisdictional defect"); see also In re G.S.F., 938 F.2d at 1472
(declining to enjoin entity that had not been a party to earlier
stipulation because "the court lacked jurisdiction").
     27
      Because we hold that the bankruptcy court lacked
jurisdiction, we do not reach CIGNA's argument that the
injunction is harmless because no cause of action for bad faith
exists in Texas. This is an argument on the merits of the claim,
and only becomes relevant if there is jurisdiction. We therefore
do not address the merits of Feld's and NUFIC's bad faith claims.
See In re Vitek, 51 F.3d at 538 (expressing "no view as to
whether Texas law recognizes [a] cause of action [for breach of
good faith]" because issue decided on procedural grounds).
     28
      This result is consistent with the policy that bankruptcy
should benefit only the debtor. See Pacor, Inc., 743 F.2d at 996
("Bankruptcy jurisdiction, however, was not conferred for the
convenience of those not in bankruptcy."). Otherwise, creditors
would have too much incentive to push a failing enterprise into
bankruptcy not for the debtor's sake, but for their own
interests. We decline to create such a rule because:

          "[I]t could discharge the debts of nondebtors ... as
          well as of debtors even if the creditors did not
          consent.... If the court could do all these nice

                                      20
                                       2

      We turn now to the contract claims.29          CIGNA and Zale suggest

that no contract rights have been impaired by the issuance of the

injunction.     Indeed,    the   bankruptcy       court   believed   that   the

protective    language    it   added   to   the    injunction   accomplished

precisely that result—that is, no impairment of contract rights.30

Protection of defensive rights, however, does not encompass all



          things the result would indeed be to make the property
          of bankrupts more valuable than other property—more
          valuable to the creditors, ... [and] the result would
          not only be harm to third parties, such as the [tort
          claimants], but also a further incentive to enter
          bankruptcy for reasons that have nothing to do with the
          purposes of bankruptcy law."

     Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 163 (7th
     Cir.1994).
     29
      Briefly, Feld claims that the insurance policy entitles
him to coverage, and NUFIC claims that CIGNA has improperly
bypassed the limits on its policy and has shifted liability to
NUFIC's excess policy.
     30
      See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 156 ("[T]he
relief requested [from] the Court is not intended to in any way
prejudice National Union's rights to raise coverage issues....
So it seems to me that where the record stands now is that there
is in effect an agreement by the moving parties that National
Union's rights to [assert] coverage issues will be unaffected by
the court order on the motion to approve the settlement."); Id.
at 216-17 ("Any parties who are not parties to the settlement
will be protected. The settlement will not prejudice their
abilities to defend themselves if there is any action sought
against them."); Order on Mot. for Reh'g, 9 Bankr.Ct.R. at 1534
("Feld is not a party to the settlement and has not settled with
these bankruptcy estates. Although the court used broad
injunction language, Feld reads that language too broadly. The
Court did not enjoin Feld from asserting contract rights, if any,
he may have with Cigna or anyone else. Nor did the court enjoin
Feld from having a judgment, if any, obtained against him by the
debtors reduced by the amounts paid to the estates in this
settlement, if appropriate. Feld's contract rights, if any, are
unaffected.").

                                       21
rights Feld and NUFIC may have with respect to the policy.               NUFIC's

declaratory judgment action, for example, exerted an offensive

right.    Because the injunction explicitly deprives NUFIC and Feld

of any offensive contract rights they may have,31 the injunction

impairs their rights.     We therefore examine the bankruptcy court's

jurisdiction   over   CIGNA   and    Zale's      request   for   the     type   of

injunctive relief the bankruptcy court granted.

     Feld   and   NUFIC   argue     that   the    bankruptcy     court    lacked

jurisdiction because the insurance policy is not property of the

estate. An insurance policy frequently is property of the estate,32

     31
      See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 216-17 ("There
was also an issue raised regarding injunction against offensive
litigation against parties to the settlement because of the facts
that they reached a settlement, how they went about negotiating
it. The Court will enter that injunction.... Frankly, it's
going to involve anyone else who's not a party to the
settlement.... [T]hey will not be able to bring offensive action
against parties as a result of the settlement."); Order on Mot.
for Reh'g, 9 Bankr.Ct.R. at 1534 ("The injunction does bar Feld
from commencing litigation to recover on claims, if any, arising
from any persons' participation in the settlement.").
     32
      See, e.g., Houston v. Edgeworth (In re Edgeworth), 993
F.2d 51, 56 (5th Cir.1993) (listing casualty, collision, life and
fire insurance as policies whose proceeds are property of estate,
whereas malpractice policies are not property of estate); St
Clare's Hosp. & Health Ctr. v. Insurance Co. of N. Am. (In re St.
Clare's Hosp. & Health Ctr.), 934 F.2d 15, 18-19 (2d Cir.1991)
(noting that insurance policies are property of debtor's estate,
when debtor is insurer's insured); National Union Fire Ins. Co.
v. Titan Energy, Inc. (In re Titan Energy, Inc.), 837 F.2d 325,
329-30 (8th Cir.1988) (finding related-to jurisdiction because
insurance policy was property of estate); MacArthur Co. v.
Johns-Manville Corp., 837 F.2d 89, 92 (2d Cir.) (holding that
products liability policies were property of estate), cert.
denied, 488 U.S. 868, 109 S.Ct. 176, 102 L.Ed.2d 145 (1988);
Tringali v. Hathaway Mach. Co., 796 F.2d 553, 560 (1st Cir.1986)
(holding that products liability policy is property of estate,
because debtor has right to have insurer satisfy claims against
debtor); A.H. Robins Co. v. Piccinin (In re A.H. Robins Co.),
788 F.2d 994, 1001-02 (4th Cir.) (holding that products liability

