Travelers V Bailey - Brief of Future Claimants
Travelers V Bailey - Brief of Future Claimants
urt, U.S.
ED
IN THE
~rtmt
FEB 2 - 2009
v.
PEARLIE BAILEY, et al.,
Respondents.
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TABLE OF CONTENTS
Page
iv
ARGUMENT...............................
10
12
13
I.
A.
B.
ii
Contents
Page
A.
15
15
19
23
B.
Contents
Page
A.
23
27
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
B.
iv
Cases
Amchem Products, Inc. v. Windsor,
521
...................... 11, 12
........... ............
28
Begier v. IRS,
Caminetti v. United States,
242 U.S. 470 (1917) . . . . . . . . . . . . . . . . . . . . . . .
28
. . . . . . . . . . . . . . . . . . . . . . 16, 17
16
In re ACandS, Inc.,
2008 Bankr. LEXIS 2169
(Bankr. D. Del. 2002) . . . . . . . . . . . . . . . . . . . . . .
'~-----------------------
Cited Authorities
Page
14
In re Combustion Eng'g,
391 F.3d 190 (3d Cir. 2004) ............. 29, 30, 31
In re Dow Corning Corp.,
86 F.3d 482 (6th Cir. 1996) ................ 17, 18
In re Drexel Burnham Lambert Group, Inc.,
960 F.2d 285 (2d Cir. 1992) ................ 18, 20
In re Federal-Mogul Global, Inc.,
282 B.R. 301 (Bankr. D. Del. 2001) . . . . . . . . . .
vi
Cited Authorities
Page
In re Walker,
51 F.3d 562 (5th Cir. 1995)
16, 17
In re Wood,
825 F.2d 90 (5th Cir. 1987)
17
Munford v. Munford,
97 F.3d 449 (11th Cir. 1996)
18
...................... 11, 12
16
Perez v. Campbell,
402 U.S. 637 (1971)
25
_______
_______ __ __ --
31
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vii
Cited Authorities
Page
25
31
.. .. . .. . .. .. .. .. .. .. .. .
26
CaNST.
25
U.S.
CaNST.
art. I, 8, cl. 4 . . . . . . . . . . . . . . . . . . .
16
Statutes
11 U.S.C. 524(g) ......................... passim
11 U.S.C. 524(g)(2)(B)(i) .. .. .. .. .. .. . .. .. .. .
11
u.s.c. 524(g)(4)
11
.. . .. .. .. .. .. . .. . .. .. .. .
24
11 U.S.C. 524(g)(4)(A)(ii) .. .. .. .. .. .. .. .. . ..
25
11 U.S.C. 524(g)(4)(A)(ii)(I)-(IV) . . . . . . . . . . . .
24
11 U.S.C. 524(g)(4)(A)(ii)(III) . . . . . . . . . . . . . . .
24
11 U.S.C. 524(g)(4)(B) .. .. .. .. .. .. .. .. .. . .. .
11
viii
Cited Authorities
Page
11 U.S.C. 524(g)(4)(B)(i) .................. 3, 9, 11
28 U.S.C. 1334 .......................... passim
28
15, 26
Rules
Supreme Court Rule 37(3)
Other Authorities
1 Collier on Bankruptcy (Alan N. Resnick &
Henry J. Sommer eds., 15th ed. rev. 2008) . 17, 22
140 Cong. Rec. H10752 (daily ed. October 4,
1994) ................................ 23, 28, 31
140 Cong. Rec. S 4521, S4523 (daily ed. April11,
1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
10
13
ix
Cited Authorities
Page
29
10
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Lawrence Fitzpatrick currently serves as the courtappointed legal representative for future asbestos personal
(Cont'd)
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5
timely, fair, and meaningful compensation for the
asbestos-related injuries they will suffer over the next
decades depends largely on the viability of asbestos
compensation trusts of the type at issue in this appeal.
