Travelers Indemnity Company et al. v. Bailey, et al. (08-295); Common Law Settlement Counsel v. Bailey (08-307)

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Oral argument: Mar. 30, 2009

Appealed from: United States Court of Appeals, 2d Circuit (Feb. 15, 2008)


In 1986, a bankruptcy court issued a landmark confirmation order that discharged Johns-Manville Corporation and its indemnity insurers from future asbestos-related tort liabilities in exchange for the ability to apply the full value of the insurance policies for the benefit of the tort claimants. However, claimants sought to collect from Travelers Indemnity Company and other insurers directly, arguing that these insurers were independently liable for torts. Travelers sought the protection of the 1986 Confirmation Order, arguing that the injunction disallowed such actions. The bankruptcy court agreed with Travelers. But the Second Circuit reversed, holding that state law applies to the independent tort claims. The Second Circuit reasoned that the Bankruptcy Court lacked subject matter jurisdiction, since the tort claims did not involve the Manville estate. The parties also disagree about whether the Supremacy Clause precludes state law interference in matters resolved by the Bankruptcy Court. This case will certainly have implications for bankruptcy courts, debtors, indemnity insurers, and mass tort claimants in future adjudications. For instance, insurers may be less willing to contribute to a fund to resolve tort matters, and the debtor and the insurer may elect to vigorously contest and litigate these claims.

Question(s) presented

Travelers Indemnity Company et al. v. Bailey, et al. (08-295)

Whether the court of appeals erred in categorically holding that bankruptcy courts do not have jurisdiction to enter confirmation orders that extend beyond the "res" of a debtor's estate, despite this Court's recent ruling that "[t]he Framers would have understood that laws 'on the subject of Bankruptcies' included laws providing, in certain respects, for more than simple adjudications of rights in the res," Central Virginia Community College v. Katz, 546 U.S. 356, 370 (2006), and whether the court of appeals compounded this error by:

(a) failing to apply as written a federal statute (11 USC §§ 524(g) and (h)), by limiting the scope of relief in a manner that is contrary to the express terms and purposes of that statute;

(b) failing to give effect to the Supremacy Clause and holdings of this Court that federal bankruptcy relief cannot be overridden by rights alleged to have been created under state law; and

(c) failing to respect important principles of finality and repose, and the express provisions of §524(g), by failing to approve a federal court's enforcement of a confirmation order that was affirmed over two decades ago on direct appeal.

Common Law Settlement Counsel v. Bailey et al. (08-307)

Once a bankruptcy court's subject-matter jurisdiction over a case attaches, whether the court must have a separate jurisdictional basis to approve a third-party injunction provision in a plan of reorganization or related confirmation order.



Whether a bankruptcy court may prohibit future claims against the insurer of the debtor by third parties who were not involved in the original bankruptcy proceedings.



From the 1920s to the 1970s, Johns-Manville Corporation ("Manville") was one of the largest manufacturers and suppliers of asbestos and asbestos-containing products in the country. When the health dangers of asbestos were discovered, Manville became the target of products liability lawsuits, leading it to file for bankruptcy protection in 1982. Because asbestos-related injuries may not manifest themselves for decades, Manville's insurance policies were the bankruptcy estate's most valuable asset, as well as its most uncertain one. Manville eventually settled with its insurers for $770 million, and Travelers Indemnity Corporation ("Travelers"), Manville's primary insurer from 1947-1976, paid nearly $80 million to the bankruptcy estate "in exchange for a full and final release of all Manville-related claims." Manville's other insurers, including Common Law Settlement Counsel, obtained similar settlements. According to the bankruptcy court's 1986 Confirmation Order, all claims that were "based upon, arose out of, or related to" Manville's liability insurance policies were directed against the Manville Personal Injury Settlement Trust. The Confirmation Order further enjoined "all persons" from bringing suit against Travelers and Manville's other liability insurance companies "for the purpose of, directly or indirectly, collecting, recovering or receiving payment of, on or with respect to any Claim . . . or other Asbestos Obligation." In 1994, Congress amended the Bankruptcy Code to explicitly authorize bankruptcy court "injunctions barring derivative claims against third party insurers." This amendment was a codification of the injunction in the 1986 Confirmation Order.