                                      22
because the insurance policy usually indemnifies the debtor.33   We

have excluded the proceeds of director and officer liability

policies from property of the estate, however, when those proceeds

directly paid the individual officers and not the debtor.34   Feld

and NUFIC argue that we should likewise exclude the $10 million in

proceeds from the policy at issue in this case.    CIGNA and Zale

argue that the policy and its proceeds are property of the estate

because the policy includes a reimbursement element, under which


policies are property of debtor because policies reimburse debtor
for claims against debtor), cert. denied, 479 U.S. 876, 107 S.Ct.
251, 93 L.Ed.2d 177 (1986).
     33
      See In re Edgeworth, 993 F.2d at 55 ("Insurance policies
are property of the estate because, regardless of who the insured
is, the debtor retains certain contract rights under the policy
itself. Any rights the debtor has against the insurer, whether
contractual or otherwise, become property of the estate.").

          The overriding question when determining whether
          insurance proceeds are property of the estate is
          whether the debtor would have a right to receive and
          keep those proceeds when the insurer paid on a claim.
          When a payment by the insurer cannot inure to the
          debtor's pecuniary benefit, then that payment should
          neither enhance nor decrease the bankruptcy estate. In
          other words, when the debtor has no legally cognizable
          claim to the insurance proceeds, those proceeds are not
          property of the estate.

     Id. at 55-56.
     34
      See In re Vitek, 51 F.3d at 533-34 (noting that proceeds
of D & O policies were not part of bankruptcy estate (citing
Louisiana World Exposition, Inc. v. Federal Ins. Co. (In re
Louisiana World Exposition, Inc.), 832 F.2d 1391 (5th
Cir.1987))); In re Louisiana World Exposition, Inc., 832 F.2d at
1399-1400 (holding that proceeds of D & O policies are not
property of estate because D & O policies do not reimburse
corporation); cf. Minoco Group v. First State Underwriters
Agency (In re Minoco Group), 799 F.2d 517, 519 (9th Cir.1986)
(holding that D & O indemnity policy was property of estate
because it indemnified debtor against claims by directors and
officers).

                               23
CIGNA pays Zale for certain expenses.     We need not decide whether

the proceeds are property of the estate, if we find that the

disputes over the CIGNA policy can have an effect on the estate.

      Feld and NUFIC argue that the contract claims had no effect

on the estate.   They correctly state that the effect must be on the

estate, not merely on the debtor.     In re Wood, 825 F.2d at 94 ("To

fall within the court's jurisdiction, the plaintiffs' claims must

affect the estate, not just the debtor.").35    Feld and NUFIC argue

that because the creditors approved and confirmed the plan prior to

the settlement approval, they assumed that the estate did not

include any insurance proceeds and therefore the settlement cannot

have affected the estate.   We disagree.    The disclosure statement

explicitly stated that:

     The Proponents believe that recoveries from third party claims
     could be substantial. However, the Proponents are presently
     unable to predict the precise amount of such recoveries.
     Therefore, the Proponents of the Plan do not make any
     representation or warranty whatsoever as to the value, if any,
     of th[ose recoveries].

Disclosure Statement, Bankr.Ct.R. at 568.     Thus, we infer that the

creditors approved the plan on the assumption that some amount of

proceeds from CIGNA would flow into the estate. Moreover, the plan

intertwines these claims with other provisions of the plan.36 Suits

     35
      See also In re Boone, 52 F.3d at 961 (holding that
"related to" jurisdiction required an effect on the estate not
merely on the debtor).
     36
      In the disclosure statement for its reorganization plan,
Zale stated that:

          "The Proponents believe that potential claims are
          covered by the directors and officers insurance and
          that the insurers may well be liable for all or most of

                                 24
over the CIGNA policy will tie up the policy assets and other

assets of the Litigation Entity due to the litigation and its

attendant expenses.37   For these reasons, we hold that Feld and

NUFIC's contract claims had an effect on the estate.38 Accordingly,

the bankruptcy court had "related to" subject-matter jurisdiction

over the contract claims.

      Feld and NUFIC argue that, even if the court had jurisdiction


          the policy limits. In this regard, the Proponents
          intend to preserve to the fullest extent the ability to
          make claims under such policies. To that end, the
          Proponents have reached a tentative agreement with
          representatives of certain officers and directors to
          settle all outstanding director and officer claims,
          conditional upon the agreement of the carriers to fund
          such settlement. As of the date of the filing of this
          Disclosure Statement, the insurers have not responded
          to the request by the directors and officers that the
          insurers fund the agreement. A response is expected,
          however, in the near future. Failure to reach an
          agreement with the insurers may result in a
          restructuring of the agreement with the directors and
          officers.").

     Disclosure Statement, 5 Bankr.Ct.R. at 525; see also id. at
     567 ("At the present time, the Proponents have identified
     potential claims against third parties as discussed further
     in other sections of this Disclosure Statement, including
     ... certain current and former directors and officers; ...
     and various directors' and officers' liability insurance
     carriers.").
     37
      See American Hardwoods, Inc. v. Deutsche Credit Corp. (In
re American Hardwoods, Inc.), 885 F.2d 621, 624 (9th Cir.1989)
(holding that related-to jurisdiction existed for third-party
claim against debtor's guarantor, because guarantor would make
claim against officers' stock and interfere with critical
officers' participation in management of reorganization plan).
     38
      Because this holding involves a reorganization plan, we
make no prediction as to whether the result would be different in
a Chapter 7 case. See Celotex, --- U.S. at ----, 115 S.Ct. at
1500 (comparing Chapter 11 and Chapter 7 cases and noting that
"[t]he jurisdiction of bankruptcy courts may extend more broadly
in the former case than in the latter").

