TRAVELERS INDEMNITY CO. v. BAILEY
In 1986, a federal bankruptcy court granted Travelers Indemnity Co.'s (Travelers) motion to settle with three separate classes of plaintiffs in asbestos related litigation (on behalf of its insuree Johns-Manville Corp.) and enjoin non-settling parties from future litigation with Travelers for alleged misconduct unrelated to the settlement. The orders were subsequently affirmed by a New York federal district court and the U.S. Court of Appeals for the Second Circuit.
Over ten years later, the Second Circuit vacated the orders, stating that state-law actions ("Direct Actions") against Travelers that alleged wrongdoing while it acted as Johns-Manville Corp.'s insurer were not barred by the 1986 order. The court held that the federal bankruptcy court lacked jurisdiction to prevent such lawsuits.
Did the United States Court of Appeals for the Second Circuit err in holding that bankruptcy courts do not have the power to enter orders that extend beyond matters directly related to the execution of a debtor's estate?
Legal provision: Bankruptcy
Yes. The Supreme Court held that the Second Circuit erred in holding that federal bankruptcy courts lack jurisdiction to enter orders beyond matters directly related to the execution of a debtor's estate. With Justice David H. Souter writing for the majority and joined by Chief Justice John G. Roberts, and Justices Antonin G. Scalia, Anthony M. Kennedy, Clarence Thomas, Stephen G. Breyer, and Samuel A. Alito, the Court recognized that the unambiguous terms of the 1986 orders barred Direct Actions against Travelers and the orders' finality stood in the way of challenging their enforceability. It reasoned that the federal bankruptcy court's 1986 orders had become final on direct review 20 years previously, and thus the Second Circuit improperly ruled on an issue that was not reviewable.
Justice John Paul Stevens, joined by Ruth Bader Ginsburg, dissented. He criticized the majority for improperly interpreting the meaning of the 1986 orders.
ORAL ARGUMENT OF BARRY R. OSTRAGER ON BEHALF OF THE PETITIONERS
Chief Justice Roberts: We will hear argument first this morning in Case 08-295, Travelers Indemnity Company v. Bailey, and Common Law Settlement Counsel v. Bailey.
Mr. Ostrager: Mr. Chief Justice, and may it please the Court: In 1988, the Second Circuit decided in two separate decisions that a bankruptcy court exercising its core jurisdiction had properly confirmed the plan of reorganization that resolved present and future claims against Johns-Manville and the insurers who funded Manville's reorganization plan.
Last year, despite its decades-old rulings to the contrary, the Second Circuit sustained a collateral attack on the confirmation order and held that the bankruptcy court lacked subject matter jurisdiction back in 1986 to enjoin direct actions against Travelers, quote,
"based upon, arising out of, or related to. "
Justice Ginsburg: Mr. Ostrager, you have characterized the Second Circuit's decision in a way the Second Circuit did not.
The Second Circuit said: The confirmation of the 1986 order stands, but that order did not encompass what was added in 2004; that is, that order dealt with the debtor, with Manville and the insurers' obligation to cover Manville's liability.
The Second Circuit said: Now, this 2004 order, which concerns independent actions against insurers for their own wrong, was never encompassed in the order that they affirmed.
So I think it's quite unfair to say it's a collateral attack on the 1986 order.
Mr. Ostrager: --Justice Ginsburg, the bankruptcy court judge, interpreting his own order, explicitly held that the 1986 order was intended and was always intended to enjoin direct actions against Travelers based upon, arising out of, or relating to the insurance policies Manville purchased from Travelers.
Justice Ginsburg: At the time of the 1986 order, had these independent actions started?
I thought at the time of the 1986 order the concerns were suits involving Manville's liability and the insurers' derivative obligation to cover.
Mr. Ostrager: Justice Ginsburg, at the time of the 1986 order there had been various forms of direct action filed against Manville, and the bankruptcy court concluded, and the Second Circuit recognized, that a settlement with the insurers was essential for the reorganization and rehabilitation of Manville--
Justice Ginsburg: The insurers, to the extent of the insurance proceeds.
That's what created the pot that made the settlement fund.
But what I'm trying to get at is this extra piece, because the only information we have is that Manville -- there was the conversation that's reported in the Chubb brief.
This question came up, well, what about actions against the insurers for their own wrongs?
And the answer was, oh, those aren't covered.
Mr. Ostrager: --The plan of reorganization as ultimately confirmed contained the language to which I directed the Court.
It -- a plan of confirmation included all aspects of the resolution of the Manville estate.
The confirmation order was all about ensuring fairness to all claimants.
It was all about expanding the value of the estate, and it was all about rehabilitating the debtor for the benefit of its employees, suppliers, and local claimants.
Justice Souter: Well, Mr. Ostrager, is -- help me out, because this is an issue of fact, and I don't have the record in front of me now.
But didn't the 1986 order expressly include permission for certain actions alleging insurer misconduct to proceed, those that had already been filed?
Mr. Ostrager: It did.
It did, yes.
Justice Souter: I drew the implication from that that the -- that the bankruptcy court thought its order would be barring such actions if they had not already been filed.
Am I right on the -- on the -- at least on the record point?
Mr. Ostrager: You are right on the record point.
However, Judge Lifland in the hearings that were associated with his clarifying order was very explicit that he used the words
"based upon, arising out of, or related to. "
for the express purpose of granting Travelers the broadest relief that could be afforded to Travelers post-confirmation.
Justice Souter: But he was saying that -- in effect, that was simply articulating rather more than he had done the first time around and what he intended the first time around.
Mr. Ostrager: --Well, he certainly intended to make the cornerstone of the Manville reorganization work.
And as the Second Circuit itself held, in a subsequent collateral attack, the O'Malley case -- reported at 100 F. 3d 944, a 1996 case where there was a challenge to the bankruptcy court's reaffirmation and continuation of the '86 order, the Second Circuit held in 1996 that such an injunction is essential to the success of the settlement, and its continuation was well within the discretion of the trial court.
Justice Alito: Was the Second Circuit's decision based on an interpretation of the confirmation order or was it based on subject matter jurisdiction?
Mr. Ostrager: The Second Circuit order was explicitly predicated on the theory that the bankruptcy court lacked subject matter jurisdiction back in 1986 to enjoin these direct actions.
Now, we submit that the Second Circuit clearly erred, because it conflated the entirely distinct concept of a court's subject matter jurisdiction and the propriety of the court's exercise of subject matter jurisdiction.
