The Supreme Court's Holding in Travelers Indemnity Co. v. Bailey, 129 S. Ct. 2195 (2009)

In this LexisNexis Emerging Issues Analysis, Professor Kenneth N. Klee discusses the holding in Travelers Indemnity Co. v. Bailey, 2009 U.S. LEXIS 4537, 129 S. Ct. 2195 (2009), the most recent in a long line of five other Supreme Court cases consistently precluding collateral attack on final bankruptcy court judgments, even where the scope of the judgments arguably exceed the subject matter jurisdiction of the bankruptcy court.
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Professor Klee writes: In Travelers Indemnity Co. v. Bailey, 2009 U.S. LEXIS 4537, 129 S. Ct. 2195 (2009), the Supreme Court granted certiorari to review the decision of the Second Circuit in In re Johns-Manville, 517 F.3d 52 (2d Cir. 2008), interpreting the 1986 confirmation order and injunction in the Manville chapter 11 plan. As provided in the plan, Bankruptcy Judge Burt Lifland approved a settlement providing that Manville's insurers, including petitioner The Travelers Indemnity Company, would contribute $770 million to the corpus of an asbestos claimants' trust in exchange for a release from any "Policy Claims" channeled to the trust. Some asbestos claimants, however, filed direct or independent action claims against Travelers based on Travelers' alleged wrongdoing, independent of any wrongdoing of Manville. Travelers asked Bankruptcy Judge Lifland to enjoin the direct action claims based on the 1986 confirmation order and injunction. In settlement of this matter, Travelers agreed to pay the direct action claimants $445 million for a 2004 bankruptcy court order "clarifying" that the direct or independent actions are, and always have been, permanently barred by the 1986 confirmation order and injunction. In issuing its 2004 order, Judge Lifland found that the direct action claims were inextricably intertwined with Travelers' long relationship as Manville's insurer. As such, they were barred by the 1986 confirmation order and injunction.
Some individual asbestos claimants and Chubb Indemnity Insurance Company objected to the 2004 settlement and appealed. The district court affirmed, but the Second Circuit reversed, holding that the direct actions were not enjoined by the 1986 order or injunction and that the 2004 clarifying order was beyond the subject matter jurisdiction of the bankruptcy court. The Court granted certiorari, 129 S. Ct. 1606, to consider whether the bankruptcy court had subject matter jurisdiction to authorize the inclusion in a chapter 11 confirmation order of a release of non-debtor claims and to enjoin their prosecution against a non-debtor, if the claim asserted does not seek a recovery from the debtor estate or give rise to a claim for indemnity or contribution from the debtor estate, even though the released entity contributed major funding necessary to confirm the chapter 11 plan.
The Court ducked the issue of jurisdiction over third party releases and decided the case narrowly based on the finality of the 1986 Confirmation order. Under the Court's precedent in Local Loan v. Hunt, 292 U.S. 234, 239 (1934), the bankruptcy court clearly had jurisdiction to enforce its prior order. The Second Circuit erred in holding that the order could be collaterally attacked.
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