                                25
over their contract claims generally, that jurisdiction extended

only to a temporary injunction, not a permanent one.   They contend

that a permanent injunction is outside the bankruptcy court's

jurisdiction because the contract claims will have no effect on the

estate after confirmation of the plan.      The confirmation of a

reorganization plan or the close of a bankruptcy estate regularly

results in the dismissal of related claims,39 because the nexus

between the related claim and the bankruptcy estate no longer

exists.40 However, we distinguish "between the determination of the

existence of jurisdiction at the outset of [the dispute] and the

determination of whether "related' claims should be dismissed with

the dismissal of the bankruptcy case."   In re Smith, 866 F.2d at


     39
      See Querner v. Querner (In re Querner), 7 F.3d 1199, 1201
(5th Cir.1993) ("[A]s a general rule the dismissal or closing of
a bankruptcy should result in the dismissal of related
proceedings."); Smith v. Commercial Banking Corp. (In re Smith),
866 F.2d 576, 580 (3d Cir.1989) ("As a general rule, the
dismissal of a bankruptcy case should result in the dismissal of
"related proceedings' because the court's jurisdiction of the
later depends, in the first instance, upon the nexus between the
underlying bankruptcy case and the related proceedings."). See
In re Querner, 7 F.3d at 1201 ("Notwithstanding the general rule,
however, nothing in the statute governing bankruptcy jurisdiction
mandates automatic dismissal of related proceedings upon
termination of the underlying bankruptcy case."); Carraher v.
Morgan Elec., Inc. (In re Carraher), 971 F.2d 327, 328 (9th
Cir.1992) ("[B]ankruptcy courts are not automatically divested of
jurisdiction over related cases when the underlying bankruptcy
case is dismissed.").
     40
      In re Querner, 7 F.3d at 1201 ("The general rule favors
dismissal because the court's jurisdiction over the related
proceedings depends upon the nexus between the underlying
bankruptcy case and the related proceeding."); In re Lemco
Gypsum, Inc., 910 F.2d at 789 ("The fact that property was once
owned by a bankrupt does not supply federal jurisdiction of all
future disputes concerning the property."). This is not an
automatic rule, however.

                                26
580.41 Accordingly, because jurisdiction existed at the time of the

settlement hearing, the bankruptcy court had jurisdiction over the

request for injunctive relief on the contract claims.

                                          B

        Feld and NUFIC argue nonetheless that, even if the bankruptcy

court       had    jurisdiction    to   enjoin     their   contract   claims,     the

bankruptcy court had no power to enter the permanent injunction at

issue. Section 105 provides that a bankruptcy court "may issue any

order, process, or judgment that is necessary or appropriate to

carry out the provisions of [the Bankruptcy Code]."                   11 U.S.C. §

105(a). Although we interpret § 105 liberally, Momentum Mfg. Corp.

v. Employee Creditors Committee (In re Momentum Mfg. Corp.), 25

F.3d    1132,       1136   (2d   Cir.1994),    a    §   105   injunction   must    be

consistent with the rest of the Bankruptcy Code, see Chiasson v. J.

Louis Matherne & Assocs. (In re Oxford Mgmt., Inc.), 4 F.3d 1329,

1334 (5th Cir.1993) ("[T]he powers granted by that statute must be

exercised in a manner that is consistent with the Bankruptcy

Code.").          A § 105 injunction cannot alter another provision of the

code.       Id. (holding that § 105 injunction was improper because it

purported to alter other Code provision).42

       41
      See also In re Querner, 7 F.3d at 1201 (addressing
existence of jurisdiction "while the [bankruptcy] case was
proceeding"); In re Morris, 950 F.2d 1531, 1534 (11th Cir.1992)
(looking to whether the dispute "was related to the bankruptcy
case at the time of its commencement").
       42
      See also Landsing Diversified Props. v. First Nat'l Bank &
Trust Co. (In re Western Real Estate Fund, Inc.), 922 F.2d 592,
601 (10th Cir.1990) ("[A] bankruptcy court's supplementary
equitable powers [under § 105(a) ] may not be exercised in a
manner that is inconsistent with the other, more specific

                                          27
          Feld and NUFIC argue that the injunction was improper,

contending that the injunction eradicated any liability of CIGNA

for contract debts to Feld or NUFIC and therefore violated § 524 of

the Bankruptcy Code.43 Section 524 prohibits the discharge of debts

of nondebtors.44   Accordingly, we must overturn a § 105 injunction

if it effectively discharges a nondebtor.   See In re Vitek, 51 F.3d

at 536 n. 27 ("[N]on-debtor property thus should not ordinarily be

shielded by the powers of the bankruptcy court.").


