Travelers Indemnity v. Bailey; Common Law Settlement Counsel v. Bailey

The Supreme Court has agreed to decide whether a federal bankruptcy court has the authority to block private lawsuits that seek damages for injury and death due to exposure to asbestos.

More than 20 years ago, a federal bankruptcy court approved Johns Manville Corp.’s reorganization plan, including the creation of a trust, with money provided by the insurers, to compensate those who claimed harm from exposure to the company’s asbestos products. The insurance companies, that judge indicated, would not have put money into the trust if they did not have protection against liabilities growing out of their ties to Johns-Manville. Travelers Cos. Travelers, which was Johns-Manville's primary insurer until 1976, paid $80 million into that fund in exchange for a broad court order against lawsuits aimed at them.

Nonetheless, lawsuits were filed in various states seeking recovery from Travelers because of its alleged independent misconduct in its investigation, defense and settlement of asbestos claims against its insureds. None or these suits sought recovery from the insurance policies issued by Travelers to Johns Manville.

On appeal to the U.S. District Court for the Southern District of New York, the decision of the bankruptcy court approving the settlement and enjoining the common law suits was affirmed. But in February 2008, the U.S Circuit Court of Appeals for the Second Circuit overturned the lower court’s decision, holding that a bankruptcy judge lacks the authority to act so broadly.

In asking the Supreme Court to hear the case, attorneys for Travelers argued that “the Second Circuit’s decision undermines important principles of judicial finality.”

On Dec. 12, the justices consolidated the pair of cases for oral arguments. The cases are Travelers Indemnity Co. v. Bailey (08-295) and Common Law Settlement Counsel v. Bailey (08-307).

Question presented: Whether a federal bankruptcy court can block private lawsuits that seek damages for injury and death due to exposure to asbestos?

The Supreme Court ruled today that a federal bankruptcy court does have the authority to block private lawsuits that seek damages for injury and death due to exposure to asbestos.

More than 20 years ago, a federal bankruptcy court approved Johns Manville Corp.’s reorganization plan, including the creation of a trust, with money provided by the insurers, to compensate those who claimed harm from exposure to the company’s asbestos products. The insurance companies, that judge indicated, would not have put money into the trust if they did not have protection against liabilities growing out of their ties to Johns-Manville. Travelers Cos. Travelers, which was Johns-Manville's primary insurer until 1976, paid $80 million into that fund in exchange for a broad court order against lawsuits aimed at them.

Nonetheless, lawsuits were filed in various states seeking recovery from Travelers because of its alleged independent misconduct in its investigation, defense and settlement of asbestos claims against its insureds. None or these suits sought recovery from the insurance policies issued by Travelers to Johns Manville.

On appeal to the U.S. District Court for the Southern District of New York, the decision of the bankruptcy court approving the settlement and enjoining the common law suits was affirmed. But in February 2008, the U.S Circuit Court of Appeals for the Second Circuit overturned the lower court’s decision, holding that a bankruptcy judge lacks the authority to act so broadly.

In asking the Supreme Court to hear the case, attorneys for Travelers argued that “the Second Circuit’s decision undermines important principles of judicial finality.”

On Dec. 12, the justices consolidated the pair of cases for oral arguments. The cases are Travelers Indemnity Co. v. Bailey (08-295) and Common Law Settlement Counsel v. Bailey (08-307).

On June 18, the high court reversed and remanded the case with Justice David H. Souter writing for the majority.

“So long as respondents or those in privity with them were parties to the Manville bankruptcy proceedings, and were given a fair chance to challenge the bankruptcy court's subject matter jurisdiction, they cannot challenge it now by resisting enforcement of the 1986 orders,” Souter wrote for the 7-2 majority

Justice John Paul Stevens, joined by Justice Ruth Bader Ginsburg, dissented.

Question presented: Whether a federal bankruptcy court can block private lawsuits that seek damages for injury and death due to exposure to asbestos?