Why it matters

Weighing in on a long-running dispute arising from the bankruptcy of Johns-Manville Corp., the Second Circuit Court of Appeals recently ordered several of the Travelers companies to pay up to $510 million directly to asbestos claimants. The case began when Travelers reached a settlement with certain claimants, but payment of the settlement was put on hold when another insurer objected. Nearly a decade later, Travelers refused to pay, arguing that certain conditions of the settlement had not been met as a result of the other insurer’s ongoing objections. But the appellate panel unanimously rejected Travelers’ “subjective hopes” as unsupported by the language of the settlement, ordering Travelers to pay the $445 million promised in the settlement deal, plus interest.

Detailed Discussion

Facing thousands of asbestos-related claims, Johns-Manville Corp. filed for Chapter 11 bankruptcy protection in 1982. In 1986 Travelers, which had been Manville’s primary insurer for many years, agreed to contribute roughly $80 million to a trust to compensate victims in exchange for a complete release of Manville’s asbestos-related liabilities.

Despite the settlement, thousands of asbestos plaintiffs sued Travelers directly in subsequent years. Many of the suits alleged wrongdoing against Travelers in its capacity as Manville’s insurer, including that Travelers fraudulently perpetuated a “state-of-the-art defense” and that Travelers “failed to disclose what it knew about asbestos hazards from its relationship with Manville.”

In 2004 a second settlement was reached that included the direct action plaintiffs, this time for $445 million. The settlement imposed three conditions for payment: a “Clarifying Order” had to be issued by the bankruptcy court barring additional claims against Travelers, the Clarifying Order had to become a final order from which no appeal could be taken, and at least 49,000 general releases of claims had to be delivered into escrow.

Third parties immediately filed objections to the settlement, including Chubb Indemnity Insurance Company. Chubb argued that the Order violated its due process rights because it had never been notified of the 1986 agreement, yet it could be bound by the broad terms of the Order. The bankruptcy court denied the objection and issued the Clarifying Order in 2004. Chubb appealed all the way to the U.S. Supreme Court, which concluded that the Clarifying Order was a proper exercise of the bankruptcy court’s jurisdiction. The Supreme Court did not, however, address which parties might be bound by the Order. On remand, the Second Circuit held that Chubb was not bound by either the 1986 orders or the Clarifying Order.

In 2010, three groups of plaintiffs involved in the 2004 settlement filed a motion to compel Travelers to pay the agreed-upon amounts. Travelers refused, arguing that the conditions of the Clarifying Order had not been satisfied because Chubb could still bring claims against it. The bankruptcy court granted the order to compel, but a federal district court judge reversed.

Reversing and reinstating the bankruptcy court’s order, the Second Circuit found that the conditions of payment were fully satisfied. Just because Chubb successfully challenged the Clarifying Order, the court held, Travelers was not off the hook. Even though Chubb might potentially bring a claim against Travelers, the integrity and breadth of the Clarifying Order remained in place.

“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 court wrote. “The interpretation proposed by Travelers would have required the bankruptcy court either to (1) 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 (2) bar all claimants whether or not they had constitutionally sufficient notice.”

Since both of these options were “well beyond the bankruptcy court’s power,” Travelers’ argument failed, the panel held. Put somewhat differently, Travelers proposed an interpretation incapable of ever being fulfilled, which would have rendered the deal a nullity from its inception.

Therefore the Clarifying Order met the first condition. The second was met because the Supreme Court’s decision was a final order. The remand of the case and subsequent Second Circuit decision – even the finding that Chubb was not bound by the 1986 orders – did not render the Clarifying Order any less final, the court held. “It would defy logic to hold that the Clarifying Order, as an extension of the 1986 orders, is not ‘final’ simply because Chubb did not receive constitutionally adequate notice of the 1986 proceedings,” the court opined.

As for the third condition, the court held, Travelers waived any challenge by failing to raise the issue before the bankruptcy court.

With all three conditions satisfied, the court reinstated the bankruptcy court’s order compelling Travelers to pay the promised $445 million, as well as statutorily prescribed interest, bringing the total payment to $510 million.

To read the decision in In re Johns Manville, click here.