Nonetheless, several groups filed Direct Action lawsuits against Travelers and other insurance companies, alleging both statutory and common law claims. The claims alleged not that Travelers should reimburse the plaintiffs for asbestos-related injuries, but that Travelers 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 product. In 2002, Travelers asked the bankruptcy court to enjoin, under the 1986 Confirmation Order, twenty-six such lawsuits. The bankruptcy court referred the matter to mediation, and several of the plaintiffs settled with Travelers for almost $500 million in 2004. As a condition of the settlement, the bankruptcy court entered an Order "clarifying that the Direct Action lawsuits are, have always been, prohibited by the 1986 orders."

The bankruptcy court found that although the Direct Action plaintiffs asserted injuries independent from injuries from asbestos exposure, their Direct Action claims against Travelers fell under the "arise out of" and "related to" provisions of the Confirmation Order. The court also emphasized that the Confirmation Order was jurisdictionally sound and that the Direct Actions, like any similar future actions, violated that Order. The district court affirmed the bankruptcy court's findings. Bailey and five other asbestos claimants, representing some 18,000 claimants affected by the settlement agreement, appealed. The Court of Appeals for the Second Circuit reversed, finding "it was inappropriate for the bankruptcy court to enjoin claims brought against a third-party non-debtor solely on the basis of that third-party's financial contribution to a debtor's estate;" rather, the court held, the "bankruptcy court only has jurisdiction to enjoin third-party non-debtor claims that directly affect the res of the estate." The Court of Appeals distinguished several precedents, reasoning that the damages sought from Travelers were unrelated to proceeds from the insurance policy and that the bankruptcy and district courts should have looked to state law to determine whether the Direct Action plaintiffs had causes of action. Travelers Indemnity Company and Common Law Settlement Counsel appealed to the United States Supreme Court, and the Court granted certiorari of the consolidated cases on December 12, 2008.



Bailey argues that because a bankruptcy court's jurisdiction does not extend beyond debtor-creditor relations, the court's injunction of future claims against the insurance companies cannot be upheld. The insurance companies, however, contend that the bankruptcy court's jurisdiction cannot be limited to the res, or object, of the debtor's estate, and that there is a sufficient nexus between the direct action claims and Traveler's relationship with Manville to give the bankruptcy court jurisdiction to prohibit future claims.

The dangers of asbestos exposure were known before World War II, but asbestos manufacturing companies failed to warn their workers of these dangers and lobbied against government regulation of asbestos exposure in the workplace. Thus, by the time Dr. Irving Selikoff's research unearthed the dangers in the 1960s and 1970s, asbestos manufacturers had been concealing the harms of their product for upwards of thirty years.

The scope of asbestos litigation is astounding: through 2002, approximately 730,000 people filed asbestos claims, and there were at least 8,400 entities named as defendants. The cost of this litigation eventually reached $70 billion. Unsurprisingly, those named as defendants in such claims are subject to bankruptcy: through mid-2004, "at least 73 firms that had been named on a substantial number of asbestos claims had filed for bankruptcy." Because so little data has been collected on the past incidence of asbestos injuries, it is difficult to tell how many future asbestos-related injuries may occur and give rise to legal claims. Furthermore, symptoms of asbestos-related illness do not manifest for approximately forty years, further complicating attempts to estimate future incidence of these illnesses.