The Future Claimants Representatives have been
appointed in bankruptcy proceedings pursuant to
Section 524(g) to represent persons who have been
exposed to asbestos, and who have not yet brought
personal injury claims or lawsuits but will assert such
claims once their injuries become manifest. The Future
Claimants Representatives are charged by Congress
and the federal courts with ensuring that future
claimants are treated fairly and similarly to current
claimants. The work of the Future Claimants
Representatives, and others, has led to the creation of
more than 40 asbestos compensation trusts pursuant
to Section 524(g). These trusts enable companies
responsible for asbestos personal injuries to fully resolve
all of their present and future asbestos liabilities, and
at the same time provide a dedicated source of funds to
compensate current and future claimants. The creation
of asbestos compensation trusts has benefited both
asbestos claimants and companies seeking to resolve
their asbestos-related liabilities and thus remain
economically viable and competitive.
Because the Future Claimants Representatives do
not have a position as to whether all of the claims
Travelers seeks to enjoin under the Manville
Confirmation Order have a "reasonable nexus" to the
Manville estate, they have not filed this brief in support
of any party. In particular, the Future Claimants
Representatives do not take a position on whether the
- - - -- ...... -- ---
ARGUMENT
I.
10
between 1.5 million and 2.5 million future claims for
asbestos-related injuries against the Manville trust
alone. Stephen J. Carroll et al., RAND Institute for
Justice, Asbestos Litigation 114 (2005), available at
h ttp://www.rand.org/Pu bs/documented_briefings/2005/
DB397.pdf. As of summer 2004, 73 asbestos defendants
had filed for bankruptcy. !d. at 109. More have filed since
then. Based on the number of asbestos bankruptcy cases
and the asbestos products with which the debtors were
associated, the persons already appointed and serving
as FUture Claimants Representatives likely represent
all, or nearly all, of the future claimants.
11
or a subsidiary that is also a debtor. 11 U.S.C.
524(g)(2)(B)(i). Additionally, before a channeling
injunction can be entered, the bankruptcy court must
appoint a Future Chiimants Representative to protect
the interests of the future claimants and must determine
that the injunction is "fair and equitable" to potential
future claimants. 11 U.S.C. 524(g)(4)(B).
The creation of asbestos compensation trusts has
benefited both injured claimants and debtors, while also
promoting judicial efficiency. By permitting a debtor to
cleanse itself of asbestos-related liabilities through
bankruptcy, Congress has enabled such debtors to truly
obtain a fresh start through bankruptcy and continue
to operate. Indeed, as a result of Supreme Court
decisions, Section 524(g) is the only means by which a
company can fully resolve all of its present and future
asbestos liabilities. 8
8
12
13
cash component of the res with which the asbestos
compensation trust was funded. Eric D. Green et al.,
Prepackaged Asbestos Bankruptcies: Down but Not
Out, 63 N.Y.U. Ann. Surv. Am. L. 727,768-69 (2008). In
addition, the res that was agreed to for the asbestos
compensation trust included almost 60 million shares of
Halliburton stock. !d. at 769. Between December 2002,
when the parties first agreed on the res, and the time
of the confirmation hearing, the stock of Halliburton had
increased in value by 50%. I d. By the time the
Halliburton stock was sold by the trust, the value of the
stock had more than doubled, and the sale proceeds
were sufficient to cover the projected liabilities over the
life of the trust. !d. at 770 n.195. FUture claimants will
receive full compensation for their injuries, and the
debtor was able to recover its credit status in the capital
markets and emerge from the bankruptcy proceeding
as a robust, competitive entity. This is what is meant by
a "win-win" solution.
14
to compensate persons who have been exposed to the
debtor's asbestos. For example, the asbestos
compensation trust that resulted from the Babcock &
Wilcox Company bankruptcy cases has been funded, to
date, with nearly $1 billion of insurance settlement
proceeds. 9 Such proceeds and policies arise out of and
relate directly to the debtor's activity in exposing
claimants to asbestos and the associated risks of injury.
