Supreme Court Upholds 20-Year-Old Johns-Manville Injunction
On June 18, 2009, in a decision written by Justice David Souter, the United States Supreme Court reversed the Second Circuit Court of Appeals’ determination that a bankruptcy court did not have jurisdiction to enter an injunction protecting third parties against lawsuits arising out of the third parties’ own conduct. By a 7-2 margin, the Court in Travelers Indemnity Co. v. Bailey, 557 U.S. -, 2009 WL 1685625 (2009), determined that an injunction issued by the United States Bankruptcy Court for the Southern District of New York in 1986 in conjunction with the court’s confirmation of a plan of reorganization of Johns-Manville Corporation (Manville) was a final order which was not subject to collateral attack. In doing so, the Court referenced the need for finality in litigation, even if there may have been a question of whether the bankruptcy court had subject matter jurisdiction when it issued the order.
Trust for Claims Established
Manville’s reorganization plan created the Manville Personal Injury Settlement Trust (Trust) to pay all asbestos claims against Manville, which would be channeled to the Trust. In a settlement approved by the bankruptcy court in 1986, Manville’s insurers, including The Travelers Indemnity Company (Travelers), agreed to provide most of the initial corpus of the Trust, with a payment of $770 million, $80 million of which was to be paid by Travelers. In exchange for the payment to the Trust, the bankruptcy court order approving the settlement provided that, “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 settlement order defined “Policy Claims” 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 settlement order was incorporated by reference in the bankruptcy court’s December 22, 1986 order confirming Manville’s plan of reorganization. Both the confirmation order and the settlement order were affirmed by the district court and the Second Circuit Court of Appeals. Several years later, plaintiffs started filing asbestos actions against Travelers in various state courts. The actions sought to recover against Travelers for alleged wrongdoing in its capacity as Manville’s insurer or for improper use of information that Travelers obtained from Manville as Manville’s insurer. In 2002, Travelers invoked the terms of the 1986 bankruptcy court orders, moving the bankruptcy court to enjoin the 26 actions pending against Travelers in the state courts. After the bankruptcy court issued and then repeatedly extended a temporary restraining order, Travelers and three sets of plaintiffs in the state court actions reached a settlement. Pursuant to the settlement, Travelers agreed to pay more than $400 million to settlement funds to compensate the claimants contingent upon the bankruptcy court entering an order clarifying that the state court actions were and remained prohibited by the 1986 settlement and confirmation orders. After notice of the settlement and an evidentiary hearing, the bankruptcy court determined that the gravamen of the state court actions were acts or omissions by Travelers arising from or relating to Travelers’ insurance relationship with Manville. Finding that the claims against Travelers based on such actions or omissions necessarily “arise out of and [are] related to” the insurance policies, the bankruptcy court concluded and held that the state court actions “are – and always have been – permanently barred” by the 1986 settlement and confirmation orders. The settlement was approved and the bankruptcy court entered an order dated August 17, 2004, which provided that the 1986 settlement and confirmation orders barred the pending state court actions brought against Travelers. Certain of the claimants objected to the settlement and appealed the 2004 clarifying order. Although the district court affirmed the bankruptcy court’s 2004 order, the Second Circuit Court of appeals reversed.
The objecting claimants argued to the appellate court that the state court actions fell outside the scope of the 1986 settlement and confirmation orders and that the 2004 order improperly expanded the 1986 orders to bar actions beyond the bankruptcy court’s subject matter jurisdiction. Travelers and the settling claimants responded that, among other things, the 2004 clarifying order was consistent with the 1986 orders and this reading of the 2004 order did not raise any jurisdictional or other statutory concerns.
Although the Second Circuit recognized that the bankruptcy court had continuing jurisdiction to interpret and enforce its 1986 orders and that it had “little doubt” that the state court actions filed against Travelers “arise out of its provision of insurance coverage to Manville,” the appellate court nonetheless reversed the district court after it determined that the bankruptcy court did not have jurisdiction when it entered the 1986 orders to enjoin claims brought against a third party solely on the basis of the third party’s financial contribution to a debtor’s estate. The appellate court made this determination because “a bankruptcy court only has jurisdiction to enjoin third-party non-debtor claims that directly affect the res of the bankruptcy estate.” In reaching its conclusion, the Second Circuit effectively determined more than 20 years after the fact that the bankruptcy court did not have jurisdiction to enjoin actions against Travelers and Manville’s other contributing insurance carriers.
The Answer “Is Easy”
In the view of the Supreme Court, however, the question of whether the bankruptcy court had jurisdiction to enter the 1986 settlement and confirmation orders was not before the Second Circuit or the Supreme Court. Instead, the issues before the Court were whether the state court actions were within the terms of the 1986 orders and whether the 2004 order was within the bankruptcy court’s jurisdiction. The Supreme Court concluded that the bankruptcy court’s 2004 order was a correct reading of that court’s 1986 settlement and confirmation orders. Consequently, the Court considered whether the bankruptcy court had jurisdiction to enter the 2004 order. The Court noted that the answer to this question “is easy” as the Second Circuit recognized that the bankruptcy court plainly had jurisdiction to interpret and enforce its own orders.
The Court determined that the Second Circuit erred when it held that the 1986 orders could not be enforced according to their terms because, in the view of the Second Circuit, the bankruptcy court had exceeded its jurisdiction when it issued the settlement and confirmation orders. The Court concluded that the Second Circuit was in error to re-evaluate the bankruptcy court’s exercise of jurisdiction in 1986. Once the 1986 orders had become final orders, they became res judicata to the parties and those in privity with them even if the bankruptcy court was without jurisdiction when it entered the orders. The Court asserted that the need to provide an end to litigation prohibits a court called upon to enforce a final order to “tunnel back … for the purpose of reassessing prior jurisdiction de novo.”
A Narrow Holding by the Supreme Court
The Court was explicit, however, that its holding was a narrow one. The Court specifically acknowledged that its decision does not resolve whether a bankruptcy court could properly enjoin claims against non-debtor insurers that are not derivative of claims against the debtor. The Court also acknowledged that it has not decided whether a particular respondent received constitutionally sufficient notice to be bound by the 1986 settlement and confirmation orders. In making its decision, the Court assumed that the respondents were bound by these orders, but because the issue was not considered by the Second Circuit, the Court stated that on remand the appellate court could take up that objection as it had been raised by some of the respondents.