Introduction
On June 18, 2009 the United States Supreme Court ruled 7-2 that an injunction (the “1986 Injunction”) incorporated into the 1986 Johns-Manville Corp. (“Manville”) bankruptcy reorganization order (the “1986 Order”) barred claims made directly against Manville’s insurer, the Travelers Indemnity Company (“Travelers”), even though those claims were derivative of Travelers’ alleged wrongdoing, as opposed to that of Manville. See Travelers Indemnity Co. v. Bailey, ___ U.S. ___ (June 18, 2009) (Souter, J.) (copy available here). The Court held that: (a) the claims fell within the terms of the 1986 Injunction; and (b) the claimants were barred by res judicata from collaterally attacking the Bankruptcy Court’s subject-matter jurisdiction to enter the 1986 Order containing the 1986 Injunction. Slip op. at 1-2 & 9-10.
The decision should bring some degree of finality to Manville’s insurers’ exposure to asbestos-related claims, which has been a moving target for quite some time. The effect, if any, the decision may have on reinsurance claims and disputes is not yet clear. That said, now that Travelers’ liabilities presumably can more easily be quantified, cedents, retrocedents, reinsurers and retrocessionaires whose claims and liabilities are derived from Travelers’ and other Manville insurers’ liabilities might be in a better position to attempt to settle or commute those claims and liabilities. And, in a more general sense, the decision provides some guidance on how bankruptcy-court channeling-injunctions should be interpreted, and the extent to which, if at all, such injunctions may be collaterally attacked for lack of subject-matter jurisdiction.
Facts
As many readers may know, from the 1920s until the 1970s Manville reputedly was the largest supplier of raw asbestos and manufacturer of asbestos-containing products in the United States. Travelers insured Manville during much of that period. Thousands of law suits were filed against Manville as studies demonstrated that asbestos exposure could cause respiratory disease. Travelers paid Manville’s litigation costs and worked closely with Manville to learn what Manville knew, to assess risks associated with asbestos exposure, and evaluate potential liability for — and defenses to — asbestos claims.
The Manville Reorganization
In 1982 Manville filed under Chapter 11 of the Bankruptcy Code in the Southern District of New York, and the Bankruptcy Court was charged with devising “a plan of reorganization for [Manville] which would provide for payment to holders of present or known asbestos health-related claims . . . and [to] those persons who had not yet manifested an injury but who would manifest symptoms of asbestos-related illnesses at some future time.” Slip op. at 2 (quoting Re Johns-Manville Corp., 97 B.R. 174, 176 (S.D.N.Y. Bkrtcy 1989)). To that end the reorganization plan created the Manville Personal Injury Settlement Trust (the “Trust”) to pay claims, which were channeled to the Trust. Since inception the Trust has paid $3.2 billion to over 600,000 claimants.
During the period leading up to the reorganization, Travelers and other insurers litigated with Manville over coverage issues and were sued by third parties seeking to recover under insurance policies issued to Manville. The insurers entered into a settlement under which they agreed to pay $770 million into the Trust. Travelers’ contribution was $80 million.
The quid pro quo for the settlement was the 1986 Injunction, which provided that upon payment of the settlement funds, “all persons are permanently restrained and enjoined from commencing and/or continuing any suit, arbitration, or other proceeding of any type or nature for Policy Claims against any or all members of the Settling Insurer Group.” The 1986 Injunction also provided that the insurers were “released from any and all Policy Claims,” which were to be channeled to the Trust. “Policy Claims” were defined as “any and all claims, demands, allegations, duties, liabilities and obligations (whether or not presently known) which have been, or could have been, or might be, asserted by any Person against . . . any or all members of the Settling Insurer Group based upon, arising out of or relating to any or all of the Policies.”
The 1986 Injunction was incorporated and made part of the 1986 Order, which established a Plan of Reorganization for Manville. The 1986 Order was affirmed by the District Court, and ultimately, the United States Court of Appeals for the Second Circuit.