provisions of the Code."); Southern Ry. Co. v. Johnson Bronze
Co., 758 F.2d 137, 141 (3d Cir.1985) ("[S]ection 105 does not
authorize the bankruptcy court to create rights not otherwise
available under applicable law."); cf. United States v. Sutton,
786 F.2d 1305, 1308 (5th Cir.1986) (holding that § 105 "does not
authorize the bankruptcy courts to create substantive rights that
are otherwise unavailable under applicable law, or constitute a
roving commission to do equity").
     43
      Section 524(e) provides that "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).
     44
      See In re Edgeworth, 993 F.2d at 53 (holding that § 524(e)
discharges only the debtor's liability); Citizens Bank & Trust
v. Case (In re Case), 937 F.2d 1014, 1025 (5th Cir.1991) (holding
that bankruptcy court can only determine dischargeability of
debts owed by debtor, not those owed by third party); see also
First Fidelity Bank v. McAteer, 985 F.2d 114, 118 (3d Cir.1993)
("While it is true that the bankruptcy court's confirmation of
the plan binds the debtor and all creditors vis-a-vis the debtor,
it does not follow that a discharge in bankruptcy alters the
right of a creditor to collect from third parties. Section
524(e) specifically limits that discharge."); McAteer, 985 F.2d
at 118 (noting that although bankruptcy court can and does alter
obligations of debtor, the Code does not have the same effect on
the obligations of nondebtors); In re Western Real Estate Fund,
Inc., 922 F.2d at 600 (rejecting permanent injunction against
third party because it effectively discharged nondebtor); In re
Western Real Estate Fund, Inc., 922 F.2d at 600 ("Congress did
not intend to extend [fresh-start] protection" to third parties);
In re American Hardwoods, 885 F.2d at 625-26 (accepting argument
that permanent injunction improper because would effectively
discharge nondebtor, an effect prohibited by § 524).

                                 28
      [W]hile a temporary stay prohibiting a creditor's suit against
      a nondebtor ... 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) ..., 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. Not
      only does such a permanent injunction improperly insulate
      nondebtors in violation of section 524(e), it does so without
      any countervailing justification of debtor protection....

In re Western Real Estate Fund, Inc., 922 F.2d at 601-02;                 see also

In re American Hardwoods, 885 F.2d at 626 (concluding that "the

specific provisions of section 524 displace the court's equitable

powers under section 105 to order the permanent relief sought").

      CIGNA    and   Zale    argue    that      courts   have   upheld   permanent

injunctions against third-parties in other cases.                 In those cases,

however, the courts upheld permanent injunctions of third-party

claims   because     while   the     injunction     permanently     enjoined   the

lawsuits, it also channeled those claims to allow recovery from

separate assets and thereby avoided discharging the nondebtor. See

S.E.C. v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham

Lambert Group, Inc.), 960 F.2d 285, 293 (2d Cir.1992) (approving

settlement that excluded class from sharing in recovery fund

because class would receive fair amount from other funds), cert.

dismissed, --- U.S. ----, 113 S.Ct. 1070, 122 L.Ed.2d 497 (1993);

MacArthur Co., 837 F.2d at 94 (holding that injunction did not

discharge creditor because third-party interest could be asserted

against settlement fund); cf. Cullen v. Riley (In re Masters Mates

&   Pilots    Pension   Plan),       957   F.2d    1020,   1032   (2d    Cir.1992)

(rejecting settlement bar that eliminated creditor's debt because

settlement did not fairly compensate third party for lost rights).

                                           29
The injunction at issue in this case provided no alternative means

for Feld and NUFIC to recover from CIGNA for their offensive

contract rights.       Accordingly, because the permanent injunction as

entered    improperly       discharged       a    potential    debt        of   CIGNA,   a

nondebtor, the bankruptcy court exceeded its powers under § 105.

          The   impropriety      of     a    permanent       injunction         does   not

necessarily     extend      to   a    temporary        injunction     of    third-party

actions.        Such   an     injunction         may   be   proper     under      unusual

circumstances.         See Patton v. Bearden, 8 F.3d 343, 349 (6th

Cir.1993) ("Some courts have held that the debtor's stay may be

extended to non-bankrupt parties in "unusual circumstances.' "

(citing Robins, 788 F.2d 994));              Teachers Ins. & Annuity Ass'n v.

Butler, 803 F.2d 61, 65 (2d Cir.1986) ("Several courts have held

that under specific circumstances nondebtors may be protected by

the automatic stay—even though such protection may be temporary—if

it   contributes         to      the        debtor's        efforts        to     achieve

rehabilitation.").            These    circumstances         include       1)   when   the

nondebtor and the debtor enjoy such an identity of interests that

the suit against the nondebtor is essentially a suit against the

debtor, and 2) when the third-party action will have an adverse

impact on the debtor's ability to accomplish reorganization.45 When

     45
      See Patton, 8 F.3d at 349 ("Such circumstances usually
include when the debtor and the non-bankrupt party are closely
related or the stay contributes to the debtor's
reorganization."); In re Drexel Burnham Lambert Group, Inc., 960
F.2d at 293 ("In bankruptcy cases, a court may enjoin a creditor
from suing a third party, provided the injunction plays an
important part in the debtor's reorganization plan." (citing
Robins )); In re A.H. Robins Co., 788 F.2d at 999 (describing
"unusual situation" in which enjoining third parties might be

                                            30
either    of    these     circumstances     occur,    an   injunction    may    be

warranted.     See In re Drexel Burnham Lambert, Inc., 960 F.2d at 293

(approving of injunction because settlement was "unquestionably an

essential      element"     of   reorganization      and   injunction    a   "key

component" of settlement).           If not, a bankruptcy court may not

enjoin the third-party action.46

      Feld and NUFIC argue that this case does not involve "unusual

circumstances" and that, even if it did, the bankruptcy court did

not make the required findings to that effect.              If the bankruptcy

court does not determine that unusual circumstances exist, the

court may not enter an injunction of the third-party actions.                  See

In re American Hardwoods, 885 F.2d at 626-27 (distinguishing Robins

because in that case injunction would only affect fraction of

creditors and court had made finding that injunction was essential

to plan and entire reorganization hinged on injunction);                O'Malley

Lumber Co. v. Lockard (In re Lockard), 884 F.2d 1171, 1179 (9th


appropriate as "when there is such identity between the debtor
and the third-party defendant that the debtor may be said to be
the real party defendant and that a judgment against the
third-party defendant will in effect be a judgment or finding
against the debtor."); id. at 1003-06 (stating that § 105
injunction may be appropriate where proceeding would have an
adverse impact on debtor's ability to reorganize or deplete
property of estate).
     46
      See Oklahoma Federated Gold & Numismatics, Inc. v.
Blodgett, 24 F.3d 136, 141-42 (10th Cir.1994) (refusing to extend
stay to third party because "unusual situations" exception did
not apply where claims against third party were "separate and
independent from the claims asserted against [the debtor]");
International Bus. Machs. v. Fernstrom Storage & Van Co. (In re
Fernstrom Storage & Van Co.), 938 F.2d 731, 736 (7th Cir.1991)
(refusing to extend stay to debtor's insurer because Robins test
not met and suit would not "cause the debtor, the bankruptcy
estate, or the reorganization plan "irreparable harm' ").

