LEGAL NEWSLINE

NEW YORK (Legal Newsline) – The Second Circuit Court of Appeals has reinstated a $500 million settlement agreement against the former insurance company for Johns Manville in an asbestos case that has been tossed back and forth between three New York courts several times.

The Second Circuit concluded that Travelers Indemnity Company and Travelers Casualty and Surety Company, referred to collectively as Travelers, is required to pay more than $500 million to three groups of asbestos plaintiffs based on its obligations governed by several settlement agreements.

As a result, the case was remanded to the United States District Court for the Southern District of New York with instructions to reinstate the bankruptcy court’s final judgment.

Judge Ralph K. Winter delivered the July 22 opinion, with Judges Rosemary S. Pooler and Denny Chin concurring.

This appeal came from the district court, which reversed the bankruptcy court’s judgment on appeal. Simply put, the bankruptcy court required Travelers to pay more than $500 million to asbestos plaintiffs.

The district court reversed on the grounds that conditions precedent to payment under the settlement agreements were not met and that Travelers obligation to pay had never matured. Now the Second Circuit is vacating the district court’s ruling and reinstating the bankruptcy court’s judgment.

Travelers was the primary insurer for the Johns-Manville Corporation, which was once the largest supplier of asbestos and asbestos-containing products – most widely known for its asbestos-containing insulation.

After asbestos use was regulated by OSHA, asbestos litigation was on the rise. As a result, Johns Manville filed for Chapter 11 bankruptcy protection and reorganization in 1982 due to the possibility of “tremendous liability.”

In response to the bankruptcy, asbestos plaintiffs instead filed direct-action lawsuits against Travelers and other insurers based on the insurers’ relationships with Johns Manville.

While more lawsuits were being brought against Travelers, the insurance companies were also entangled in a policy-coverage dispute with Johns Manville, meaning several contribution, indemnity and cross claims were asserted among Johns Manville’s insurers.

Eventually, the insurers entered into a settlement agreement with Johns Manville.

According to the settlement, Travelers agreed to contribute roughly $80 million to a trust established as part of Johns Manville’s bankruptcy in exchange for a complete release of Johns Manville policy-related liabilities.

The bankruptcy court approved the settlement in 1986 and entered the Insurance Settlement Order and the Confirmation Order, known collectively as the “1986 Orders.”

The Insurance Settlement Order released the settling insurers form any obligations relating to Johns Manville, enjoined future claims for bad faith or insurer misconduct and channeled those claims to the trust.

The Confirmation Order confirmed Johns Manville’s reorganization plan and reiterated that all plaintiffs are barred from bringing any action against the settling insurance companies.

However, despite the orders, asbestos plaintiffs continued filing more actions against Travelers, but primarily didn’t allege violations in reference to Johns Manville’s actions. Rather, they alleged violations based on Travelers’ own alleged wrongdoing as Johns Manville’s insurer.

These claims were brought by three groups of plaintiffs asserting two categories of claims.

Then in June 2002, Travelers moved before the bankruptcy court to enjoin the lawsuits. The court issued a temporary restraining order against prosecution of certain lawsuits against Travelers but also referred to the matter as mediation, which was conducted by former New York Governor Mario M. Cuomo.

Three settlement agreements resulted from the mediation between Travelers and the three groups of plaintiffs.

Travelers agreed to pay up to $360 million to the statutory plaintiffs, up to $15 million to the Hawaii plaintiffs and up to $70 million to the common law plaintiffs, which would be placed in three funds separate from the Johns Manville Trust.

According to the agreement, plaintiffs would be paid from the funds but only after satisfying three requirements.

The conditions “concerned the breadth of an order to be entered by the bankruptcy court regarding the interpretation of the 1986 orders, the finality of the Clarifying Order, and various provisions regarding disposal of the direct actions.”

Despite several objections, the bankruptcy court approved all three agreements and entered a Clarifying Order in August 2004, which is an extension of the 1986 Orders.

With Bankruptcy Judge Burton R. Lifland presiding, the court concluded that it had the authority to enter both the Clarifying Order and the 1986 Orders and that the lawsuits were barred by the 1986 Orders.

