June 18, 2009

Supreme Court Decides Travelers Indemnity Co. v. Bailey

On June 18, the Supreme Court decided Travelers Indemnity Co. v. Bailey, No. 08-295.

Asbestos litigation has forced many companies into bankruptcy since the 1980s, leaving plaintiffs to search for additional sources of recovery. From the 1920s to the 1970s, the Johns-Manville Corporation was the country's largest supplier of raw asbestos and manufacturer of asbestos-containing products, and for much of that time Travelers Indemnity Co. was its primary liability insurer. Manville filed for bankruptcy in 1982. The resulting reorganization plan created the Manville Personal Injury Settlement Trust to pay all asbestos claims against Manville, which would be channeled to the trust. The trust has paid out more than $3.2 billion to more than 600,000 claimants.

Manville's insurers, which had litigated coverage disputes among themselves and with Manville and agreed to settle as part of the bankruptcy proceeding, contributed most of the initial corpus of the trust—$770 million, of which Travelers paid $70 million. The bankruptcy court's orders in 1986 provided that, upon the insurers' payment to the trust, "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 Insurance Group." Policy Claims were defined as all claims "based upon, arising out of or relating to any or all of the Policies."

More than a decade later, plaintiffs began filing actions against Travelers in state courts, alleging that Travelers conspired with other insurers and manufacturers to hide the dangers of asbestos and/or violated common law duties by failing to warn the public about the dangers of asbestos. Many of the claims sought recovery from Travelers, not indirectly for Manville's wrongdoing, but directly for Travelers' own alleged violations of state law. Travelers invoked the terms of the 1986 orders, contending that its knowledge of the hazards of asbestos was derived from its insurance relationship with Manville and therefore the common law lawsuits were claims "relating to" the policies.

The Supreme Court held that the plain terms of the 1986 orders unambiguously applied to plaintiffs' claims and were entitled to their effect. Further, the bankruptcy court in 2004 had jurisdiction to enter an order clarifying, interpreting and enforcing its own 1986 orders, even if it had exceeded its jurisdiction when it issued the orders in 1986. Once the 1986 orders became final upon direct review (whether or not they were proper exercises of bankruptcy court jurisdiction and power), they became res judicata to the parties and those in privity with them. Even subject matter jurisdiction may not be collaterally attacked.

The Court noted that its decision was narrow and "did 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." The Court also did not address whether any particular plaintiff was bound by the 1986 orders.

In dissent, Justices Stevens and Ginsburg contended that the 1986 injunction barred only claims against Manville's insurers seeking to recover from the bankruptcy estate for Manville's misconduct, not claims seeking to recover against the insurers for their own misconduct.

Justice Souter delivered the opinion of the Court, in which Chief Justice Roberts and Justices Scalia, Kennedy, Thomas, Breyer and Alito joined. Justice Stevens filed a dissenting opinion in which Justice Ginsburg joined.

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