The ability of insurers to protect themselves from
asbestos liability, following the contribution of their
insurance policies to an asbestos compensation trust and
the confirmation of a plan of reorganization, has been
critical to the success of reorganizations employing
Section 524(g).
Liability insurers are willing to enter into
comprehensive settlements in connection with asbestosrelated bankruptcy proceedings only because, pursuant
to Section 524(g), the insurers can obtain channeling
injunctions barring actions against them that arise out
of or relate to the debtor's liability. Without the ability
to offer insurers the benefits of channeling injunctionsfinality and protection from further claims-Future
Claimants Representatives would have little leverage
in dealing with insurers and little ability to negotiate
favorable insurance settlements for the benefit of future
9
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15
claimants, including accelerated payments to properly
fund asbestos compensation trusts. Thus, the Section
524(g) process, a process that has proven highly effective
in efficiently and fairly resolving mass asbestos
liabilities, would be seriously undermined by a ruling
that creates uncertainty about the post-bankruptcy
protections afforded to insurers that agree to fund
asbestos compensation trusts.
II. Section 1334 Provides Bankruptcy Courts with
Subject Matter Jurisdiction to Issue Injunctions
to Preclude Third-Party Actions Against Insurers,
Where the Outcomes of Such Actions Could Have
a "Conceivable Effect" on the Bankruptcy Estate
or Would Otherwise Affect the Administration of
the Estate.
16
prevent the full application of Section 524(g) as a tool to
resolve asbestos-related bankruptcies and compensate
asbestos claimants.
Article I of the Constitution vests Congress with the
power "[t]o establish ... uniform Laws on the subject of
Bankruptcies throughout the United States."
U.S. Const. art. I, 8, cl. 4. Pursuant to that grant,
Congress conferred upon the district and bankruptcy
courts broad jurisdiction over "all civil proceedings
arising under title 11, or arising in or related to cases
under title 11." 28 U.S.C. 1334(b). In Celotex Corp. v.
Edwards, this Court, construing the breadth of "related
to" jurisdiction under the statute, approved the
proposition that "'Congress intended to grant
comprehensive jurisdiction to the bankruptcy courts so
that they might deal efficiently and expeditiously with
all matters connected with the bankruptcy estate."'
Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995)
(quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d
Cir. 1984)).
Jurisdiction pursuant to Section 1334(b) exists if a
matter is related to the bankruptcy, whether or not the
matter arises out of the bankruptcy. See Feld v. Zale
Corp., 62 F.3d 746, 752 (5th Cir. 1995) ("to ascertain
whether jurisdiction exists, 'it is necessary only to
determine whether a matter is at least "related to" the
bankruptcy."' (quoting In re Walker, 51 F.3d 562, 569
(5th Cir. 1995))). Courts have established that the
jurisdictional requirement of Section 1334(b) is met
when the "outcome of [the] proceeding could
conceivably have any effect on the estate being
administered in bankruptcy." Pacor, Inc., 743 F.2d at
-- -
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17
994, quoted in Celotex Corp., 514 U.S. at 308 (emphasis
added). See also In re Walker, 51 F.3d at 569; In re Wood,
825 F.2d 90, 93 (5th Cir. 1987); 1 Collier on Bankruptcy
~ 3.01[4][c][ii] (Alan N. Resnick & Henry J. Sommer
eds., 15th ed. rev. 2008). "Related to" jurisdiction has
also been framed in terms of whether the claims could
potentially affect the handling or administration of the
estate. See In re Dow Corning Corp., 86 F.3d 482, 494
(6th Cir. 1996). These tests for relatedness are consistent
with the broad jurisdictional mandate of Section 1334(b ).