Those objecting the agreements appealed, and District Judge John G. Koeltl reversed the bankruptcy court’s ruling

Chubb Indemnity Insurance Company was one of the objectors. It claimed any potential contribution and indemnification claims it might have against Travelers would be unlawfully barred if the Clarifying Order is approved.

However, the district court concluded that objector Chubb Indemnity Insurance Company had received sufficient notice regarding its purported claims and should have had plenty of time to take care of any such claims.

“It determined further that, even if notice in the usual sense was lacking, Chubb’s claims could be foreclosed upon because of the special nature of the remedial scheme at issue: reorganization of the bankruptcy estate,” Winter explained.

Again, the objectors appealed.

The Second Circuit vacated and remanded the case, concluding that the 1986 Orders “exceeded the proper bounds of the bankruptcy court’s jurisdiction insofar as they enjoined state-law claims, nonderivative of the debtor’s wrongdoing that did not seek recompense from the Manville corpus.”

However, the U.S. Supreme Court reversed the Second Circuit’s decision. It held that the lawsuits were barred by the 1986 Orders and that the Second Circuit erred when reevaluating the bankruptcy court’s jurisdiction to enter the orders.

Likewise, the Clarifying Order was proper because the bankruptcy court “plainly had jurisdiction to interpret and enforce its own prior orders.”

The Supreme Court then remanded the case back to the Second Circuit to consider whether Chubb was bound by the orders.

The Second Circuit concluded that Chubb was not bound by the orders “because it had not been afforded constitutionally sufficient notice of the 1986 Orders and their attendant proceedings,” Winter wrote.

Then in September 2010, the plaintiffs’ counsel moved to compel Travelers to make the payments required by the agreements. Travelers objected, claiming that the breadth and finality conditions required for payment were unsatisfied because Chubb was still free to bring claims.

However, the bankruptcy court granted the motion to compel, holding that the disputed conditions had actually been satisfied.

It concluded that a Clarifying Order regarding the required breadth had been entered in 2004, the Order became a "Final Order" when it was affirmed by the Supreme Court in 2009, and even after Chubb was not bound by the injunctions due to its lack of notice, the order enjoined the bargained-for breath of claims.

As a result, Travelers was ordered to fulfill its payment obligations immediately.

While the court began determining the propriety and amount of prejudgment interest, Travelers also claimed the agreements’ conditions precedent regarding disposal of the lawsuits had not been met.

“The bankruptcy court rejected this attempt [to broaden the issues] on the ground that Travelers had not asserted this issue in response to the motion to compel,” Winter wrote.

Ultimately, the court entered a final judgment requiring Travelers to pay more than $500 million.

The district court reversed the judgment in February 2012, concluding again that the disputed conditions required for payment had not been satisfied.

Another appeal to the Second Circuit followed.

Winter explained that the primary arguments between the parties focus on whether the breadth of the bankruptcy court’s Clarifying Order met the breadth requirement of the agreements and whether the Clarifying Order became final according to the agreements.

“These questions, of course, govern whether the conditions precedent to Travelers’ obligation to pay have been satisfied,” Winter wrote. “We conclude that they have been satisfied.”

Travelers argued that the court’s prior holding diminished the reach of the Clarifying Order because the order became "jurisdictionally void" in regards to Chubb.

Consequently, Travelers claimed, the Clarifying Order does not contain broad prohibitions because Chubb could potentially bring a claim against Travelers.

The court disagreed, Winters wrote, because the Supreme Court previously determined that the bankruptcy court had properly interpreted the orders with respect to the new lawsuits against Travelers, and the language has not been changed since that ruling.

Therefore, the injunction approved by the Supreme Court bars traditional direct-action claims seeking redress from Travelers based on Manville’s own wrongdoing as well as nonderivative claims against nondebtor Travelers.

“Travelers’ reading asks us to adopt an interpretation of the Clarifying Order that could not reasonably have been intended by the parties, whatever Travelers’ private hopes and dreams, and is not supported by the language of the agreements,” Winter wrote.

“The interpretation proposed by Travelers would have required the bankruptcy court either to certify that all potential claimants – all entities and individuals on the planet, from now until the end of time – have received constitutionally sufficient notice of the 1986 Orders and their relevant proceedings; or bar all claimants whether or not they had constitutionally sufficient notice.”

From Legal Newsline: Reach Heather Isringhausen Gvillo at asbestos@legalnewsline.com