The representatives of future claimants in asbestos-related litigation, while supporting neither party, urge the Supreme Court to be mindful of the "delicate endeavor" of both protecting victims of injury from asbestos and preventing a flood of claims against a viable business. With an estimated 1.5 million to 2.5 million future claims against the Manville Trust for asbestos-related injuries yet to be filed, amici contend that the interests of such future claimants are extremely important in Manville's bankruptcy proceedings. In the absence of a trust to compensate victims of asbestos-related injury and injunctions preventing future claims against non-trust entities, future claimants will only be able to obtain redress if the defendant business has any assets left at the time the claimant's injury manifests itself. Furthermore, amici argue, future claimants will bring suit in a variety of state and federal courts, creating great burdens on the court system and undermining judicial efficiency. Finally, such trusts and injunctions allow debtor businesses "to truly obtain a fresh start through bankruptcy and continue to operate." Additionally, the willingness of liability insurers to enter into asbestos-related settlements is dependent on their ability to obtain injunctions against future claims. Because an asbestos debtor's insurance policies are often its most valuable asset, reaching a comprehensive bankruptcy settlement with the involvement of the insurers is "critical to the success of reorganizations."

A group of bankruptcy law professors urges the Supreme Court not to let the practical concern of ensuring that all claimants obtain recovery blind them to the constitutional implications of expanding the jurisdiction of the bankruptcy court. Amici recognize that the bankruptcy court was attempting to achieve "the overriding beneficial purposes" of Chapter 11 by "provid[ing] for those injured by Manville." However, amici point out that "causes of action owned by a bankruptcy debtor constitute property" that is protected under the Fifth and Fourteenth Amendments, and that these property interests cannot be extinguished by a bankruptcy court asserting jurisdiction over claims "related to" the bankruptcy proceeding, no matter how good the court's intentions.



This case deals with the scope and jurisdictional validity of the 1986 Confirmation Order that shielded Manville's insurers from any future liabilities arising out of its insurance obligations.

Does the Bankruptcy Court Have Jurisdiction to Hear this Case?

Travelers argues that the bankruptcy court's jurisdiction is not limited to the res, or the object, of the debtor's estate. In canvassing the U.S. Constitution, the Bankruptcy Code, and judicial opinions, Travelers argues that there is no authority that limits the jurisdiction of the bankruptcy court to the property at issue in the bankruptcy proceeding. Rather, it argues that "[t]he broad jurisdiction and authority . . . is critical for the fair and equitable resolution of commercial matters." Travelers cites three bankruptcy cases in support of its view that the bankruptcy courts have the authority to issue broad injunctive relief protecting debtors, insurers, and other non-debtors from future liability. It goes on to assert that the 1986 Confirmation Order should be broadly interpreted to protect insurers from all liabilities arising under its insurance contracts with Manville. Travelers cites language in the Confirmation Order itself, which precludes claims against Travelers arising out of "the contractual relationship between Travelers and Manville."

Bailey and the other claimants and Chubb Indemnity Insurance Company take a more limited view of the bankruptcy court's jurisdiction. The claimants rely on the Supreme Court's plurality opinion in to assert that the bankruptcy court's subject matter jurisdiction is limited to "the restructuring of the debtor-creditor relationships," and to argue that anything more would infringe upon state rights. They go on to argue that Congress framed the federal subject matter jurisdiction statute with Northern Pipeline Constr. Co. in mind. The claimants cite statutory language which confers "original but not exclusive jurisdiction of all civil proceedings arising under . . ., or arising in or related to" the Bankruptcy Code. Within this context, claimants mention that the bankruptcy court, which receives its mandate from the U.S. district court by operation of 28 U.S.C. § 157, may only exercise "exclusive jurisdiction over . . . the ‘property . . . of the debtor.'" As this case deals with independent tort claims against the insurer without any impact on the Manville estate, claimants argue that the bankruptcy court inappropriately exercised jurisdiction.