See, e.g., 1 Collier on Bankruptcy~ 3.01[ 4][c][ii] (noting
that courts generally "seem to recognize the
importance of a generous definition of 'related to'
jurisdiction in encouraging the expeditious and efficient
administration of bankruptcy cases").
In Celotex, for example, this Court affirmed the
jurisdiction of the bankruptcy court to issue an
injunction barring a suit against Celotex's surety,
because allowing asbestos plaintiffs to proceed with the
suit would have hampered the bankruptcy court's ability
to foster a comprehensive settlement with all of Celotex's
insurers. See Celotex, 514 U.S. at 309-10. Similarly, in
Dow Corning, the Sixth Circuit held that the bankruptcy
court and district court had jurisdiction to enjoin breastimplant suits against the debtor's co-defendants
because, if the claims against the co-defendants were
allowed to continue, they would have given rise to claims
against the debtor for contribution and common law
indemnity, and therefore would have "affect[ ed] the size
of the [bankruptcy] estate." Dow Corning, 86 F. 3d at
494. The court in Dow Corning also observed that
18
automatic liability (i.e., where a judgment has already
been rendered) was not a prerequisite for "related to"
liability, noting:
"A key word in [the] test is conceivable.
Certainty, or even likelihood, is not a
requirement. Bankruptcy jurisdiction will
exist so long as it is possible that a proceeding
may impact on the debtor's rights, liabilities,
options, or freedom of action or the handling
and administration of the bankrupt estate."
19
the non-settling defendants' contribution and indemnity
claims affected the ability of the estate to receive its
settlement).
20
plaintiff is seeking recovery from insurance policies that
are property of the bankruptcy estate. 10
The Second Circuit also engaged in an overly narrow
interpretation of "relatedness" by looking to the link
between the substantive legal claims asserted by the
debtor and the non-debtors against the insurance
companies. In this regard, the Second Circuit looked to
whether the third party alleged a claim that was founded
on a legal duty independent of the one asserted by the
debtor. According to the Second Circuit, the district
court should have looked to the law of the states where
the third-party claims arose, to determine whether
Travelers had an "independent legal duty in its dealing
with plaintiffs." (I d. at 23a-24a.) Along these lines, the
Second Circuit asked whether Travelers owed a duty to
the third-party claimants independent of its contractual
obligations to indemnify those injured by the tortious
conduct of Manville. According to the court, "[i]f such a
duty exists, then the fact that it arises from a common
nucleus of operative facts involving Travelers and
In attempting to distinguish MacArthur and Davis, the
Second Circuit incorrectly recast a sufficient condition as a
necessary one. There is no disagreement among courts that
federal jurisdiction exists over a claim seeking direct recovery
from the res of the bankruptcy estate. But it is also true that, as
recognized in Drexel and Metromedia, injunctions that "play[]
an important part in the debtor's reorganization plan" provide
a sufficient basis for jurisdiction. In re Metromedia Fiber
Network, Inc., 416 F.3d at 141 (quoting In re Drexel Burnham
Lambert Group, Inc., 960 F.2d at 293). In this case-at least to
the extent that the injunction in question is related to the
insurers' coverage of Manville-the requisite standard has been
met.
10
21
22
Section 524(g) "provides a unique form of supplemental
injunctive relief for an insolvent debtor confronting the
particularized problems and complexities associated
with asbestos liability." (App. to Pet. Cert. at 33a-34a
(citing H.R. Rep. 103-835, at 40, as reprinted in 1994
U.S.C.C.A.N. 3340, 3348 (1994)).) Section 524(g) thus
advances the purpose of chapter 11 by "facilitating the
reorganization and rehabilitation of the debtor as an
economically viable entity." (!d. at 34a.) This policy will
be undermined by a ruling that casts doubt on-not to
mention one that punches holes in-the protection
liability insurers can receive against end-run, so-called
direct claims.