                                       31
Cir.1989) (noting that, even if Robins rule were adopted, unusual

situation had not been shown);         cf. MacArthur Co., 837 F.2d at 93

(noting that court had made factual finding that suits would

"adversely affect property of the estate and would interfere with

reorganization").

      In this case, the bankruptcy court found that:

      The relationship to other motions to settle other litigation
      is before the Court, and the relationship to the prospect of
      either litigating or otherwise resolving other causes of
      action which belonged to the estate originally, or which now
      belong to the estate as resolved at confirmation of the
      proponents' plan.    Those last two factors should not be
      minimized.     There is a significant and substantial
      relationship between this settlement and other settlements
      that have been presented to the Court.     Those settlements
      considered globally will result in substantial consideration
      being paid to the bankruptcy estate. This settlement fits
      within the fabric of the other settlements that have been
      reached which are very important to the creditors of these
      estates.   Further, the ownership of whatever subrogation
      rights CIGNA may have will enable the estate to proceed to
      offer global settlements to other persons. That is consistent
      with the plan that the court has just confirmed, a key
      provision of which was to gather all causes of action, both
      those of the estate and those of others, in one place so that
      any persons subject to litigation would be able to settle
      globally at one time....        [T]hat is a very valuable
      consideration.

Confirmation Hearing, 3 Bankr.Ct.R. at 197-98.              We hold that this

language   under     the     circumstances          satisfies    the     "unusual

circumstances"     requirement     because     it    clearly    identifies     the

settlement as providing "substantial consideration" to the estate

and   constituting    part    of   a    "key    provision"      of     the   plan.

Accordingly, the bankruptcy court had power under § 105 to enjoin

temporarily the contract claims.

                                       C

      Feld and NUFIC further argue that the injunction was improper

                                       32
because the court failed to follow the procedures required by the

Bankruptcy Code for the entry of a § 105 injunction.                     They contend

that the bankruptcy court erred in granting the injunction without

conducting    a     full   adversary      proceeding.      Under        Rule    7001,    a

proceeding     to     obtain     an    injunction       requires        an     adversary

proceeding.       Lyons v. Lyons (In re Lyons), 995 F.2d 923, 924 (9th

Cir.1993) (holding that, when a Rule 7001 category was at issue,

the movant "may obtain the authority he seeks only through an

adversary proceeding").47 Rule 7001 matters incorporate much of the

Federal Rules of Civil Procedure, In re Haber Oil Co., 12 F.3d at

437 (noting that adversary proceeding rules "generally "either

incorporate or are adaptations of most of the Federal Rules of

Civil     Procedure.'      "   (quoting    Fed.R.Bankr.P.        7001        adv.   comm.

note)),48 and they equate to full-blown lawsuits, see Toma Steel

Supply,     Inc.     v.    Transamerican        Natural    Gas      Corp.       (In     re

Transamerican       Natural     Gas   Corp.),     978   F.2d     1409,       1416     (5th

Cir.1992)    (describing       adversary       proceedings     as   "    "full      blown

federal lawsuits within the larger bankruptcy case,' ... which are

governed by all of the rules in Part VII of the Bankruptcy

     47
      See also Fed.R.Bankr.P. 7001 ("An adversary proceeding is
... a proceeding in a bankruptcy court ... (7) to obtain an
injunction or other equitable relief."); Haber Oil Co. Inc. v.
Swinehart (In re Haber Oil Co.), 12 F.3d 426, 437 (5th Cir.1994)
("A proceeding "to recover money or property' is an adversary
proceeding, as are proceedings ... "to obtain an injunction or
other equitable relief.' " (quoting Fed.R.Bankr.P. 7001)).
     48
      See also id. at 438 (describing requirements of adversary
proceeding as including "a complaint in compliance with Federal
Rule of Civil Procedure 3," "a summons in keeping with Bankruptcy
Rule 7004," "an allegation of jurisdiction," and "a statement
that the proceeding was "core or non-core.' ").

                                          33
Rules...." (quoting Matter of Wood & Locker, Inc., 868 F.2d 139,

142 (5th Cir.1989))), cert. dismissed, --- U.S. ----, 113 S.Ct.

1892, 123 L.Ed.2d 646 (1993).           In contrast, contested matters49

require fewer procedural protections.        In re Transamerican Natural

Gas Corp., 978 F.2d at 1416 ("[C]ontested matters are "subject to

the less elaborate procedures specified in Bankruptcy Rule 9014.'

Contested    matter   proceedings   are    generally   designed     for   the

adjudication of simple issues, often on an expedited basis."

(quoting Matter of Wood & Locker, Inc., 868 F.2d at 142)).