This was a distinction that this Court expressly recognized 75 years ago in the Continental Illinois v. Rock Island Railroad.
Justice Scalia: Well, there is a distinction between jurisdiction and whether the action taken by the bankruptcy court comes within the statute.
But at some point, at some point surely the two overlap.
I mean, suppose -- you know, you say simply because it is a bankruptcy action it comes within the bankruptcy clause and there is jurisdiction.
But what if the bankruptcy court in connection with the bankruptcy decrees that a totally unrelated company has to pay a certain amount of money and it's conceded that this company has no relation to the bankruptcy, but the court says, this is a national problem and this other company ought to contribute?
Mr. Ostrager: --Justice Scalia--
Justice Scalia: Do you think that would be within the bankruptcy power?
Mr. Ostrager: --Justice Scalia, clearly the Congress in fashioning over the years expansive safeguards facilitating growth and change in the bankruptcy law as our nation's commerce has grown has done that.
Justice Scalia: They can do anything under the bankruptcy law?
Mr. Ostrager: No.
Subject to appropriate safeguards.
Now, in order to confirm a plan of reorganization a -- a debtor must meet all 16 requirements of section 1129.
Justice Scalia: Okay, that's fine.
I'm not arguing about that.
I'm arguing about the principle that you are asking us to accept, to wit, that this challenge cannot possibly be based upon jurisdiction.
Surely, there are some things that simply do not fall within the bankruptcy power.
Isn't that true?
Mr. Ostrager: I would agree that that is so.
Justice Scalia: Okay.
Mr. Ostrager: This is not our case.
Justice Scalia: --Well, what you are saying is this does fall within the bankruptcy power.
But don't tell us that it is not a challenge based upon the jurisdiction of the court and based exclusively upon the statute.
It could be based upon both.
Mr. Ostrager: Justice Scalia, I would say that the bankruptcy court in this case unquestionably had jurisdiction over the Manville reorganization under 28 U.S.C. 1334(b) as the Manville reorganization was a civil proceeding arising under Title 11 of the Bankruptcy Code.
Justice Ginsburg: The Second Circuit's view was that the bankruptcy court has no authority, no subject matter jurisdiction, when the debtor -- debtor's liability is not in question.
The Second Circuit thought, rightly or wrongly, that when the liability is between two -- the question is between two non-debtors, Travelers on the one hand, the claimants on the other, Manville is not in the picture.
That's what the Second Circuit said, it falls outside the domain of the bankruptcy court.
And that could be wrong or it could be right.
But in the Second Circuit's view the bankruptcy court lacked authority to deal with the nondebtors' liability to the claimants.
Mr. Ostrager: There were, Justice Ginsburg, 60 pages of findings of fact indicating that the direct action suits against Manville was an end run around the--
Justice Ginsburg: The direct actions against Travelers.
Mr. Ostrager: --Against Travelers were an end run around the discharge of Manville, and that all of the claims against Travelers arose out of and flowed to the insurance relationship.
Justice Stevens: Mr. Ostrager, may I ask this question?
I -- I was unable to find the complaints in the voluminous filings here.
Do any of the plaintiffs' cases seek recovery from assets of the estate that would reduce the payments to creditors of Manville?
Mr. Ostrager: Well, what -- the reason that this is so critical is that, as the--
Justice Stevens: Can you answer my question?
Mr. Ostrager: --They do not seek assets of the estate, although Travelers would potentially have contribution claims against Manville because all of the claims--
Justice Stevens: But -- but why does a bankruptcy court have jurisdiction to enjoin third-party actions against some creditor of the estate?
Mr. Ostrager: --The Respondents actually concede that bankruptcy courts have subject matter jurisdiction to enjoin actions against non-debtors in appropriate circumstances.
That's the Chubb brief at pages 22 and 40.
Justice Stevens: But if those actions won't affect the estate at all, I just don't understand sort of the basic theory, and I don't really understand the theory of the plaintiffs' cases, either.
I don't understand -- I can't figure out what anybody expects to collect from Travelers for what they did.
The fact that they defended cases certainly was -- was proper for them as an insurance company.
This is mysterious case to me.
Mr. Ostrager: Justice Stevens, you are absolutely right that these direct action cases have never been sustained because they all relate to the discharge by Travelers of Travelers' obligations as Manville's insurer, and that's one of the reasons why the bankruptcy court judge issued the injunction.
Now, the Second--
Justice Ginsburg: These were cases in the State courts and, as I understand it, so far none of them has succeeded.
Mr. Ostrager: --That is correct.
The Second Circuit also completely ignored the enactment by Congress of sections 524(g) and (h) of the Bankruptcy Code, which are modeled on the Manville reorganization, and expressly grandfather the Manville injunction as a final order that could not be revoked.
Justice Ginsburg: How can you say they ignored it when they had several pages devoted to 524, and they said it was -- it didn't cover these so-called direct actions, which really aren't what we generally call "direct actions".
But the Second Circuit did address what Congress did to codify essentially the Manville device.
Mr. Ostrager: I would respectfully disagree.
524(g) specifically says that asbestos -- asbestos channeling injunction
"shall be valid and enforceable and may not be revoked or modified by any court except through direct appeal. "
And 524(h)(i) specifically says that the pre-1994 asbestos channeling injunctions shall be considered to meet all of the requirements of 524(g)(2), which is in our appendix at page 471, which means that they automatically meet 524(g)(3)(A)(i) and may not be revoked or modified except through appeal.
Justice Stevens: How do -- how do these pending actions have any impact on fulfilling the objections -- objectives of the channeling instruction or affect the disposition of the assets in the estate?
I just don't understand it.
Mr. Ostrager: The essential issue here, Justice Stevens, is that there would have been no Manville reorganization--
Justice Stevens: Yes, but there has been one and it's been a success.
Mr. Ostrager: --It's been a remarkable success.
Asbestos claimants have received -- 660,000 asbestos claimants have received--
Justice Stevens: None of whom would be affected--
Mr. Ostrager: --more than $2.8 billion.
Justice Stevens: --But none of whom would be affected if these suits go forward, as I understand it.
I'm missing something very important, I think.
Mr. Ostrager: But the point is that there couldn't have been have a Manville reorganization without the insurance settlements.
The Second Circuit recognized that.