Chubb contrasts this case with the circumstances surrounding the 1986 Confirmation Order. Chubb explains that at the time of the bankruptcy proceeding, the insurance proceeds amounted to the "substantial property" of the Manville estate; thus, the court granted the injunction on behalf of the insurers to protect the estate and to "ensure its equitable division among creditors." Chubb claims that the necessary link between the debtor's estate and the insurer's liability was present in 1986 so as to provide jurisdiction to the bankruptcy court, whereas such a link is absent here. Lastly, Chubb contends that the bankruptcy court's equitable powers, under Section 105(a) of the Bankruptcy Code, do not permit it to provide for rights ‘otherwise . . . unavailable under the . . . Code.' An injunction precluding an independent tort suit against the insurers would be a right ‘unavailable under the . . . Code' because it does not involve the Manville estate. Thus, claimants and Chubb argue that the bankruptcy court lacked jurisdiction in this particular matter.

Does the Second Circuit Ruling Violate the Supremacy Clause?

Travelers asserts that the Second Circuit ruling is constitutionally impermissible because it violates the Supremacy Clause, which holds that the "Constitution, and the laws of the United States which shall be made in pursuance thereof; . . . shall be the supreme law of the land." Travelers cites the enumerated powers delegated to Congress under the Constitution, which provides that only Congress can "establish uniform laws on the subject of bankruptcies throughout the United States." Travelers also refers to analogous cases where state laws overruling bankruptcy orders have been held invalid by the federal courts. Therefore, Travelers argues, state law causes of action against insurers cannot be asserted after the 1986 Confirmation Order. According to Travelers, finding in the alternative would be untenable, because such a rule would obstruct the bankruptcy court's ability to discharge asbestos-related and similar liabilities via a confirmation order.

But Chubb responds by alleging that Travelers misconstrued the Second Circuit ruling. Chubb argues that to the extent that insurers are liable under the insurance contract for a debtor's liabilities, bankruptcy law still controls. However, where insurers are charged with tortious conduct independent of the indemnity obligations, Chubb argues that the action is no longer in bankruptcy court jurisdiction because state law would control that action. Chubb maintains that such a reading is fully consistent with the Supremacy Clause. Thus, the Second Circuit's ruling was not improper.

Does the Second Circuit Ruling Undermine the Expectation of Finality and Repose in Court Rulings?

Lastly, Travelers argues that the Second Circuit ruling undermines the important public policies of finality and repose that attach to a court ruling. Travelers contends that once a direct appeal of a bankruptcy order is exhausted or unexercised, parties must be able to rely on the enforcement of that order. Travelers explains that such reliance allows a debtor in Manville's position to reorganize its business and to form trusts for the benefit of current and future asbestos litigants, so that it may emerge from bankruptcy free and clear of any debts. Travelers asserts that revisiting the 1986 Confirmation Order and "[l]imiting the scope and finality of [it] . . . threatens drastically to reduce, if not eliminate, the incentive for insurers to contribute the monies necessary to make . . . trusts . . . for distribution of assets to asbestos victims . . . ."

Chubb disagrees with Travelers' commentary on the public policy effects of the Second Circuit ruling. Chubb clarifies that the validity of the 1986 Confirmation Order is not being attacked here; rather, at issue is the attempt by Travelers to extend the scope of the 1986 Confirmation Order. Chubb explains that the Second Circuit just vacated a new 2004 bankruptcy court order which extended the 1986 injunctions to protect insurers from independent tort liabilities in exchange for insurers contributing an additional $500 million into the trust. Thus, Chubb argues that the Second Circuit did not undermine the ability of Manville, insurers, and claimants to rely on the original 1986 Confirmation Order.



The 1986 Manville Confirmation Order served as the blue print for the bankruptcy court's approach to dealing with unknown and incalculable mass tort claims. However, as evidenced by this case, issues dealing with third party insurer liability for those tort claims continue to evolve. Specifically, this case deals with claimants attempting to go directly after the insurance companies for tortious conduct independent of Manville's liabilities. The resolution of this case will have important implications as to how Manville-type debtors and their indemnity insurers will approach the discharge of mass tort liabilities in bankruptcy proceedings.


Prepared by: Brian Chung and Rebecca Vernon

Edited by: Carrie Evans

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