To construe "related to" jurisdiction broadly does
not imply there are no limits to the jurisdictional scope
of Section 1334(b). The jurisdiction does not extend to
those cases where there is no "reasonable nexus"
to the bankruptcy estate. 1 Collier on Bankruptcy
~ 3.01[ 4][c][ii][B]; see also Dow Corning, 86 F.3d at 488.
But "related to" jurisdiction will almost always be broad
enough to encompass injunctions against claims relating
to an insurer's provision of coverage to the debtor,
whether those claims sound in tort, statute, or some
other duty, because the "reasonable nexus" between the
debtor's estate and those claims will almost always be
present. The Amici submit that the "reasonable nexus"
test has been met with respect to the claims relating to
insurers' provision of insurance to a debtor. This does
not suggest that "related to" jurisdiction would
necessarily provide a basis for a bankruptcy court to
enjoin claims based on coverage an insurer provided to
an entity other than the debtor. In the case of a claim
arising out of the insurance coverage of a non-debtor,
23
the bankruptcy court's jurisdiction depends on a
searching inquiry into the facts and circumstances
concerning the basis of the "reasonable nexus."
24
The text of Section 524(g) is clear that injunctions
protecting non-debtors may bar lawsuits seeking to
recover from the non-debtors' own funds (rather than
funds that are part of the debtor's estate), and that are
brought pursuant to state law doctrines. A debtor's
corporate parents, affiliates, officers, and lenders (along
with insurers) are expressly eligible for third-party
protection under Sections 524(g)(4)(A)(ii)(I)-(IV). As to
a debtor's insurers, Section 524(g)(4) allows for broad
protection. It states in pertinent part:
Notwithstanding the provisions of section
524(e), such an injunction may bar any action
directed against a third party who is
identifiable from the terms of such injunction
(by name or as part of an identifiable group)
and is alleged to be directly or indirectly liable
for the conduct of, claims against, or demands
on the debtor to the extent such alleged
liability of such third parties arises by reason
of ... (Ill) the third party's provision of
insurance to the debtor....
Section 524(g)( 4)(A)(ii)(Ill).
The foregoing requirements are satisfied where a
suit seeks to hold an insurer liable because of its
provision of coverage to the debtor, even if the claimant
alleges that the insurer had an independent state law
duty toward the claimant. Although no such theory of
an independent state law duty apparently has been
successful, the Second Circuit's decision provides fodder
for creative lawyers to invent a claim or theory to
attempt to circumvent a channeling injunction. The
25
mere threat that circumvention could be so easily
achieved would itself be damaging to the policy and
purposes behind Section 524(g). 11 Plaintiffs alleging that
an insurer of the debtor, by reason of its status as the
debtor's insurer, had an independent "duty to warn"
them of the dangers of the debtor's product are seeking
to hold the insurer liable for the asbestos-related injury
caused by their exposure to the debtor's product, and
thus, in the language of Section 524(g)( 4)(A)(ii), to hold
the insurer "indirectly liable for the conduct" of the
debtor. Claims based on "bad faith" and state trade
practice laws are seeking to hold the insurer liable for
the manner in which it, as required by its insurance
policy, defended the debtor, and thus are seeking to hold
the insurer "indirectly liable" for the "claims against"
the debtor, within the meaning of Section 524(g). 11
U.S.C. 524(g)(4)(A)(ii).
11
26
If actions cannot be enjoined under Section 524(g),
12
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28
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its impression of congressional intent has no grounding
and is not a substitute for the plain language of Section
524(g).
The source of the extra-statutory "derivative"
nomenclature is not statutory history, but rather a
borrowing of dicta from the Third Circuit decision in
In re Combustion Eng'g, 391 F.3d 190 (3d Cir. 2004).
The Second Circuit's reliance on In re Combustion
Eng 'g to determine congressional intent is misplaced.
In that case, the Third Circuit used the term
"derivative" in a different context from the one in which
the Second Circuit employed it below, and the Third
Circuit's analysis does not reveal any evidence of
congressional intent that would support the Second
Circuit here.