The Second Circuit further recognized that these direct actions violate the express terms of the injunction that Judge Lifland, the bankruptcy judge, granted in this case.
Justice Stevens: Why isn't it harmless error?
Mr. Ostrager: The -- 524(g)(4)(A)(2)(iii) specifically authorizes asbestos channeling injunctions that bar any claim against the third party to be directly or indirectly liable for claims against the debtor.
Chief Justice Roberts: So if -- if part of the settlement -- I mean, Travelers says, we need to get more out of this before we're going to put in all the policy funds.
The bankruptcy judge says, well, you are going to be immune from any traffic accident liability.
And there is a traffic accident, and Travelers said, well, the bankruptcy court said I don't have to pay.
Is that all right?
It's within the jurisdiction as you read it because it involves Travelers, it's related to the funds they submitted into the trust account.
Mr. Ostrager: Mr. Chief Justice, that would not be covered, and that is certainly not what the bankruptcy court intended or said.
Chief Justice Roberts: --No, I know they that didn't intend anything with respect to traffic accidents.
But my question is how far does your theory reach?
Mr. Ostrager: This Court has recognized in the Katz case that bankruptcy extends beyond the res.
Chief Justice Roberts: So there would be jurisdiction in the hypothetical that I posed?
Mr. Ostrager: --Not in the hypothetical you posed.
On direct appeal that would clearly be excluded because it wouldn't meet--
Chief Justice Roberts: Right, on direct appeal.
Are you suggesting it would be barred -- that Travelers would have protection under a collateral attack?
Mr. Ostrager: --Well, I don't think we need to reach that issue in this case.
There is no question that, in connection with exercising its subject matter jurisdiction over the Manville reorganization, the bankruptcy court had the power under section 105 of the Bankruptcy Code to issue any order, process, or judgment necessary or appropriate to carry out the provisions of Title 11.
Justice Kennedy: Well, but it seems to me you--
Justice Scalia: But you acknowledge that that's not true.
You acknowledge that -- that they couldn't have issued the hypothetical order that the Chief Justice proposed, even if that was necessary, even if -- even if Travelers said, we will not kick in the money up to the limits of our liability unless you make us immune from all traffic accidents.
You acknowledged that that's no good, right?
Mr. Ostrager: In this order, the -- the limitation on the injunction was based upon
"arising out of or related to. "
I would submit that the traffic accident falls outside the scope of that.
Chief Justice Roberts: Why is that?
It -- it involves one -- it involves the insurance company, its coverage of Johns-Manville.
And the Travelers is saying: Look, we are not going to do it unless you give us this -- this broader immunity.
And the bankruptcy judge does it.
I don't know why it would be outside the jurisdiction of the bankruptcy court.
It's clearly related to allowing the settlement to go forward.
Mr. Ostrager: Well, I -- I think we have an act of Congress, 524(g) and (h), which--
Justice Ginsburg: May I interrupt you there?
Because you told me that the Second Circuit ignored 524(g), and I'm looking at page 33a of the petition for cert, and the Second Circuit addresses 524(g), and its discussion continues for a couple pages.
I don't see how that's ignoring the issue.
Mr. Ostrager: --With -- with respect, I believe that there are express findings of fact that the bankruptcy court made which were adopted by the district court, which were embraced in full by the Second Circuit, and we have a -- a pure issue of law here.
Justice Ginsburg: May I have an answer to my question about the Second Circuit ignoring 524(g) when they devoted two and a half pages to it?
Mr. Ostrager: I believe that they clearly misinterpreted the intent of 524(g) and (h).
They clearly misperceived the fact that Congress had expressly grandfathered the Manville injunction--
Justice Ginsburg: If it--
Mr. Ostrager: --in 524(g).
Justice Ginsburg: --Another mystery in this most mysterious case: If it was so clear that the original order, the 1986 order, ensured Travelers that it would have no liability for asbestos claims, period, then why did it put up $400 million, much more than it put up originally, in order to settle with people who were bringing precisely that kind of claim?
Mr. Ostrager: During the course of the 5 years of proceedings before the bankruptcy court, the case was referred to mediation before the Honorable Mario Cuomo.
And in connection with that mediation, there was a business decision made to secure releases much broader than the injunction that was contained.
Travelers would, in connection with the mediation process, participate in a settlement.
Justice Ginsburg: What was the difference between the release that you say flowed from the 1986 order and the releases that were obtained with the $400 million?
Mr. Ostrager: One was a general -- one was a general release and the other was a release based upon, arising out of, or related to the Manville insurance policies that Travelers purchased--
Justice Ginsburg: So, specifically what was not included in the 1986 release that was included as a result of the settlement negotiations?
Mr. Ostrager: --It -- an absolute, broad general release by 80,000 people.
Now, I want to--
Justice Ginsburg: But I would like to know the difference.
What would -- what would Travelers be liable for under the 1986 order as you read it--
Mr. Ostrager: --Potentially--
Justice Ginsburg: --that they got freedom from as a result of this settlement?
Mr. Ostrager: --Potentially the traffic accident that Mr. Chief Justice referenced.
I want to reserve--
Justice Ginsburg: So then -- so that the 2000 clarification order did exonerate them from traffic accidents?
Mr. Ostrager: --It's a general release.
I -- I want to conclude and reserve the balance of my time by noting that
"Redefining the scope of a long-final confirmation order unravels intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place. "
That's a quote from the Second Circuit's decision in Chateaugay Corp., 10 F. 3d 944.
And that creates an unmanageable, uncontrollable situation for courts and litigants alike.
Justice Ginsburg: I have one question before you reserve the rest of your time.
That is, you said this is -- this was a sweeping release that Travelers got in settlement for the claims of many parties.
But some people were not there, and those are the people who still want to bring their claims.
Mr. Ostrager: --I would say that the--
Justice Ginsburg: I haven't asked my question.
Mr. Ostrager: --Oh, I'm sorry.
Justice Ginsburg: I would like to know what -- what notice did the people who were left out of the settlement, who were not part of the settlement, who say, so we want our day in court -- what notice did they have and what opportunity to be heard?
Mr. Ostrager: There was broad notice to the people who would be affected by the issuance of the injunction.
This Court has recognized--
Justice Souter: How did they get the notice?
You say it's broad notice.
What exactly was done?
Mr. Ostrager: --There were newspaper blasts repeatedly, all sorts of public notice, radio announcements.
