Vol 6 (2009) - Issue 5

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Don’t Look Back: US Supreme Court Upholds Res Judicata Effect of 1986 Asbestos Channelling Injunction (Travelers Indemnity Co. v Bailey, 129 S.Ct. 2195 (2009))

Introduction

On 18 June 2009, the United States Supreme Court (the ‘Court’) issued its ruling in Travelers Indemnity Co. v Bailey, and held that the terms of a bankruptcy court injunction issued in 1986 remained in force and precluded asbestos plaintiffs from currently pursuing a direct right of action against The Travelers Indemnity Company (‘Travelers’). Reversing a ruling from the United States Court of Appeals for the Second Circuit (the ‘Second Circuit’), the Court held that the Second Circuit erred in concluding that the bankruptcy court exceeded its jurisdiction when it entered the 1986 order. The Court explained that following entry of the order, aggrieved parties had the right to challenge the order on appeal. Once the order became final on direct review, however, it became ‘res judicata to the parties and those in privity with them.’ The Court stated that ‘even subject matter jurisdiction … may not be attacked collaterally.’ Noting that its holding was a narrow one, the Court explained that it was not necessary to determine whether a bankruptcy court has the authority to enjoin third party claims against non-debtor insurers that are not derivative of the debtors’ wrongdoing. In closing, the Court explained that given the procedural posture of the matter before it (i.e., the finality of the 1986 order), the Court did not need to address whether the 1986 order exceeded the permissible scope of a channelling injunction entered pursuant to Bankruptcy Code section 524(g).

The Travelers ruling will be favourably received by insurance companies that have been embroiled in asbestos litigation, as it provides them with some protection from attempts to circumvent channelling injunctions that may have been entered many years earlier. The ruling also should help facilitate the reorganisation of companies facing asbestos liabilities. Insurers should be more willing to participate in bankruptcy settlements since those settlements, once approved by a final court order, can provide insurers with expansive protection from future liabilities. From the plaintiffs’ standpoint, following Travelers, it will be important for claimants either to assert all claims in the subject bankruptcy proceeding, or to carefully analyse, and if necessary, object to, the terms of the proposed channelling injunction to preserve future direct claims against insurers.

Background

For decades, dating back to the 1920s, the Johns-Manville Corporation (‘Manville’) was acknowledged as the largest producer of asbestos-containing products in the United States. As science began to link asbestos exposure to deadly respiratory illnesses, Travelers, as Manville’s primary insurer, consulted with Manville to gain an understanding of the dangers created by asbestos exposure and to assess Manville’s potential asbestos-related liability and possible defences thereto. In 1982, faced with a growing wave of lawsuits and the prospect of overwhelming liability, Manville filed for protection under chapter 11 of Title 11, United States Code (the ‘Bankruptcy Code’) in the United States Bankruptcy Court for the Southern District of New York (the ‘Bankruptcy Court’).