The U.S. Supreme Court has issued a long-awaited decision that many practitioners had hoped would provide insight into the permissible breadth of third-party releases and injunctions often contained in confirmed chapter 11 plans. The high court, however, narrowly resolved the issue presented in Travelers Indem. Co. v. Bailey, 129 S.Ct. 2195 (2009), and left open that ultimate question.

The case stems from the widely influential In re Johns-Manville Corp. bankruptcy case filed in 1982. The In re Johns-Manville Corp. bankruptcy case was the first to address the multitude of current and future asbestos claims pending against a corporation. That case provided the fundamental framework upon which most (if not all) subsequent asbestos cases have been based, and provided a mechanism for the determination and adjudication of current and future asbestos claims through the creation of the Manville Personal Injury Settlement Trust (the "Manville Trust").

Ultimately, the structure created by the Manville Trust was codified in section 524(g) of the Bankruptcy Code; however, at the time, the "channeling injunction" contemplated by the Manville Trust was unprecedented. To resolve In re Johns-Manville Corp., the bankruptcy court ordered (the "1986 Order") that any and all personal injury claims related to the exposure to asbestos and/or asbestos products against Johns-Manville Corp., or any claims that are, could have been, or might be asserted against any Settling Insurer Group related to certain insurance policies, were released, enjoined and ordered to be made solely against the Manville Trust.

The enforceability of the Manville Trust was timely appealed and ultimately affirmed by the U.S. Court of Appeals for the Second Circuit.

Trust Challenge

After many years, various creditors attempted to make claims against The Travelers Indemnity Company (one of the settling insurers under the Manville Trust), asserting that Travelers conspired with insurers and other asbestos manufacturers to hide the dangers of asbestos.

Travelers defended the actions, arguing that the actions were prohibited by the 1986 Order establishing the Manville Trust. Travelers ultimately sought to have the bankruptcy court enjoin the various actions by confirming that the 1986 Order properly included those actions.

After several rounds of mediation, a settlement was reached whereby the bankruptcy court clarified the 1986 Order and held that the claims currently asserted against Travelers were included in the claims to be prohibited pursuant to the channeling injunction in the 1986 Order. In exchange, Travelers made an additional contribution to the Manville Trust.

Certain creditors appealed and the U.S. District Court affirmed. A further appeal to the U.S. Court of Appeals for the Second Circuit reversed, and a petition for certiorari (seeking appeal to the Supreme Court) was granted.

Supreme Court Review

The issue presented and addressed by the Supreme Court was whether the bankruptcy court had the jurisdiction to clarify the 1986 Order, and/or whether the bankruptcy court had jurisdiction to provide that third-party claims (which are not a derivative of claims arising by or through the debtor) could be enjoined pursuant to the 1986 Order. While most practitioners hoped that the court would expound on the latter issue, the Court (in a 7-2 decision) focused exclusively on the right of the bankruptcy court to clarify the 1986 Order.

The Supreme Court held that the bankruptcy court's clarification of the 1986 Order did not "expand" the 1986 Order; rather, the 1986 Order was broadly drafted and the bankruptcy court simply confirmed that it should be broadly construed. Therefore, the Supreme Court held that because the 1986 Order was entered and became final after a direct review, that order became res judicata and could not be collaterally attacked in any separate proceeding.

The Court expressly noted that it did not confirm or deny whether it was proper for the bankruptcy court to enter the injunction for third-party claims in the 1986 Order or the recent clarification. The Court noted only that once the 1986 Order was entered, formally appealed, and upheld on a direct appeal, it could not be collaterally attacked.

In dissent, Justice Stevens (joined by Justice Ginsberg) focused exclusively on the bankruptcy court's jurisdiction. The dissent noted that the insurance policies were significant assets of the Johns-Manville Corp. bankruptcy estate; therefore, the bankruptcy court had the power to channel claims related to the insurance proceeds to the Manville Trust.

The dissent made the distinction that the claims asserted here were claims directly against Travelers for Travelers' separate "bad acts." They were not "claims relating to a policy" that were meant to be channeled under the 1986 Order. Justice Stevens urged the court to hold that the bankruptcy court had no jurisdiction to enter an order prohibiting third-party claims because the claims sought to be enjoined were third-party claims against a non-debtor. In fact, the dissent argued that the 1986 Order was not clear as to whether such third-party claims were included. The dissent noted that if the 1986 Order had been clear, would Travelers have paid additional consideration for the "clarification"?

Going Forward

While the Travelers Indemnity Company decision confirms the Supreme Court's res judicata jurisprudence, it unfortunately does not lend much insight into the issues practitioners hoped to have clarified through the petition for certiorari. The permissible scope of third-party releases and injunctions contained in confirmed chapter 11 plans and confirmation orders continues to be fluid and differs depending on the appellate circuit in which the bankruptcy case is pending.