But we are dealing with a special remedial scheme that expressly forecloses successive litigation by non-litigants, and in the bankruptcy context--
Justice Ginsburg: How can it be successive when they didn't even get their -- I mean they -- these people haven't had a day in court.
They may have a claim that's no good.
All State courts so far have said their claim is no good.
But they have a right to sue.
Mr. Ostrager: --This is what Congress has made provision for in 524(g) and (h).
This is what I believe the Court contemplated in Ortiz at page 846, also in Martin v. Wilks, also in Taylor v. Sturgell.
And I think this rule was foreshadowed as long ago as Mullane v. Central Hanover Trust Company.
Justice Ginsburg: The rule -- the particular rule that I am asking you about is that people who have not had their day in court can be precluded--
Mr. Ostrager: Yes.
Justice Ginsburg: --on the basis of newspaper notice and radio announcements?
Mr. Ostrager: As the Court said in Mullane, that
"beneficiaries whose interests are either conjectural or future, or although they could be-- "
Justice Ginsburg: That was the best possible notice, which included regular mail notice.
Mr. Ostrager: --Not -- not with respect to future claimants who haven't had any disease.
There has to be finality.
That's what 524(g) and (h) says.
A confirmation order has to be final.
As the Court said in Stoll, there has to be a beginning of litigation and a place to end litigation.
I'd like to reserve, if I may, with respect, the balance of my time for rebuttal.
Chief Justice Roberts: Thank you, counsel.
ORAL ARGUMENT OF SAMUEL ISSACHAROFF ON BEHALF OF THE RESPONDENTS CASCINO ASBESTOS CLAIMANTS
Mr. Issacharoff: Mr. Chief Justice, and may it please the Court: As the Court has indicated, this is a question of jurisdiction, and the issue is whether a bankruptcy court may enter an order that goes to a nondebtor, offers a release against independent State law claims.
Justice Kennedy: Well, as to the 1986 order it seemed to me that the counsel for the Petitioner might have answered the question posed by the Chief Justice with the traffic accident hypothetical: That is an interesting question of subject matter jurisdiction, and maybe there is subject matter jurisdiction, maybe there isn't, but that issue as to the 1986 order is final.
Now, that brings us to the -- the later order, 2004, 2006.
And then the question is whether or not that's just a reiteration of the earlier order or a further expansion of jurisdiction that can be reached.
Why couldn't the counsel for Petitioner have given that answer?
Mr. Issacharoff: Well, the counsel for Petitioner can't give that answer for two separate reasons.
The first has to do with the subject matter jurisdiction limitation of a bankruptcy court, that as soon as the release is outside the debtor's estate and impact on the debtor's estate or the debtor/creditor relationship, that places it beyond the power of the bankruptcy court.
Justice Kennedy: But putting aside questions of notice, if these parties had been represented in the appeal of the 1986 order, maybe the subject matter jurisdiction ruling was correct; maybe it was incorrect; but it's done.
Mr. Issacharoff: If -- if these parties had been present, if they had been appealed, if this had been in effect a settlement orchestrated through the bankruptcy court, then there might be the -- the ability to release as a class action--
Justice Kennedy: So then it's just a question of personal jurisdiction and notice.
It's not a question of subject matter jurisdiction--
Mr. Issacharoff: --It is--
Justice Kennedy: --because subject matter jurisdiction can be concluded in an earlier order and there can be no collateral attack if you've been a party.
Mr. Issacharoff: --Justice Kennedy, it is a question of subject matter jurisdiction if it is not to be a consensual agreement.
If there is not to be -- the purpose of notice is to give you the opportunity to opt out and to object--
Justice Breyer: I don't think there's a notice question.
I thought there were 5,538 plaintiffs here and -- that you represent, and every one of them has already gotten money from the trust except for two who have filed claims against it.
So I imagine if that's so, they certainly know about it.
Mr. Issacharoff: --They do know about it.
Justice Breyer: Okay, so there is no notice problem.
If there were a notice problem, I guess there would be a due process problem.
So, I don't see what notice has any more to do with this than the NCAA tournament.
Mr. Issacharoff: --Justice Breyer, I misunderstood Justice Kennedy's question to be about 1986, not about the present.
And in -- in the original confirmation, these people had not filed suit, had not made claims at the time.
Justice Breyer: Well, in the original confirmation, there are problems in asbestos cases, like other bankruptcy cases, of giving people notice.
Bankrupt people often give notice to many who aren't there.
And I don't know that -- maybe there's a constitutional problem with some of them, but I would have thought jurisdiction under the statute is clear.
Mr. Issacharoff: Well, the question is--
Justice Breyer: And so what is -- is this about notice?
Mr. Issacharoff: --No, I don't believe it is about notice.
Justice Breyer: No.
I didn't think so.
I thought this was about the case of the meaning of the words in the statute that they have authority in the bankruptcy court to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the title.
And we've said that the test is whether the outcome of the proceeding -- this is the other State proceeding -- could conceivably have any effect on the estate being administered in bankruptcy.
So, as I understood it, that's the test.
Mr. Issacharoff: I agree.
Justice Breyer: That's what -- that's what this Court said.
Now, they may be few and far between, an order like this, but where there are special reasons for it -- suppose it's a pension fund, and you want to reorganize the company, and this is the employees' -- they're -- the employees' pension fund is worried about claims which are related directly.
Or suppose it's an officer, or suppose it's a worker, and to reorganize the company you must cut the claims off.
And otherwise, it is down the drain for everyone, no more money in the fund, no more jobs for the employees.
Now, what is it here that would say there is no special circumstance such that a bankruptcy judge can ever do it, no matter what?
Mr. Issacharoff: In -- in your example, Justice Breyer, you rely upon this Court's decision in Celotex, which adopted the Pacor test from the Third Circuit.
And in each case that has applied that, the question is whether there is a potential impact upon the estate of the bankrupt.
The critical issue in this case is that not a single one of the claims that is presented or seeks to be enjoined here has any potential impact on the--
Justice Breyer: Is what you are saying also true of the various other asbestos cases that have, I think, done this?
Mr. Issacharoff: --There is no asbestos case that I am aware of that has released third-party claims that have no impact on the debtor.
I am not aware of a single one.
Justice Breyer: Well, of course, this has enormous practical impact on the debtor.
