The Trust had several advantages. The company could isolate
asbestos litigation because all asbestos claims were brought against the
Trust. Also, insurers, like Travelers Indemnity, were protected from future
suits involving asbestos claims in exchange for funding the Trust. Finally,
the Trust allows asbestos plaintiffs to recover regardless of whether the
company had any assets at they time they brought their lawsuit because their
claims were satisfied by the Trust's property.
The Manville reorganization plan is considered a huge
success and received Congressional approval in 1994. Section 524 of the
Bankruptcy Code codified the order and authorizes bankruptcy courts to issue
injunctions barring derivative claims against third party insurers. See 11
U.S.C. § 524(g).
Asbestos plaintiffs' attorneys began testing new
theories of liability in 2001. They filed claims against insurance
companies, which have come to be known as "direct action" claims, asserting
independent theories of liability. The direct action claims against
Travelers Indemnity allege the insurance company is liable because it
suppressed information about the dangers of asbestos, influenced Manville's
failure to disclose these dangers, violated alleged duties to disclose
information about asbestos, and engaged in a conspiracy to conceal pertinent
facts about Manville's products.
In 2002, Travelers Indemnity asked the bankruptcy court
to enjoin the direct action claims. Around the same time, Travelers
Indemnity engaged in settlement discussions with several of the direct
action plaintiffs. Until this point, Chubb Insurance was not involved in
asbestos litigation, but was concerned about the settlement discussions. If
the bankruptcy court approved the Travelers Indemnity settlement with direct
action plaintiffs, Chubb Insurance could be precluded from suing Travelers
in cases in which they shared liability. Thus, Chubb Insurance sided with
plaintiffs in arguing the bankruptcy court lacked the power to enjoin suits
brought against third-party non-debtors.
The bankruptcy court disagreed with Chubb Insurance and
the direct action asbestos plaintiffs. The court found the direct actions
"arose out of" and "related to" the Manville insurance policies and thus
were barred by the original Manville Confirmation Order. The district court
agreed.
The Second Circuit reversed, finding the bankruptcy
court did not have jurisdiction to enjoin claims brought against Travelers
Indemnity, a third-party non-debtor, solely on the basis of Travelers
Indemnity's contribution to the debtor's estate. The Second Circuit further
held that a bankruptcy court only has jurisdiction to enjoin third-party
non-debtor claims that directly affect the property of the bankruptcy
estate.
Travelers Indemnity appealed and the Supreme Court
granted certiorari. The petitioner takes the position that the bankruptcy
court's jurisdiction cannot be limited to the property of the debtor's
estate. Travelers Indemnity further argues that the Second Circuit's ruling
undermines the policy of finality and repose and that allowing independent
actions to survive will expose the insurance company to limitless
litigation.
The direct action plaintiffs and Chubb Insurance argue
that the bankruptcy court's jurisdiction does not extend beyond the
debtor-creditor relations. Moreover, finality and repose are not undermined
in this case, because this is merely an attempt by Travelers Indemnity to
expand on the scope of the 1986 Manville Confirmation Order.
From the start of oral arguments, Justice Stevens called
this a "mysterious case." He explained that he "can't figure out what
anybody expects to collect from Travelers for what they did. The fact that
they defended [Johns-Manville] was proper for them as an insurance company."
See Transcript of Record at 12:16-19, Travelers v. Bailey (argued March 30,
2009) (No. 08-295, 08-307) available at
http://www.supremecourtus.gov/oral_arguments/argument_transcripts/08-295.pdf.
Yet, at the same time, Justice Stevens seemed to disagree with the idea that
the bankruptcy court should be able to enjoin actions that do not affect the
bankruptcy debtor's estate. See Transcript of Record at 11:15-25, 12:1-14.
Chief Justice Roberts and Justice Scalia took particular
interest in the breadth of the bankruptcy court's jurisdiction and made
several inquiries regarding the bankruptcy court's authority to enjoin
actions against third-party non-debtors. Similarly, Justice Beyer disfavored
a bright line rule where bankruptcy courts could never enjoin actions
against third-party non-debtors. See Transcript of Record at 39:8-13.
On the other hand, Justice Souter and Justice Ginsburg
addressed practical considerations. Both seem to acknowledge the reality
that the Manville insurers would likely have refused a settlement agreement
in which hundreds of millions of dollars were contributed to the trust and
yet exposure to liability for future claims continued. See Transcript of
Record at 34:10-21. Justice Souter went further to ask counsel for the
claimants whether the Court should construe the original Manville
Confirmation Order bearing that premise in mind.
Justice Breyer pointed out that the impact of the direct
action claims will not only reach third-party non-debtors, but will also
extend to future debtors. He contends future debtors will be negatively
affected because insurance companies will loathe defending future mass tort
liability, like asbestos cases. See Transcript of Record at 27:24-25,
28:1-2, 4-10.
Justice Breyer returned to public policy considerations
at the end of the argument when he invited counsel to comment on the public
policy concerns underlying a decision that would narrow the bankruptcy
court's powers to enforce Manville Confirmation Orders. See Transcript of
Record at 53:6-15. Justice Beyer expressed concern over the consequences of
failing to channel claims against trusts created in Manville-like
reorganizations that preserve assets from which future plaintiffs recover.
Without establishing trusts under these reorganizations, company assets are
quickly drained through litigation, leaving future plaintiffs with no
remedy.
Monday's oral argument hardly makes predicting the
Court's decision an easy task. It seems, however, the Court will attempt to
strike a balance between defining reasonable jurisdictional limits for
bankruptcy courts and preserving Manville-like confirmation orders that
invite settlement trusts to serve the interests of future claimants and
third-party non-debtors alike. As the Manville Confirmation Order has been
codified in the Bankruptcy Code and mimicked in various other mass tort
claims, this decision will have serious implications for insurers of mass
tort liabilities in bankruptcy proceedings.
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