In In re Combustion Eng'g, the Third Circuit
determined that claims alleged against two of the
(Cont'd)
"To those companies willing to submit to the
stringent requirements in this section designed to
ensure that the interests of asbestos claimants are
protected, the bankruptcy courts' injunctive power
will protect those debtors and certain third parties,
such as their insurers, from future asbestos product
litigation of the type which forced them into
bankruptcy in the first place."
140 Cong. Rec. 84521, 84523 (daily ed. Aprilll, 1994) (statement
of Sen. Brown) (emphasis added). The committee reports
similarly fail to discuss the limitation of section 524(g) based
on a "derivative" distinction. SeeS. Rpt. No. 102-279, at 42 (1992);
H Rpt. No. 103-835, at 52-53.
30
debtor's non-bankrupt affiliates, Lummus and Basic,
could not be channeled to the asbestos trust under
"related to" jurisdiction or the "equitable powers"
available under Section 105(a). I d. at 224-38. In reaching
this decision, the Third Circuit found that the
claims against Lummus and Basic arose "from
different products, involved different asbestoscontaining materials, and were sold to different
markets." I d. at 231. Moreover, the Third Circuit found
that "the lack of indemnification obligations ... , the
lack of derivative liability or unity of interest ... , the
minimal corporate affiliation of Combustion Engineering
with Lummus and Basic, and the indirect effects on the
Plan [of reorganization]" precluded the application of a
channeling injunction under Section 105(a) to the claims
against Lummus and Basic. I d. at 233. The Third Circuit
did not analyze what made the claims "derivative" or
"non-derivative," or how that analysis would affect the
application of Section 524(g). Indeed, because neither
the bankruptcy court nor the district court had made
"explicit findings whether the 524(g) requirements
were satisfied with respect to the channeling injunction
as applied to the independent, non-derivative claims
against Basic and Lummus" (id. at 237-38), an analysis
of the application of Section 524(g) to claims against
Basic and Lummus would have been misplaced.
More fundamentally, the Third Circuit's decision in
In re Combustion Eng'g provides no basis for the
Second Circuit's finding below that Congress intended
to limit the ambit of Section 524(g) injunctions to actions
"against third parties to those where a third party has
derivative liability for the claims against the debtor."
(App. to Pet. Cert. at 34a (quoting In re Combustion
31
32
serve as a useful shorthand in some situations, it should
not be grafted onto Section 524(g) as a test to determine
a bankruptcy court's power to enjoin asbestos claims
against the debtor's insurers.
The Second Circuit remanded this matter to the
bankruptcy court to "examine whether, in light of [the
Second Circuit's] opinion, it had jurisdiction to enjoin
any of the instant claims." (App. to Pet. Cert. at 36a.)
This Court should remand this matter with an
instruction that, according to the text of Section 524(g)
and not the "derivative" versus "non-derivative"
analysis set forth in the Second Circuit opinion, the
bankruptcy court has the authority to enjoin the thirdparty suits to the extent that the suits relate to insurers'
coverage of a debtor, regardless of the legal theory on
which the claim may be based and regardless of whether
the claim seeks recovery beyond the insured's policy
limits or the res. Because the reach of injunctions issued
pursuant to Section 524(g) is broad, and there exists a
wide variety of relationships between debtors and their
insurers, the application of Section 524(g) to claims
beyond that point must involve a context-specific and
fact-intensive inquiry. That inquiry should be carried
out by following the language of Section 524(g), not
short-circuited by the "derivative" versus "nonderivative" test that the Second Circuit needlessly
created.
33
CONCLUSION
34
Respectfully submitted,
JAMES L. PATrON, JR.
Counsel of Record
EDWIN J. HARRON
ROLIN
P. BISSELL
JOHN J. PASCHETTO
ELENA c. NORMAN
yOUNG CONAWAY STARGATI'
&
TAYLOR, LLP