If not him -- not this one, because it's already a done deal -- you will never get insurance companies--
Mr. Issacharoff: No, I don't--
Justice Breyer: --to go into this kind of thing if they are going to be sued for the very act of helping the debtor defend the asbestos cases.
And so, I can't imagine an insurance company in its right mind going into that when in fact all these suits are still open.
That presumably is why the bankruptcy judge cut it off.
Mr. Issacharoff: --I think that the facts of record indicate that Travelers went into this particular deal full well knowing that it was not getting this kind of release because that kind of release was not available.
And I think--
Justice Souter: What do you -- what do you make of the provision of the 1986 order to the effect that, as I understand it and as I asked your brother a moment ago, existing claims based upon misbehavior of the -- of the insurance company were not cut off?
The reasonable implication, I think, of that is that any future claims based upon insurance company misconduct would be cut off by the terms of the '86 order.
What -- what do you say about that implication?
Mr. Issacharoff: --Justice Souter, I would say two things.
First of all, that the record speaks to specific negotiations between Travelers and Manville and between all the insurers and Manville on prospective liabilities of the -- of the insurance companies, so that the bankruptcy court can be read to be just cleaning up what had happened retrospectively up until that point.
Justice Souter: Yes, but it was prospective liability based upon misconduct of the insurance company, not merely derivative of -- of its insurance contract in -- in the conventional sense.
Mr. Issacharoff: I -- I understand that.
But it's also important -- I think that there was a question raised by -- by Justice Alito a minute ago about what exactly had happened in 1986 and whether the Second Circuit was making findings of fact or findings of law.
In 1988, in the MacArthur case, the Second Circuit relied on section 1334(d) as the jurisdictional basis for upholding the district -- the bankruptcy order.
Section 1334(d), which is now recodified as 1334(e), has to do only with the disposition of the assets of the estate, the property of the estate.
And so, the Second Circuit order in 19 -- in 1988, which is the controlling legal authority on what the scope of the release was, went only to the property of the estate.
And so, I don't think that there was any understanding at the time by anyone that there was a release of claims that were independent of the property of the estate or made -- or had no hold upon or potential impact upon the property of the estate.
Justice Breyer: Why does it say -- it doesn't say that.
What it says in the release is it says: We are releasing or everybody is enjoined from bringing a suit for policy claims against Travelers, and a policy claim is any and all claims based upon, arising out of, or relating to any insurance policy.
And then the bankruptcy judge, in thousands of findings, I guess, said that your lawsuits do relate to the relevant insurance policies.
Indeed, the claims are based upon the joint -- the obligation of Travelers to defend those very policies, given the obligation to defend Johns-Manville.
So the relation is exceedingly close, and the language covers it, and there are thousands of pages of findings, I guess, that show that.
Mr. Issacharoff: Well, Your Honor, some of the releases that are in effect in this case go to conduct that occurred after 1986.
Some of them have to do with claims -- for example, the Wise claim which is referred to in the Second Circuit's opinion has to do with claims that have nothing to do with the coverage of Manville.
They have to do with actions taken with regard to other insurers.
This is an exceedingly--
Justice Kennedy: Well, settlement clauses often release future claims.
It's standard stuff in a release clause.
Mr. Issacharoff: --Absolutely, Your Honor.
Contract clauses do it and class actions do it, consensual agreements, when there is notice, the opportunity to opt out, and there is volition, they often release much broader.
But a bankruptcy court is an extraordinary proceeding.
A bankruptcy court is an obligation that rights are terminated without any consensual--
Justice Kennedy: But that's subject matter jurisdiction, and that is foreclosed.
Now, if you are talking about personal jurisdiction that may be something else.
Mr. Issacharoff: --No, I'm not talking--
Justice Kennedy: But you're talking about subject matter jurisdiction, and that has been foreclosed by the earlier circuit court of appeals' opinion.
And the court of appeals' opinion that we are reviewing now seems to conflate that issue.
Mr. Issacharoff: --I don't believe so, Your Honor.
I think that in the 1988 opinion in the MacArthur case, the Second Circuit was quite clear that all that was being released was claims against insurance proceeds that had been delivered and had become property of the estate, whose depletion could affect the estate.
Justice Souter: Okay.
If that is -- if that is the case -- let's assume that that is -- that it was that narrow.
The fact remains, however, that at this point, as Justice Kennedy has suggested several times, my understanding is at least that you cannot collaterally attack the jurisdiction of the court who entered the order it did.
And the only claim that you can make now is that the order by its terms did not cover your cases.
Do you agree?
Mr. Issacharoff: --I agree that that is the -- the general rule, that is correct.
I agree further that the Second Circuit expressly held, at page 31a, that the error of the bankruptcy court was that it subsequently interpreted the order more broadly than the Second Circuit had affirmed in 1988.
I think that that's the heart of the case, because--
Justice Souter: So it's a question of the scope of the order?
Mr. Issacharoff: --Yes, it is.
Justice Souter: Okay.
Mr. Issacharoff: Yes, it is.
There is a question which this Court has actually not addressed, which is about the prospective application of an order that is entered without subject matter jurisdiction.
I don't think there's any case squarely on point.
Certainly there are cases that allow prospective collateral challenges to an order entered without personal jurisdiction.
I don't think the Court has addressed the subject matter jurisdiction, but it doesn't have to--
Justice Alito: But didn't this--
Justice Souter: I didn't mean to cut you off.
Mr. Issacharoff: --I don't think the Court has to address this here, Your Honor, because in this case, the initial order only went -- as affirmed by the Second Circuit, only went to the property of the estate.
And the Second--
Justice Souter: May I then raise a question there?
I mean, I think there is a legitimate question about that, given the -- given the rather general terms of the -- of the scope of the order.
And I would like your response to this.
It seems to me as a background consideration that we should have in mind in interpreting how broad that order was.
It's been raised a couple times; Justice Breyer raised it a moment ago.
And it's this: It is one argument to say that the bankruptcy court does not have jurisdiction and derivatively an order that it issued should not be interpreted to cover any claim that does not affect or cannot deplete the bankruptcy estate taken as a given fact at the time this later case is brought.
Another view of jurisdiction would be that the bankruptcy court has jurisdiction and hence an order might be interpreted to cover any cases which, if contemplated, would have precluded the settlement that created the bankruptcy estate.
If Travelers had thought that it was going to be liable for these cases of insurer misconduct, it might very well have said: We're not forking over X hundred millions of dollars, leaving this exposure open.