      In order to initiate an adversary proceeding, a party seeking

the equitable relief must file a complaint and serve each affected

party.    See Village Mobile Homes, Inc. v. First Gibraltar Bank (In

re Village Mobile Homes, Inc.), 947 F.2d 1282, 1283 (5th Cir.1991)

(stating that while a motion suffices for contested matters, an

adversary proceeding requires filing a complaint in keeping with

Bankruptcy Rule 7003);      In re Perkins, 902 F.2d 1254, 1258 (7th

Cir.1990) (stating that an adversary proceeding "must be commenced

by a properly filed and served complaint" and a Rule 7001 matter

initiated by motion rather than by complaint "fail[s] on procedural

grounds").    We find no evidence in the record that CIGNA and Zale

filed a complaint for an adversary proceeding to demand injunctive

relief.      Instead,   they   simply    added   the   injunction    to   the

settlement agreement.     Including a matter governed by Rule 7001 in

another matter already before the court, however, does not satisfy


     49
      Contested matters are those issues for which Rule 7001
does not require an adversary proceeding.

                                    34
the procedural rules required by Rule 7001.            See Brady v. Andrew

(In re Commercial Western Finance Corp.), 761 F.2d 1329, 1337 (9th

Cir.1985) (requiring party to comply with adversary proceeding

requirements   rather    than   dispose   of   third    party's     claim   in

reorganization plan);     In re McKay, 732 F.2d 44, 48 (3d Cir.1984)

(holding that party cannot merely include Rule 7001 matter in

reorganization   plan,    but   must    "fil[e]   a     complaint    seeking

[resolution of the matter] with the bankruptcy court and serv[e] a

copy of it on each [affected] creditor").         Accordingly, CIGNA and

Zale failed to initiate properly their request for injunctive

relief.

      CIGNA and Zale argue that NUFIC and Feld waived their rights

to an adversary proceeding.50       "We have recognized that such a

     50
      CIGNA argues first that NUFIC waived the adversary
proceeding requirement by failing to raise it in the courts
below. We disagree. At the settlement hearing, NUFIC moved for
a continuance "on the grounds that they have not had adequate
time to prepare for this hearing, have not been provided adequate
information to go to a full evidentiary hearing on this matter at
the sole request of the Court." Tr. Confirmation Hr'g, 3
Bankr.Ct.R. at 112. NUFIC moved that they "be given at least
three weeks time in which to prepare for the hearing." Id. The
court denied the motion, stating that:

          What I'm trying to figure out is notwithstanding the
          lack of documents and notwithstanding any notice
          issues, I've still got a bottom line question I'm being
          asked, and that is whether the agreed judgment in
          Cigna's business is what Cigna agreed to constitute a
          reasonable agreement of those claims. I've got to
          assume that notice notwithstanding, there's really no
          reason to delay the hearing one way or the other.

     Id. at 116. NUFIC also stated that it had already initiated
     a declaratory action in the district court and that such
     action was an adversary proceeding. Id. at 158 ("[W]e have
     filed a complaint in federal court. That has been noticed
     and removed to this Court, and we just want that on the

                                   35
waiver    is   possible,"   In    re   Haber   Oil     Co.,    12   F.3d   at    440

(discussing whether party "waived compliance with the requisites of

an adversary proceeding");         see also In re Village Mobile Homes,

947 F.2d at 1283 ("Compliance with the requisites of an adversary

proceeding may be excused by waiver of the parties."), but only if

"the parties are apprised of and have a chance to address all the

issues being decided."           In re Haber Oil Co., 12 F.3d at 440.

Accordingly, parties have waived their right to protest the lack of

an adversary proceeding when the court afforded them all the

protections of an adversary proceeding yet they knowingly failed to

litigate a Rule 7001 issue which they had an opportunity to

litigate.      Halverson v. Estate of Cameron (In re Mathiason), 16

F.3d 234, 238 (8th Cir.1994).

     CIGNA and Zale argue that NUFIC had a full opportunity to

litigate the issues surrounding its contract claims.                We disagree.

Indeed,    the   court   frequently     prevented      NUFIC    and   Feld      from

addressing     the   issues,51   calling    them   a   "sideshow,"52       a   "side


     record because we think that is part of an adversary
     [proceeding] that we have already initiated.").
     51
      After first asking: ("But if you're not a party to [the
settlement] and I got creditors and officers and affiliates and
insiders, so forth, of this case are willing, want to come into
court to make a stipulation, should I even consider a non-party
to the settlement and a non-creditor position."), Tr.
Confirmation Hr'g, 3 Bankr.Ct.R. at 120, the court denied NUFIC's
attempts. See id. at 127 (denying motion for continuance for
"total lack of standing," after discussing standing issue with
National Union, basing its denial on grounds that "National Union
contend[s] that it is not a party-in-interest in this bankruptcy
case"); id. at 141 (overruling objection to factual findings,
stating that "I'm not here to determine and make specific
findings on the underlying merits of the claims. I'm here to
determine why the creditors have struck the deal that the

                                       36
issue,"53 and "irrelevant."54           Moreover, the settlement proponents

themselves argued that NUFIC and Feld's claims were not before the

court     at   the    settlement      hearing.      Confirmation     Hearing,   3

Bankr.Ct.R. at 122 (arguing that continuance unnecessary because

"National Union['s] submission in this matter does not oppose the

fairness or reasonableness of the transaction from the perspective

of debtor's estates [and] [t]hat is the only issue before Your

Honor....").          Also,     the   bankruptcy   court   refused    to   permit

testimony      such   as   an    adversary     hearing   would   require.55     We


creditors have struck and on what understandings and then to
determine if that's within a range of reasonableness."); id. at
143 ("[T]he Court recognizes it's not here to make any findings
of the underlying disputes that give rise to the settlement, but
rather is called upon to determine that this settlement is
reasonable.").
     52
      See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 109 ("All this
question of who was told what and what happened where and what
went on is a total sideshow to the underlying issues that the
Court has to address in the motion. That is, is the settlement
reasonable?"); id. at 220 (instructing that, on the issue of bad
faith, it would allow "no more side shows").
     53
      See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 243 (calling
bad faith question "a side issue to a settlement between certain
persons in the bankruptcy estate").
     54
      See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 232 ("[T]he
Court will not address, I'll say it again, will not address those
underlying issues that are irrelevant in the settlement.").
     55
      See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 154 ("With
this state of the record, it seems to me we do not need to go
into many of the other issues underlying factual disputes, and it
also seems to me appropriate to continue in the process that we
have done, and that is to permit a directed testimony by proffer
and then offer of cross examination.").

