Even bankruptcy court’s equity power doesn’t trump conditions precedent to the payment of $500 million

Bankruptcy Courts may be courts of equity, but a recent decision by the United States District Court for the Southern District of New York holds that even equity can’t trump the plain words of a settlement agreement. In the latest decision in the Johns-Manville asbestos claims settlement saga,¹ the District Court held that because a condition precedent of the original settlement agreement had not been satisfied, Travelers was relieved of its obligation to make settlement payments of approximately $500 million.

By way of (as short as possible) background, Johns-Manville filed for chapter 11 protection in 1982. To settle the many asbestos related claims and cross- claims (the “Asbestos Claims”), between Johns-Manville, certain Travelers Insurance entities (as Johns-Manville’s primary insurer) (“Travelers”), other insurers and plaintiffs, the parties entered into a settlement agreement whereby Travelers agreed to contribute approximately $80 million to the Manville bankruptcy estate and litigation trust in exchange for a complete release of all liabilities related to the Asbestos Claims and an injunction against future claims. The Bankruptcy Court approved the settlement and entered orders “to fully and finally extricate Travelers from the Manville morass” (the “1986 Orders”).

Despite the intended finality of the 1986 Orders, various plaintiff groups filed actions against Travelers, alleging, among other things, violations of state law trade practices and breach of common law duties. Many motions and mediations later,  Travelers agreed to further settlement agreements (the “Settlement Agreements”) with the relevant plaintiffs groups whereby it agreed to pay almost an additional $500 million (the “Settlement Payment”). The Settlement Agreements were contingent upon various conditions precedent, including the condition that there be a final order releasing and enjoining all claims against Travelers “of any kind or nature” whether for “contribution or indemnity” “arising from or related to” the Asbestos Claims. From Travelers’ point of view, this was intended to clarify the releases and injunctions it thought it had bargained for (and obtained) in the 1986 Orders. The Bankruptcy Court approved the Settlement Agreements (the “Clarifying Order”) over the objection of a number of parties, including Chubb Indemnity and Insurance Company (“Chubb”). Chubb (and others) appealed the Bankruptcy Court’s decision on grounds that the Bankruptcy Court lacked subject matter jurisdiction to enjoin such claims in both the 1986 Orders and the Clarifying Order. Chubb also appealed on the grounds that it had not received sufficient notice of the 1986 Orders. Following various appeals and cross-appeals, the United States Supreme Court held that the 1986 Orders had already become final two decades before and the Clarifying Order was a proper exercise of the Bankruptcy Court’s subject matter jurisdiction. The Supreme Court refrained from deciding Chubb’s individual objection that it had not received sufficient notice of the 1986 Orders, and instead remanded the issue to the Second Circuit. On remand, the Second Circuit concluded that Chubb had not received sufficient notice of the 1986 Orders and, accordingly, Chubb’s claims were not prohibited by the releases and injunctions in favor of Travelers in the 1986 Orders or the Clarifying Order’s restatement of the same (the “Manville IV Decision”).

With the view that the conditions precedents of the Settlement Agreements were not met, Travelers did not make the Settlement Payment. The various plaintiff groups brought motions to compel the payment and the Bankruptcy Court concluded that the conditions precedent in the Settlement Agreement had been met, namely that the Clarifying Order had become a final order. Travelers appealed the order to the District Court and argued that because the Second Circuit exempted Chubb from the broad bargained-for release and injunction provisions in Manville IV, the Clarifying Order had not become final as to all parties as was required by the Settlement Agreement and accordingly payment was not contractually due. 

In the current decision, the District Court agreed with Travelers and reversed the Bankruptcy Court. Specifically, the District Court held that since the Manville IV Decision had reversed the Clarifying Order as to Chubb, such order had not become final as defined in the Settlement Agreement. Requiring Travelers to make the Settlement Payments without the required broad releases and injunction as to all parties would force Travelers to “proceed with less than they bargained for”. The District Court further held that for the Bankruptcy Court to use its equitable powers to enforce the Settlement Agreement is a violation of New York law that “subjective notions of fairness or equity are not a permissible basis for a court to rewrite a contract or excuse compliance with conditions precedent.”

The takeaways from this decision are threefold. First, District Courts won’t always let Bankruptcy Courts’ powers of equity go unchecked; second, read the conditions precedent in your next contract carefully; and third, with $500 million at stake, there will certainly be a further appeal.  Stay tuned for Manville VIII or maybe IX, we’ve lost count . . .