So that the bankruptcy estate would never have attained the size that it had attained if the -- if the insurer and everybody else had not understood that these later claims would be -- were being cut off.
Is that argument a relevant -- number one, is that a -- a legitimate jurisdictional argument?
And number two, is it a relevant argument that we should bear in mind -- in trying to figure out how broad the '86 order really was?
Mr. Issacharoff: --Your Honor, you gave two alternative definitions of "jurisdiction".
The first one we have no problem with.
Obviously that's our argument--
Justice Souter: Everybody accepts it's at least that much.
Mr. Issacharoff: --Right.
The second one, I think that this Court has to go back to the Syngenta case, which I think is quite instructive on this point.
In Syngenta, there was a settlement in a Federal court action.
There is no question that the parties settled, that the moneys were paid, everything was done pursuant to that settlement.
Then one of the parties goes into State court and files a claim that was clearly subsumed within the settlement.
The district court tried to issue an order, saying: I have to have power over this, because otherwise there could never have been a settlement.
And this Court unanimously reversed on the grounds that that had to be brought through the State court system, because you could not get jurisdiction simply because of the expediency, the necessity, any of these terms do not afford an affirmative grant of jurisdiction to the Court.
So I think--
Justice Ginsburg: Can you answer the question -- practically the insurers would not have settled, there would have been no 1986 order, if they didn't have this broader liability?
They say without global protection they never would have contributed to the trust fund.
And I'd like you to answer that question.
Mr. Issacharoff: --We don't know that, Your Honor.
We know that the record indicates that they did not believe, in 1985, when they signed a letter among all the counsel that was submitted to the court, that they were getting any such release.
So there's nothing in the record that indicates that they would not have gone into this deal, and in fact, there have been many, many asbestos workouts since that time, none of which have releases that do not affect the debtor's estate.
So I don't know that the factual premise is there.
But let's assume that it was, for the purposes of the question.
Let's assume that no insurance company would go -- go into this, unless they get releases that go far beyond normal jurisdiction of a bankruptcy court.
I think that under Syngenta that has to be given to them by Congress.
Congress in 1334 gave specific forms of jurisdiction.
It gave the "arising under" and "arising in" which pertain to the activities of the bankrupt, of the debtor.
And it gave "related to".
And "related to", as this Court interpreted in Celotex, adopting the Third Circuit standard, "related to" means that it has an impact upon the estate of the debtor.
Justice Alito: --Isn't that what the Congress gave them in the 1994 Bankruptcy Act?
Mr. Issacharoff: --No.
The Bankruptcy Act actually has very interesting language on point.
The Bankruptcy Act says, in 524(g)(4)(ii), says that the relief is for demands on the debtor, that flow from demands on the debtor, and by reason of the demands on the debtor.
That's the trigger language before we get to Roman numeral (iii), which has to do with insurance.
So if one actually looks at the statute, the form of the statute is that there is releases to the extent that there is a claim of derivative liability.
Justice Alito: Do you dispute the proposition that that statute was passed in large part for the purpose of codifying what was done in this case?
Mr. Issacharoff: I do not--
Justice Alito: The sort of thing that was done in this case?
Mr. Issacharoff: --I do not dispute that at all.
But what was done in this case was not simply what Judge Lifland did, but what Judge Lifland did as affirmed by the Second Circuit.
The bankruptcy court does not have stand-alone powers to make determinations as pertain to, particularly, common law actions.
That goes back to the Marathon Pipeline issue that this Court had to -- had to address and that Congress sought to fix by maintaining a tight hold on the "relating to" jurisdiction of the Court and making sure that that's reviewable by the district court and by the court of appeals.
So the -- yes, Congress codified the -- the Manville deal in -- in 1994, but they did so as it was interpreted by the controlling courts.
Justice Breyer: In your view, if Smith has a $2 billion or $4 billion claim against company X and the pension fund together, company X is in bankruptcy, and so the judge says: I want to enjoin this claim, we will settle it, you know, but the pension fund -- doesn't -- doesn't the bankruptcy judge -- if in fact without the pension fund you couldn't reorganize, wouldn't the bankruptcy judge have authority to cut off the claim against the pension fund?
It's a question of whether the company goes down the drain or whether it doesn't.
Mr. Issacharoff: The rule--
Justice Breyer: --the pension fund was all mixed up in this together.
Mr. Issacharoff: --The rule of thumb, Justice Breyer, is that if there is an automatic indemnity against the -- the bankrupt--
Justice Breyer: No, there is nothing here in indemnity.
Mr. Issacharoff: --Then our position is that it does not have authority.
Justice Breyer: And that would be true of all the workforce and they have claims against the individual members of the workforce?
They have -- it seems to me it would be an unusual case, I agree with you on that, but to say never -- to say never is what's bothering me.
Mr. Issacharoff: Well, I think that it comes down to two questions, Justice Breyer.
One is whether the constitutional authority under Article I reaches beyond--
Justice Breyer: Well, why not -- because there is a good constitutional protection; it's called the Due Process Clause.
If the bankruptcy judge goes too far, it's a due process violation.
Mr. Issacharoff: --No, I don't -- I -- I disagree with that, Justice Breyer.
I think that the bankruptcy court has to point to statutory authority, and that--
Justice Breyer: Well, there's language, broad language.
Mr. Issacharoff: --Broad language in the statute?
Justice Breyer: Yes.
Mr. Issacharoff: Yes, there is broad language in the statute.
The "relating to" language is quite broad.
But the "relating to" language has been interpreted, and every court that has looked at it, this Court and -- this Court and every court of appeals, without any dissent in any court of appeals that has looked at this issue, has decided that "relating to" means an impact on the estate.
Without that, the bankruptcy power has no tethers.
Chief Justice Roberts: Thank you, counsel.
ORAL ARGUMENT OF JACOB C. COHN ON BEHALF OF THE RESPONDENT CHUBB INDEMNITY INSURANCE COMPANY
Mr. Cohn: Mr. Chief Justice, and may it please the Court: A discharge in bankruptcy wipes away a debtor's liability for its prepetition conduct.
Yet Travelers' interpretation of the 1986 orders gives Travelers broader protection than even Manville could obtain because it gives Travelers immunity for its knowledge.
Bankruptcy discharges do not erase a debtor's knowledge.
If Manville started making asbestos products again after its discharge, it would not be immune for claims that it acted with the knowledge that asbestos is dangerous.