          We do not intend to hold that a bankruptcy court can
     never reach conclusions in an adversary proceeding without a
     full-blown evidentiary hearing, but such an abbreviated
     review is appropriate only where a party "d[oes] not present

                                          37
consequently find no waiver on NUFIC's part.

      CIGNA and Zale also argue that Feld waived his right to an

adversary proceeding by leaving the hearing.            The court, however,

had already made it clear that it would not permit full litigation

of NUFIC and Feld's claims.          Accordingly, Feld would not have had

an opportunity to raise his contentions effectively, and his

counsel's departure cannot have waived his rights.                  Once Feld

learned that the bankruptcy court had actually decided the issue,

he moved for rehearing to correct the unanticipated errors. Feld's

motion for rehearing further prevented a waiver. See In re Village

Mobile Homes, 947 F.2d at 1283 (holding that party did not waive

adversary proceeding protections when, although not present after

given notice of hearing, party filed motion for rehearing).

       Alternatively, CIGNA and Zale contend that the settlement

hearing essentially was an adversary proceeding.               Calling it an

adversary proceeding, however, does not make it one.                See In re

Haber Oil Co., 12 F.3d at 438 n. 1 ("Ordinary claims litigation is

not transformed into an adversary proceeding simply by labelling it

as   one.").    When       third   parties   are   affected,   we   scrutinize

carefully the fairness of the hearing afforded.                In re Masters

Mates, 957     F.2d   at    1031   ("[T]hird   party   participation    in   an

evidentiary fairness hearing and court approval of the settlement

bar are necessary to protect the rights of third parties.").


      significant questions of disputed facts in its offer of
      proof." American Imaging Servs., Inc. v. Eagle-Picher
      Indus., Inc. (In re Eagle-Picher Indus., Inc.), 963 F.2d
      855, 859 (6th Cir.1992). Such is not the case here—NUFIC
      and Feld raised several disputed factual issues.

                                       38
     In   this    case,    the   court      did   not   conduct   an   adversary

proceeding.      The bankruptcy court itself acknowledged that proper

resolution of these issue required a separate hearing that it was

not conducting at that time.56        As discussed above, the parties did

not fully litigate the issues, nor did they even approximate

compliance with the procedural requirements.               Moreover, we find no

indication in the record that the bankruptcy court conducted the

proper analysis and made the requisite findings for entry of a

preliminary      injunction.      See       Commonwealth    Oil   Ref.   Co.   v.

U.S.E.P.A. (In re Commonwealth Oil Ref. Co.), 805 F.2d 1175, 1188-

89 (5th Cir.1986) ("[T]he legislative history of § 105 makes clear

that stays under that section are granted only under the usual

rules for the issuance of an injunction."), cert. denied, 483 U.S.

1005, 107 S.Ct. 3228, 97 L.Ed.2d 734 (1987);               In re Eagle-Pitcher

Indus.,   Inc.,    963    F.2d   at   858    ("When     issuing   a   preliminary

injunction pursuant to its powers set forth in section 105(a), a


     56
      See Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 152 ("I
understand that there is going to be an underlying dispute
between the estate and National Union about coverage. We're not
here to resolve that today. And that testimony under oath at the
time whenever that is resolved and whatever forum will decide
that question and will thereby fix parties' rights."); id. at
195-96 ("I need not decide the coverage and corresponding bad
faith denial coverage issues. They have not been fully litigated
before the Court. I understand from the parties they will be
raised in other litigation and at other times. They are not ripe
for decision and the Court does not decide it."); id. at 226-27
( "[T]he Court won't make any findings of coverage and/or bad
faith, simply reserve those for when raised dealing with the
merits of whatever would be sought for National Union."); id. at
187 ("I haven't reviewed that complaint. I haven't even seen it.
It may have coverage issues which would not be prejudiced by the
injunction. It may have other issues which may be ended by the
injunction. I just can't make any determination on that.").

                                        39
bankruptcy court must consider the traditional factors governing

preliminary injunctions issued pursuant to Federal Rule of Civil

Procedure 65.").

     The four prerequisites to the issuance of a preliminary
     injunction are: (1) a substantial likelihood that the movant
     will prevail on the merits; (2) a substantial threat that the
     movant will suffer irreparable injury if the injunction is not
     granted;    (3) that the threatened injury to the movant
     outweighs the threatened harm an injunction may cause the
     party opposing the injunction; and (4) that the granting of
     the injunction will not disserve the public interest.

In re Commonwealth Oil Ref. Co., 805 F.2d at 1189 (internal

citations omitted);      accord In re Eagle-Picher Indus., Inc., 963

F.2d at 858.      Because the bankruptcy court focused only on the

fairness of the settlement to the estate,57 it failed to address

these issues, that is, whether CIGNA and Zale had satisfied the

Rule 65 prerequisites.        We therefore hold that there was no

compliance with Rule 7001, constructive or otherwise. Moreover, we

feel this case demonstrates the "difficulties that are apt to arise

if the bankruptcy court too easily permits parties to circumvent

the rules governing adversary proceedings."     In re Haber Oil Co.,

12 F.3d at 440.      CIGNA and Zale failed to follow the rules.   The

bankruptcy court compounded their failure by excusing their lapse

and preventing NUFIC and Feld's attempts to salvage the situation.

