Not a Lexis+ subscriber? Try it out for free.


2nd Circuit: Bankruptcy Court Order Final; Insurers’ Deals With Asbestos Claimants Valid

NEW YORK — (Mealey's) The Second Circuit U.S. Court of Appeals on July 22 reinstated a federal bankruptcy court ruling requiring two insurance companies to pay $510 million to asbestos personal injury plaintiffs under decades-old settlements, finding that conditions precedent to payment under the settlement agreements were satisfied (In re:  Johns-Manville Corp., [Common Law Settlement Counsel, Statutory and Hawaii Direct Action Settlement Counsel and Asbestos Personal Injury Plaintiffs v. The Travelers Indemnity Company and Travelers Casualty and Surety Company, FKA Aetna Casualty and Surety Company], Nos. 12-1094, 12-1150 and 12-1205, 2nd Cir. [enhanced opinion available to subscribers]). 

Release Of Liabilities 

In 1982, Johns-Manville and its affiliated companies filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York.  As part of the confirmation of Johns-Manville’s plan of reorganization in 1986, the Bankruptcy Court entered orders approving a settlement agreement between Travelers Indemnity Co. and Travelers Casualty & Surety Co. (collectively, Travelers) and Johns-Manville to resolve direct actions filed against the insurers by asbestos plaintiffs in state courts.  Under terms of the settlement, Travelers agreed to contribute nearly $80 million to the bankruptcy estate in exchange for a complete release for Travelers of liabilities that were related to or based on Johns-Manville in exchange for being included in an injunction that channeled all policy claims to the Johns-Manville Personal Injury Settlement Trust. 

Despite the 1986 settlement orders, various groups of plaintiffs filed asbestos actions against Travelers in several states, with the suits falling into three categories:  the statutory direct action plaintiffs, who allege that Travelers conspired to violate state laws prohibiting unfair insurance trade practices and coordinated Johns-Manville’s national defense effort against asbestos litigation; the Hawaii statutory direct action plaintiffs, who make the same allegations under Hawaii state law; and the common-law direct action plaintiffs, who claim that Travelers violated certain common-law duties to them when it failed to disclose what it had learned about asbestos hazards from Johns-Manville and that Travelers conspired with Johns-Manville and other insurers to suppress such knowledge. 

In 2002, Travelers invoked the terms of the 1986 orders, asking the Bankruptcy Court to enjoin the direct actions against Travelers.  After the court issued a temporary restraining order prohibiting prosecution of the actions, the parties settled the actions based on the three categories of plaintiffs.  Travelers agreed to pay $360 million to a statutory direct action settlement fund, $15 million to a Hawaii direct action settlement fund and $70 million to a common-law direct action settlement fund. 

The settlements were contingent upon the satisfaction of several conditions, including entry by the Bankruptcy Court of a final settlement approval order and final clarifying order stating that all claims against Travelers “are covered by the Confirmation Order and permanently enjoined as against Travelers.” 

U.S. Supreme Court 

The Bankruptcy Court approved the settlements in a 2004 clarifying order over several objections, including one by Chubb Indemnity Insurance Co., a Johns-Manville insurer that risked having potential future contribution and indemnity claims against Travelers barred.  The U.S. District Court for the Southern District of New York affirmed the settlement orders, but the Second Circuit reversed, finding that the 1986 orders, as interpreted by the Bankruptcy Court in 2004, were not a proper exercise of the Bankruptcy Court’s jurisdiction.

The U.S. Supreme Court granted certiorari and reversed the judgment of the Second Circuit (Travelers Indem. Co. v. Bailey, 129 S. Ct. 2195 [2009]; 2009 U.S. LEXIS 4537 [enhanced opinion]), finding that the direct action suits against Travelers are barred by the terms of the 1986 orders and that the Second Circuit had erred in re-evaluating the Bankruptcy Court’s jurisdiction to enter the orders.  The Supreme Court remanded to the Second Circuit for consideration of whether Chubb “was not given constitutionally sufficient notice of the 1986 Orders, so that due process absolves it from following them.” 

On remand, the Second Circuit in 2010 concluded that Chubb was not bound by the 1986 orders or the clarifying order’s interpretation of those orders because Chubb was not afforded constitutionally sufficient notice of the 1986 orders and the proceedings leading up to them.  But the Second Circuit declined to determine the effect of its holding on the status of the settlement agreements, leaving this issue to the parties and the Bankruptcy Court. 

‘Immediately Satisfy’ 

In September 2010, the direct action plaintiffs filed motions requesting that the Bankruptcy Court compel Travelers to make the payments required under the 2004 settlements.  Travelers objected, contending that the conditions precedent to payment under the settlement agreements had not been fulfilled. 

The Bankruptcy Court in December 2010 granted the motions to compel (In re Johns-Manville Corp., 440 B.R. 604 [Bankr. S.D.N.Y. 2010]; 2010 Bankr. LEXIS 4464 [enhanced opinion]), finding that the conditions precedent to payment under the settlements had been fulfilled because the Bankruptcy Court had issued the required orders and the 2004 clarifying order became a final order when it was affirmed by the Supreme Court.  The Bankruptcy Court directed Travelers to “immediately satisfy its payment obligations pursuant to the Settlement Agreements.” 