Yet, that is precisely the protection that Travelers argues that it is entitled to here.
And to take, for example, the Wise complaint -- which the Travelers, Petitioners, put forth as a typical claim here -- and you look at the class they purport to represent, they purport to represent a class of disappointed claimants against three companies, Combustion Engineering, AC&S, and A&I, none of which are Manville.
They claim that they are not seeking even to recover for asbestos bodily injury claims.
Instead, they claim that they settled their claims too cheaply with Combustion Engineering because, for example, in the 1990s allegedly, decades, 15 years after the confirmation and discharge of Manville, Travelers in defending Combustion Engineering, with the knowledge that asbestos is dangerous or whatever from working with Manville, provided false interrogatory responses on behalf of Combustion Engineering.
That is how far afield the proffered interpretation of the 1986 order goes.
Justice Alito: Is it not the case that most of the claims are claims based on -- based on Manville?
Mr. Cohn: Are they claims--
Justice Alito: Relating to what Travelers did in relation to Manville, rather than other companies.
Mr. Cohn: --I don't think it's related to what they did.
I think the distinction here is relating to what they know.
The point is--
Justice Alito: No.
You're -- you're making the argument that some of these claims concern things that Travelers did in relation to the defense of other asbestos manufacturers.
Now, maybe that means that the -- the bankruptcy court interpreted the order too broadly or -- in that respect.
But what does that have to do with the main issue here?
Mr. Cohn: --If an asbestos claimant, an independent action plaintiff, is seeking to recover from Travelers for Manville-derived liability, it's barred.
That was the purpose of the remand by the Second Circuit having provided the appropriate measuring stick to the bankruptcy court to go look at these complaints and figure out whether or not in fact somebody's trying to take money out of Travelers' pocket for Manville's liabilities.
Justice Souter: But isn't it the case, to make sure I understand it, the Wise complaints are the -- are the exception?
They are the only complaints, as I understand it in this current round of litigation, that claims that the actual harm to them resulted from actions other than actions of Manville.
Is that correct?
Mr. Cohn: The statutory -- not exactly.
The statutory direct actions, which account for 400 million of the half billion dollars they'd like to pay to these alleged contemnors, all have to do with claimshandling practices of Travelers with respect to other insureds besides Manville.
The common law independent actions allege that the insurance industry as a whole learned of the dangers of asbestos.
It has a free-standing duty to the world to warn the world of the dangers of asbestos.
Chubb Indemnity Insurance Company was not a Manville insurer, yet Chubb is alleged to have been in cahoots with the rest of the industry in failing to warn the world, and, therefore, they along with the rest of the insurance industry face unlimited liability unrelated to insurance policies for this--
Justice Souter: No, I understand -- or maybe I don't -- maybe I don't understand the -- every step in the liability claim.
My only question was, among the plaintiffs, is it correct that the only plaintiffs who claim they were hurt physically by asbestos as a result of the actions of somebody, the only ones who are claiming that the somebody was other than Manville are the Wise plaintiffs.
Is that correct?
Mr. Cohn: --I think not.
Justice Souter: No?
Mr. Cohn: I think that every asbestos claimant by and large has a claim against Manville, but that doesn't mean they are not--
Justice Souter: Simply because of Manville's position in the--
Mr. Cohn: --The ubiquity of Manville asbestos and their activities makes practically everybody, if not everybody, a Manville claimant, at least--
Justice Souter: --So that -- so that you are saying in effect everybody ultimately is claiming against Manville, the Wise plaintiffs and every other set of plaintiffs in this -- in this group of direct liability claimants?
Mr. Cohn: --Well, is or can.
But that doesn't mean that they are attempting to assert liability against an insurance company because of Manville's own conduct.
Justice Souter: I -- I understand your cause of action.
I don't want to--
Mr. Cohn: So, getting back to the next point I'd like to make is, as Mr. Issacharoff has stated, the Second Circuit was presented and the bankruptcy court was presented in 1986 with a plan and with an order that was stated to be premised upon the derivative liability of Travelers for Manville.
Justice Breyer: Who stated it?
Who stated that?
I mean, when I -- I read what the judge said at the time.
I've read language of the order, and I haven't found there anything that said that.
What it talked about was policies that were seriously intertwined with the liability of Manville.
Mr. Cohn: Well, the insurance settlement order, which is what is at issue here -- which is not the channeling injunction order, by the way; it was entered before that -- was premised upon the policies being property of the estate.
Justice Breyer: Is this the confirmation order?
Mr. Cohn: --The confirmation order is actually not directly at issue.
Justice Breyer: That's different.
So the confirmation order--
Mr. Cohn: The confirmation order is purposely--
Justice Breyer: --But there's another piece of paper called "the insurance settlement order", which says that the confirmation order and all these other definitions and the injunction just refer to derivative liability?
Mr. Cohn: --The--
Justice Breyer: Yes or no?
Mr. Cohn: --definition of -- yes--
Justice Breyer: Yes?
Mr. Cohn: --No.
The definition of--
Justice Breyer: No?
Mr. Cohn: --of "policy claims" is contained in the--
Justice Breyer: Well, then I don't see what it has to do with it.
Mr. Cohn: --Well, the definition of 18, 1986.
It was a free-standing order that was entered--
Justice Breyer: All right.
That's a different definition than the definition of "policy claims" in the injunction, presumably.
Mr. Cohn: --There are two injunctions, Your Honor.
Justice Breyer: Right.
I have a confirmation order and injunction.
It defines "policy claims" in both as a lawsuit relating to any or all of the insurance policies.
Mr. Cohn: That is the injunction in the insurance injunction.
Justice Breyer: And your other piece of paper says what?
Mr. Cohn: The other piece of paper is even clearer.
That's why they don't rely on it.
It says, you may not seek to recover asbestos health obligations, which are the future Manville-derived asbestos claims, from Travelers, from a settling insurance company.
They don't even try to argue that the channeling injunction gets them there.
They're arguing that the insurance policy buy-back order, if you want to call it that, the insurance settlement order pursuant to which they retired their insurance obligations was -- the definition of "policy claims" was--
Justice Breyer: You go on.
I'll look it up.
Mr. Cohn: --Thank you.
Chief Justice Roberts: Why doesn't the Due Process Clause fully protect you?
If the bankruptcy court made a mistake and purported to exercise jurisdiction over your claims, then I suppose you have, in particular cases if you can establish it, a due process claim that fully protects you.
