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June 21, 2009

Travelers Indemnity v. Bailey Brief

Travelers Indemnity Co v. Bailey, 557 U.S. ---, 2009 WL 1685625 (2009)

Issue:  Did an injunction entered by the bankruptcy court restrain the filing of the suits here?  Did the bankruptcy court have subject matter jurisdiction to enter the injunction and if not, can the injunction be collaterally attacked?   

Holding:  Yes and the injunction may not be collaterally attacked here.  
Justice David Souter for 7-2 court,
Stevens dissented with Ginsburg joining

The 1986 plan of reorganization of Johns-Manville Corporation (“Manville”) enjoined “certain lawsuits” against Travelers, the debtor’s insurer.  Manville had been sued by many people for asbestos related injuries leading up to the bankruptcy filing.  Its insurance companies agreed to pay millions of dollars into a trust to pay injuries but required a full release as part of the payment.  The injunction in the plan (the “1986 Order”) provided that
“upon the insurers’ payment of the settlement funds 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 Insurer Group.’  The Insurance Settlement Order goes on to provide that the insurers are ‘released from any and all Policy Claims,’ which are to be channeled to the Trust.  The order defines ‘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 plan and injunction was affirmed by the District Court and the 2nd Circuit Court of Appeals. 

Ten years later, various plaintiffs sued Travelers seeking “to recover from Travelers, not indirectly for Manville’s wrongdoing, but for Travelers’ own alleged violations of state law.”  The gravamen of the new claims was that Travelers violated state law by its “influence” over “Manville’s purported failure to disclose” what it knew about the evils of asbestos.  Travelers went back to the bankruptcy court for further orders seeking to stop this new litigation.  Travelers argued that what it knew about asbestos it learned from Manville and therefore the new actions arose out of or were related to the policies.  Travelers then reached a new settlement with the plaintiffs, and the bankruptcy court, as part of the new settlement, entered new orders “clarifying” the 1986 Orders.  “Finding that the ‘claims against Travelers based on such actions or omissions necessarily ‘arise out of’ and [are] ‘related to’ the insurance policies, which compelled Travelers to defend Manville against asbestos-related claims, the Bankruptcy Court held that the Direct Actions ‘are—and always have been—permanently barred’ by the 1986 Orders.” 

The District Court affirmed but the Court of Appeals reversed.  The parties appealing argued that the new orders expanded the 1986 Orders and went beyond the jurisdiction of the bankruptcy court.  “The Court of Appeals held that the Bankruptcy Court mistook its jurisdiction when it enjoined ‘claims brought against a third-party non-debtor solely on the basis of that third-party’s financial contribution to a debtor’s estate,’ because ‘a bankruptcy court only has jurisdiction to enjoin third-party non-debtor claims that directly affect the res of the bankruptcy estate.’”  

The Supreme Court reversed the 2nd Circuit.  “The question is whether the [1986 Orders] bars state-law actions against Travelers based on allegations either of its own wrongdoing while acting as Manville’s insurer or of its misuse of information obtained from Manville as its insurer.”   “Travelers candidly admits that [the new claims] seek damages from Travelers that are unrelated to the policy proceeds.”  But the Court rejected the argument that the new actions were not described or covered by the 1986 Order.  “[T]his simply is not what the 1986 Orders say.”  The Court ruled that the 1986 Orders became final a long time ago and therefore even the bankruptcy court’s subject matter jurisdiction could not be collaterally attached.  The appeals of the 1986 Orders argued or at least could have argued (or could have been raised by the court sua sponte) that the bankruptcy court had no jurisdiction and those arguments were rejected.  “The willingness of the Court of Appeals [here] to entertain this sort of collateral attack cannot be squared with res judicata and the practical necessity served by that rule. ‘It is just as important that there should be a place to end as that there should be a place to begin litigation,’ Stoll v. Gottlieb, 305 U. S. 165, 172 (1938), and the need for finality forbids a court called upon to enforce a final order to ‘tunnel back . . . for the purpose of reassessing prior jurisdiction de novo.’”   “Almost a quarter-century after the 1986 Orders were entered, the time to prune them is over.”

The dissent of Stevens focused on the terms of the 1986 Order and concluded that the language did not cover the new actions and that if it did, it exceeded the bankruptcy court’s jurisdiction.  The interpretation that it covered the new actions was not appealed and could therefore be collaterally attacked.  “In my view, the judgment of the Court of Appeals was correct.  The 1986 Insurance Settlement Order did not bar independent actions, and the Bankruptcy Court lacked any basis for enjoining those actions in 2004.  The independent actions have no effect on the bankruptcy estate, and ‘bankruptcy courts have no jurisdiction over proceedings that have no effect on the debtor.’” 

My book, Bankruptcy Jurisprudence from the Supreme Court, with briefs of 121 Supreme Court cases since 1819 may be purchased on Amazon.com.   

June 21, 2009 in Supreme Court | Permalink


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It seems in Travelers v Bailey the High Court is begging someone to bring a case which properly challenges the jurisdiction of the bankruptcy court to enjoin state court actions - like successor liability, etc.

It also appears that the New GM capitulated to the High Court’s bet.

Maybe my case can help the Court decide this issue.

I am a creditor in a not so big chapter 11 where the judge snuck in a successor liability injunction (two short sentences) in a 363 sale order which no one noticed.

The stalking horse, who lost the bidding, did not have a successor injunctions in its proposed sale order - the one that got served and noticed.

The ultimate buyer was a stockholder who the court found committed perjury and could not secure a good faith finding ( no 363(m) finality) but closed the sale anyway.

At the sale hearing the injunction was not litigated, adjudicated, protected by a finding of fact, or mentioned in any manner.

I appreciate the Supreme Court footnote # 6 in Travelers v. Bailey on this point - that jurisdiction can be collaterally challenged - after the fact - if the bankruptcy court failed to properly consider and assert its jurisdiction; ie., no notice, hearing, adjudication, finding of facts, or open ruling.

Since the time for direct appeal has long past in my case, and I have been enjoined from filing further motions without an attorney (like a 60(b) motion to vacate the injunction), I will have to challenge the bankruptcy court's successor injunction in state court (Massachusetts) whereby the buyer will remove the case to bankruptcy court to have the judge enforce the injunction.

By the way, in my case the buyer is a classic successor under Massachusetts' “de facto merger doctrine”, else there would be no point violating the injunction.

Posted by: Robert White | Jun 29, 2009 9:04:29 AM

This is interesting question is whether the [1986 Orders] bars state-law actions against Travelers based on allegations either of its own wrongdoing while acting as Manville’s insurer or of its misuse of information obtained from Manville as its insurer.

Posted by: Term Papers | Feb 16, 2010 9:46:48 PM

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