The Independent Direct Action Claims
Lo and behold ten years later, plaintiffs began asserting claims directly against Travelers in various state courts. These suits (the “Independent Direct Action Claims”) were not derivative of Manville’s wrongdoing or Manville’s rights under the insurance policies, but alleged independent wrongdoing on Travelers’ part. Some of the suits were brought under state consumer-protection statutes and alleged that Travelers conspired with insurers and asbestos manufacturers to conceal the dangers of asbestos exposure and to assert a “fraudulent” “state of the art” defense (i.e., that asbestos suppliers and asbestos-containing product manufacturers had no duty to warn). Other suits claimed that Travelers had violated a common law duty to warn the public about the perils of asbestos exposure or had concealed knowledge of those perils.
The Bankruptcy Court’s Clarifying Order and Subsequent Proceedings
In 2002 Travelers, relying on the 1986 Injunction moved in the Bankruptcy Court to enjoin the Independent Direct Action Claims. A temporary restraining order was entered and extended multiple times to allow the parties to mediate their disputes. The mediation led to Travelers agreeing to pay more than $400 million in additional funds into the Trust to compensate plaintiffs for Independent Direct Action Claims, provided that the Bankruptcy Court entered a clarifying order stating that the Independent Direct Action Claims were barred by the 1986 injunction. After an evidentiary hearing, the Bankruptcy Court concluded that the Independent Direct Action Claims “necessarily ‘arise out of’ and [are] related to’” the insurance policies under which Travelers defended Manville for asbestos-related claims. The Bankruptcy Court therefore concluded that they were “Policy Claims” that “are — and always have been – permanently barred” by the 1986 Injunction.
On August 17, 2004 the Bankruptcy Court entered a clarifying order (the “Clarifying Order”), which provided that the 1986 Injunction barred the Independent Direct Action Claims and “[t]he commencement or prosecution of actions and proceedings against Travelers that directly or indirectly are based upon, arise out of or relate to Travelers[‘] insurance relationship with Manville or Travelers[‘] knowledge or alleged knowledge concerning the hazards of asbestos,” including indemnification and contribution claims.
Certain claimants and the Chubb Indemnity Insurance Company objected to the order and appealed. The District Court affirmed, but the Second Circuit reversed. The Second Circuit held that the Bankruptcy Court had continuing jurisdiction to interpret and clarify its orders, and that the literal terms of the 1986 Injunction barred the Independent Direct Action Claims. But the Second Circuit determined that the Bankruptcy Court did not have jurisdiction to enforce the 1986 Injunction because it had no jurisdiction over the Independent Direct Action Claims.
The Second Circuit held that Bankruptcy Court lacked jurisdiction when it barred “claims brought against a third-party non-debtor solely on the basis of that third-party’s financial contribution to the debtor’s estate,” since “a bankruptcy court only has jurisdiction to enjoin third-party non-debtor claims that directly affect the res of the bankruptcy estate.” The Second Circuit said that the Independent Direct Action Claims “do not seek to collect on the basis of Manville’s conduct,” but “seek to recover directly from Travelers, a non-debtor insurer, for its own alleged misconduct.”
The Second Circuit also found that the original Second Circuit decision affirming the 1986 Injunction did not bar the Court from considering the Bankruptcy Court’s subject matter jurisdiction. According to the Second Circuit the earlier appeal concerned the authority of the Bankruptcy Court to bar a Manville asbestos distributor from collecting out of Manville’s insurance coverage, a claim derivative of Manville’s own alleged wrongdoing, and therefore did not bar a challenge to the Bankruptcy Court’s subject-matter jurisdiction to enjoin claims that were not derivative of Manville’s alleged wrongdoing. The Supreme Court granted certiorari and reversed.
United States Supreme Court Decision
The Independent Direct Action Claims Fell Within the Scope of the 1986 Injunction
The Court agreed with the Second Circuit, District and Bankruptcy Courts that the Independent Action Claims fell within the terms of the 1986 Injunction. The 1986 Injunction defined “Policy Claim” as any claim, allegation, duty, liability, obligation or demand “based upon, arising out of or relating to” Travelers’ coverage of Manville. This broad language was not limited to claims derivative of Manville’s own alleged wrongdoing or its rights under the policies. The Court said that the plain terms of the order were controlling and should have been enforced:
[W]here the plain terms of a court order unambiguously apply, as they do here, they are entitled to their effect. If it is black-letter law that the terms of an unambiguous private contract must be enforced irrespective of the parties’ subjective intent, it is all the clearer that a court should enforce a court order, a public governmental act, according to its unambiguous terms. This is all the Bankruptcy Court did.