Mr. Cohn: Chubb, Mr. Chief justice, in fact has an alternative argument that was never reached that, as a non-Manville insurer, it was in a position of an unrepresented future claimant, and in fact it cannot be constitutionally bound by res judicata to the 1986 order.
Chief Justice Roberts: I saw in the -- I guess it was in the Travelers' reply brief, the suggestion that there was a future -- somebody representing future claimants.
Mr. Cohn: Future tort claimants, not future insurance defendants.
Chief Justice Roberts: Where is that?
Mr. Cohn: Cause of action claimants.
Chief Justice Roberts: Where is that limitation spelled out?
Mr. Cohn: Well, if you look at the order that -- that appoints the future claims representative, it is to represent the interests of people who have been exposed to Manville asbestos but have not yet been -- manifested harm because of the long latency period of asbestos injuries.
Chief Justice Roberts: Is that a description of the clients at issue here?
They've been -- they've all been exposed to asbestos?
Mr. Cohn: It's not a description of Chubb, Your Honor.
Chief Justice Roberts: I know, but I'm asking about the claimants.
Mr. Cohn: The claimants presumably were people that were -- the individual independent action plaintiffs presumably were represented by the future claimants' representative in 1986 and were at that time future claimants or else their -- you know, their harm would have arisen well before and they wouldn't be in these cases in this decade.
If there are no further questions, Your Honor--
Justice Ginsburg: Yes, in the -- at the time of 1986, there were many claims against Manville, of course, for Manville's liability.
These later suits -- these in State court about the insurance company's independent obligation -- I asked this to counsel on the other side -- to what extent was there such litigation in 1986?
Mr. Cohn: --May I respond?
Chief Justice Roberts: Sure.
Mr. Cohn: There were no independent actions of the flavor that you are seeing here.
I am not aware of any claim like that.
There were claims by other Manville co-insureds.
There were claims by Manville, and there may have been some direct actions.
I'm just simply not familiar -- we didn't come into this case until 2004, when our rights were impugned.
So I don't know the answer to whether or not there was anything just like this, but I doubt it.
Chief Justice Roberts: Thank you, counsel.
Five minutes, Mr. Ostrager.
REBUTTAL ARGUMENT OF BARRY R. OSTRAGER ON BEHALF OF THE PETITIONERS
Mr. Ostrager: Thank you.
I have five quick points I want to make.
First, the Second Circuit upheld the core factual findings that, quote,
"the instant claims against Travelers arise out of its provision of insurance coverage to Manville. "
That's from the Second Circuit opinion.
It's in the appendix at page 33.
Second, there is no use of the word 524(g).
524(g), about which we haven't spoken enough, clearly and unmistakably reflects Congress's intent to allow channeling injunctions that bar claims against a debtor and those, like insurers, who are directly or indirectly liable for claims against the debtor.
That's 524(g)(4)(A)(ii) and Roman (iii).
524(g) expressly provides an asbestos channeling injunction shall be valid and enforceable and may not be revoked or modified by any court except for an appeal.
We cite in our reply brief the fact that a Senate report accompanying an earlier version of the bill clarified that 524(g) is -- quote,
"is not meant to give the bankruptcy courts authority which they do not already possess and simply codifies a court 's ability to issue supplemental permanent injunctions which are irrevocable except on appeal. "
There is a final judgment in this case confirming the plan of reorganization.
The Second Circuit issued that -- confirmed that judgment twice, once in the MacArthur case and once in the Kane case.
And then in the O'Malley case, which is a 1996 case, the Second Circuit rejected a collateral attack on the confirmation order on two grounds.
First, they found that the performance of the futures representative that Judge Lifland had appointed and which was incorporated in 524(g), modeled on the Manville reorganization proceeding -- the Second Circuit found that the legal representative, quote,
"took an active and aggressive role in protecting future claimants in this litigation. "
And, secondly, the Second Circuit rejected the challenge to the continuation of the 1986 order enjoining the suits against the insurers as being without merit because such an injunction was essential to the success of the settlement, and its continuation was well within the court's discretion.
As respects Chubb, Judge Koeltl in affirming Judge Lifland's 2004 order, specifically found that Chubb, a multinational insurer that has paid more than a billion dollars to resolve asbestos-related claims, was clearly on notice of these proceedings.
We cite in our reply brief, on pages 10 and 11, several 524(g) injunctions that have run to the benefit of Chubb which contain the exact same
"based upon, arising out of, or related to. "
language that appears in the original Manville order.
We didn't cite -- but it's a matter of public record -- that Chubb paid $550 million to resolve through a bankruptcy proceeding in Fibreboard liabilities relating to Fibreboard receiving the same
"based upon, arising out of, or related to. "
The Manville plan carries out the core values of bankruptcy.
The Manville trust has made payments to 660,000 asbestos claimants -- that's at record at 139 -- funded by $2.8 million of proceeds from insurance settlements and the sale of the reorganized and rehabilitated Manville--
Justice Breyer: Is there anything you want to say about the practical thing I have in the back of my mind which may be false?
That language permits your position, but it certainly has rarely been implemented, if ever.
And I see that, but in the back of my mind is the fact that if we start mucking around and give narrow meanings to these things now, there are going to be hundreds of thousands of people who won't get compensated who have asbestos--
Mr. Ostrager: --Precisely.
Justice Breyer: --Is that true?
Mr. Ostrager: That is absolutely correct, Justice Breyer.
Justice Breyer: Is there anything to back that up?
Mr. Ostrager: And I -- I wanted to point out that, in your dissent in the Ortiz case, you said that
"judges can and should search aggressively for ways within the framework of existing law to avoid delay and expense so great as to bring about a massive denial of justice-- "
Justice Ginsburg: That was the dissenting opinion.
Justice Breyer: I said that?
Mr. Ostrager: --I understand that.
But you were -- on that particular point you were correct.
And we have a General Motors ----
We have a General Motors potential bankruptcy--
Justice Ginsburg: But there are two decisions of this Court, Amchem and Ortiz, that reject that position.
Mr. Ostrager: --In Ortiz, the -- the Court absolutely recognized that where you have a special statutory scheme that is designed as 524(g) and (h) is to deal with these types of issues, that is an exception to Hansberry v. Lee.
Chief Justice Roberts: Thank you, counsel.
The case is submitted.