In January 2011, the Bankruptcy Court added more than $65 million in prejudgment interest to the settlement amounts, bringing the total owed to direct action plaintiffs to $510 million.  The Bankruptcy Court also denied a motion by the common-law settlement counsel seeking to hold Travelers in contempt for failure to make the payments required by the December order.  Travelers and the common-law settlement counsel both appealed to the District Court. 

2nd Circuit 

In reversing in part, Judge John G. Koeltl on March 1, 2012, held that the Bankruptcy Court erred in concluding that the breadth of the clarifying order was sufficient to meet the conditions precedent of the settlement agreements (In re Johns-Manville Corp., et al., Nos. 11-1312, 11-1329, S.D. N.Y.; 2012 U.S. Dist. LEXIS 27266 [enhanced opinion]). The judge rejected the Bankruptcy Court’s finding that the conditions were satisfied because the clarifying order contained the “broad injunctive language” required by the conditions and had become a final order.  Judge Koeltl said such a conclusion ignores the scope of the clarifying order that survived after the limitation placed on it by the Second Circuit’s ruling on Chubb.  The judge said the Bankruptcy Court also erred in concluding that the clarifying order became a final order as required by the settlement agreements. 

Three appeals were filed in the Second Circuit — one by the common-law settlement counsel, one by the statutory and Hawaii direct action settlement counsel and one by asbestos personal injury plaintiffs.  The appellants said that Judge Koeltl’s ruling should be overturned because it was based on several errors, including a finding that the 2004 clarifying order is not a final order for purposes of the settlements. 

In response, Travelers argued that the judge’s decision should be affirmed based on New York contract law because the condition precedent of a final order was not met.  Travelers said it did not get the protections it bargained for in the settlements through a final court order. 

Conditions Precedent 

In an opinion written by Senior Circuit Judge Ralph K. Winter, with Circuit Judges Rosemary S. Pooler and Denny Chin concurring, the Second Circuit vacated Judge Koeltl’s decision and ordered reinstatement of the final judgment of the Bankruptcy Court. 

The panel held that because the breadth of the Bankruptcy Court’s clarifying order met the breadth requirement in the settlement agreements and the clarifying order became “final” within the definition of the agreements, the conditions precedent to Travelers’ obligation to pay have been satisfied. 

The panel rejected Travelers’ argument that the Second Circuit’s 2010 decision on remand diminished the reach of the clarifying order because the order became “jurisdictionally void” as to Chubb, which did not receive constitutionally sufficient notice of the 1986 orders. 

“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,” the panel said.  “The interpretation proposed by Travelers would have required the bankruptcy court either to:  (i) 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 (ii) bar all claimants whether or not they had constitutionally sufficient notice.  But neither action could have been intended by sophisticated parties because each would have been well beyond the bankruptcy court’s power.” 

Final Order 

The panel further held that the clarifying order became final and unappealable after the Supreme Court’s ruling in Bailey. 

“In reviewing the 2004 Orders, Bailey rejected the jurisdictional challenges brought by Chubb and the other objectors.  It determined that the 1986 Orders, having been final for decades, were no longer subject to challenges to the bankruptcy court’s power to enjoin third-parties from bringing claims that did not affect the res of the bankruptcy estate against nondebtors,” the panel said.  “Therefore, the pertinent portion of the injunction contained within the Clarifying Order, as an extension of the 1986 Orders, was similarly not subject to challenges regarding the bankruptcy court’s subject matter jurisdiction.  Once Bailey determined that the bankruptcy court had jurisdiction to interpret the scope of the 1986 Orders, the Clarifying Order became a ‘Final Order’ under the Agreements’ definition.” 

Travelers is represented by Barry R. Ostrager, Andrew T. Frankel, Jonathan M. Weiss and Bryce A. Pashler of Simpson Thacher & Bartlett in New York. 

The common-law settlement counsel are represented by Danielle W. Juhle, Kenneth S. Ulrich and Ronald Barliant of Goldberg Kohn in Chicago.  The statutory and Hawaii direct action settlement counsel are represented by Kent A. Bronson and Matthew Gluck of Milberg in New York and Paul D. Clement of Bancroft in Washington, D.C.  The asbestos personal injury plaintiffs are represented by Sander L. Esserman and Cliff I. Taylor of Stutzman, Bromberg, Esserman & Plifka in Dallas.

[Editor's Note: Lexis subscribers may download the document using the link above. The document(s) are also available at or by calling the Customer Support Department at 1-800-833-9844.]

For all of your legal news needs, please visit subscribers may search all Mealey Publications.

Non-subscribers may search for Mealey Publications stories and documents at or visit

Mealey's is now available in eBook format!

For more information about LexisNexis products and solutions, connect with us through our corporate site