CIGNA and Zale cannot now benefit from their own mistake.   See Bear

v. Coben (In re Golden Plan of Calif., Inc.), 829 F.2d 705, 712

(9th Cir.1986) (reversing determination of issue covered by Rule

7001 because party seeking determination had failed to initiate an


     57
          See supra nn. 51-54 and accompanying text.

                                   40
adversary proceeding and commenting that party's failure to comply

improperly imposed on affected party the "burden of challenging

[the] action and thus contravened Rule 7001");         In re Commercial W.

Fin. Corp., 761 F.2d at 1337 (stating that if a party wants the

benefits of the Bankruptcy Code, it "must carry the burden of

following the mandated procedures"). Accordingly, we hold that the

district court's injunction against NUFIC's and Feld's contract

claims was improper.

     Given that the district court had either no jurisdiction, no

power, or used improper procedures to enjoin NUFIC's and Feld's

claims,     the   question   remains   what   remedy   this   Court   should

order—affirm a modified settlement that lacks the injunction or

vacate the settlement entirely.         NUFIC and Feld argue that we can

affirm the settlement approval without the injunction.                 CIGNA

contends that it would not have settled absent the injunction and

accordingly affirming a modified settlement would be unfair.58            We

decline to speculate whether the bankruptcy court, which was

intimately familiar with this bankruptcy case, would have approved


     58
          CIGNA's counsel stated at the settlement hearing that:

             The biggest incentive of paying your limits and going
             home instead of just paying lawyers to defend the
             lawsuit is you want to avoid litigation. And if this
             settlement simply means more litigation for CIGNA and
             its officers and its directors and its employees and
             lawyers and its lawyers' law firm, then at that point
             it doesn't make any sense for CIGNA to do it because
             what it will mean is that we just simply bought
             ourselves another lawsuit which will not deplete our
             limits.

     Tr. Confirmation Hr'g, 3 Bankr.Ct.R. at 179-80.

                                       41
the settlement without the injunction.   Accordingly, we believe it

more appropriate to reverse the approval order, vacate the entire

settlement, and remand to the district court for reassessment of

the settlement.

                                 D

     NUFIC and Feld also challenge the district court's factual

findings that (1) the settling parties had acted in good faith and

(2) the settlement exhausted CIGNA's policy limits.   They contend

that CIGNA is already arguing in other proceedings that these

findings preclude NUFIC and Feld from arguing otherwise in future

actions.59   Given that we vacate the settlement, these findings no

longer have any legal effect. Accordingly, we need not address the

arguments on this issue.

     Moreover, the res judicata and collateral estoppel effect of

the bankruptcy court's findings is not a question for this Court.

CIGNA is not asking us to give the findings preclusive effect in

this case.   Accordingly, we leave this issue for a future court to

decide.60

     59
      See Br. in Support of CIGNA Insurance Company's Mot. for
Contempt Against National Union Fire Insurance Company, B.Ct.R.
at 1548 (asserting in proceeding brought by National Union that
settlement injunction acts as a bar against action and against
litigation of issues of bad faith).
     60
      We comment, however, that such findings could have
preclusive effect against third parties only where the bankruptcy
court had jurisdiction over their claims. Latham v. Wells Fargo
Bank, 896 F.2d 979, 983 (5th Cir.1990) (requiring that " "the
prior judgment must have been rendered by a court of competent
jurisdiction' " (quoting Nilsen v. City of Moss Point, 701 F.2d
556, 559 (5th Cir.1983) (en banc)); Latham, 896 F.2d at 983
("[T]he preclusive effect of a bankruptcy decree must reflect the
reality of its limited jurisdiction."). We also note for future

                                 42
                                    III

     The bankruptcy court lacked jurisdiction over CIGNA and Zale's

request to enjoin NUFIC's and Feld's tort claims against CIGNA.

The bankruptcy court also lacked power under § 105 to permanently

enjoin NUFIC's and Feld's contract claims against CIGNA.               Lastly,

the bankruptcy court failed to conduct an adversary proceeding as

required   by   Rule   7001   for   the   entry   of   a   §   105   temporary

injunction.     For these reasons, we REVERSE the judgment of the

district court and REMAND for the district court to (1) vacate the

approval of the settlement between Zale and its three former

directors and CIGNA, and (2) conduct further proceedings consistent

with this opinion.61




reference that the legal standard in a settlement hearing differs
from that applicable in an adversary proceeding or state court
trial. Copeland v. Merrill Lynch & Co., 47 F.3d 1415, 1423 (5th
Cir.1995) ("Examining whether a particular settlement is fair or
equitable and in the best interest of the estate and creditors is
a different inquiry, driven by different policies, than
litigation of the actual claim."). Consequently, we doubt that
the findings of the bankruptcy court in a settlement hearing
would have preclusive effect in adversary proceedings or state
court trials. Id. at 1422 ("Collateral estoppel does not
preclude litigation of an issue unless both facts and the legal
standard used to assess them are the same in both proceedings."
(citing Recoveredge L.P. v. Pentecost, 44 F.3d 1284, 1291 (5th
Cir.1995); Brister v. A.W.I., Inc., 946 F.2d 350, 354 & n. 1
(5th Cir.1991))).
     61
      Because we reach our conclusion on jurisdictional and
procedural grounds, we need not and do not address the parties'
remaining arguments.

                                     43