Slip op. at 12-13 (citations and parenthetical quotations omitted).
The Bankruptcy Court Had Subject-Matter Jurisdiction to Enter the Clarifying Order
The Court viewed the subject matter jurisdiction issue as a relatively simple one: whether the Bankruptcy Court in 2004 had the subject matter jurisdiction to enter the Clarifying Order. The Court said “[t]he answer here is easy; as the Second Circuit recognized, and respondents do not dispute, the Bankruptcy Court plainly had jurisdiction to interpret and enforce its own prior orders.” Slip op. at 13 (citation omitted). And, noted the Court, “when the Bankruptcy Court issued the 1986 Orders it explicitly retained jurisdiction to enforce its injunctions.” Id.
The Court said the Second Circuit erred by holding that the Bankruptcy Court lacked subject-matter jurisdiction to enter the 1986 Injunction. See Slip op. at 13-14. The issue of the Bankruptcy Court’s jurisdiction was res judicata and simply not open to collateral attack: “Almost a quarter-centruy after the 1986 Orders were entered, the time to prune them is over.” Slip op. at 16. When the Second Circuit first reviewed the 1986 Injunction on direct appeal, “anyone who objected was free to argue that the Bankruptcy Court had exceeded its jurisdiction, and the District Court or the Court of Appeals could have raised such concerns sua sponte.” Slip op. at 14. One asbestos distributor challenged the subject matter jurisdiction of the Bankruptcy Court, albeit in the context of a claim derivative of Manville’s own wrongdoing. But the failure of that person, and others, to object on the ground that the orders might be construed to bar claims that were not derivative of Manville’s alleged wrongdoing, and the failure of the Second Circuit to raise the issue sua sponte, precluded further, collateral attack on the Bankruptcy Court’s subject matter jurisdiction.
The Court emphasized that its holding was “narrow.” See Slip op. at 17. First, the Court said that “[w]e do not resolve whether a bankruptcy court, in 1986 or today, could properly enjoin claims against nondebtor insurers that are not derivative of the debtor’s wrongdoing.” Id. The Court noted that a statute enacted in 1994 “authorized bankruptcy courts, in some circumstances, to enjoin actions against a nondebtor ‘alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability . . . arises by reason of . . . the third party’s provision of insurance to the debtor or a a related party,’ and to channel those claims to a trust for payments to asbestos claimants.” Slip op. at 17 (quoting 11 U.S.C. § 524(g)(4) (A)(ii).) On direct review of a channeling injunction, said the Court, a reviewing court would have to assess the injunction in light of the requirements of 11 U.S.C. § 524(g)(4)(A)(ii). But, in view of the procedural posture of the case, the Court did not express any opinion on whether the 1986 Injunction would have satisfied those requirements. See Slip op. at 17.
Second, the Court did not decide whether any particular respondent was bound by the 1986 Order. One of the respondents, Chubb, claimed below that it was not given constitutionally sufficient notice of the 1986 Order (including the 1986 Injunction) and accordingly, due process considerations absolved it from following the Order. Since the Second Circuit did not reach this argument, the Court said that it could take it up on remand along with any other objections properly preserved by the respondents. See Slip op. at 17-18.
Justice Stevens dissented in an opinion joined by Justice Ginsburg. While a detailed discussion of the dissenting opinion is outside the scope of this post, the dissent’s principal argument was that the 1986 injunction was intended to cover only claims derivative of Manville’s own alleged wrongdoing.
Tags: Asbestos, Bankruptcy, Channeling Injunction, Chapter 11, Claim Preclusion, Collateral Attack, Injunction, Insurance, Manville, Order, reinsurance, Reorganization, Res Judicata, Subject Matter Jurisdiction, Travelers Inemnity Co. v. Bailey, Trust, United States Supreme Court
