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In Re Johns-Manville Corporation, et al., Debtors. v. Statutory and Hawaii Direct Action Settlement

March 1, 2012

IN RE JOHNS-MANVILLE CORPORATION, ET AL., DEBTORS.
THE TRAVELERS INDEMNITY COMPANY AND TRAVELERS CASUALTY AND SURETY COMPANY (F/K/A AETNA CASUALTY AND SURETY COMPANY), APPELLANTS,
v.
STATUTORY AND HAWAII DIRECT ACTION SETTLEMENT COUNSEL AND COMMON LAW SETTLEMENT COUNSEL,
APPELLEES.



OPINION AND ORDER

The appellants, Travelers Indemnity Company and Travelers Casualty and Surety Company ("Travelers"), appeal from a final judgment of the United States Bankruptcy Court for the Southern District of New York (Lifland, J.), dated January 20, 2011, requiring Travelers to pay over $500 million to certain asbestos plaintiffs that had filed direct actions against Travelers. The Judgment sought to enforce three settlement agreements that were executed by the parties in 2004. Because a condition precedent in the settlement agreements was not satisfied, it was error to require Travelers to make the settlement payments. To that extent, therefore, the judgment must be reversed.

I.

This appeal is the latest chapter in a long-running litigation involving Johns-Manville Corporation ("Manville"), Travelers, and asbestos claimants. The history of that litigation is recounted here only to the extent necessary to understand the current appeal.

A.

From the 1920s until the 1970s, Manville was the largest manufacturer of asbestos-containing products and the largest supplier of raw asbestos in the United States. In re Johns-Manville Corp. ("Manville I"), Nos. 82 B 11656, 82 B 11657, 82 B 11660, 82 B 11661, 82 B 11665, 82 B 11673, 82 B 11675, 82 B 11676, 2004 WL 1876046, *2, ¶ 1 (Bankr. S.D.N.Y. Aug. 17, 2004). Travelers was Manville's primary insurer from 1947 through 1976, providing comprehensive general liability coverage and other insurance policies. Id. at *5, ¶ 12. In 1982, faced with overwhelming litigation stemming from the health problems associated with asbestos, Manville filed a voluntary petition for reorganization under chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 1101 et seq. In re Johns-Manville Corp. ("Manville II"), 340 B.R. 49, 54 (S.D.N.Y. 2006). Soon after Manville filed for bankruptcy, Travelers and other Manville insurers became enmeshed in so-called "direct action" suits by asbestos plaintiffs, which sought to recover directly against insurers based on those insurers' relationships with Manville ("Direct Action Suits"). Id. at 55. There were also a series of contribution claims, cross claims, and indemnity claims between and among many of the companies that had insured Manville over the years. Id. Travelers and other insurers were also embroiled in a contentious coverage dispute with Manville. Id.

Ultimately, Travelers and other insurers entered into a settlement agreement with Manville. Pursuant to this agreement, Travelers agreed to contribute nearly $80 million to the bankruptcy estate in exchange for a complete release for Travelers of liabilities that were related to or based on Manville and an injunction that channeled all claims related to policy claims to the Manville Personal Injury Settlement Trust ("Manville Trust"). Manville I, 2004 WL 1876046, at *15, ¶¶ 58, 61. After considering objections to this settlement and holding a series of hearings, the Bankruptcy Court approved the agreement and entered two orders intended "to fully and finally extricate Travelers from the Manville morass" ("the 1986 Orders").*fn1 Id. at *15, ¶ 60. These two orders - the "Insurance Settlement Order" and the "Confirmation Order" - enjoined "all persons" from commencing any action against any of the settling insurance companies for any and all claims based upon, arising out of, or relating to these insurers' policies with Manville, and released the settling insurers from any such claims. Id. at *15, ¶¶ 61-64. The Insurance Settlement Order also channeled all litigation by potential claimants to the Manville Trust.

Id. at *15, ¶ 61. As this Court explained, with the entry of the 1986 Orders, "Travelers thought it had secured finality and a full and complete release of liabilities related to Manville." Manville II, 340 B.R. at 55.

Nonetheless, even after the 1986 Orders, various groups of plaintiffs filed asbestos actions against Travelers in several states. Manville I, 2004 WL 1876046, at *17, ¶ 70. These lawsuits fell within two broad categories. The Statutory Direct Action Plaintiffs alleged that Travelers conspired to violate state laws prohibiting unfair insurance trade practices, and that Travelers coordinated Manville's national defense effort against asbestos litigation, including the allegedly fraudulent perpetuation of the "state of the art" defense.*fn2 Id. at *18-19, ¶¶ 73-74, 78-79. The Common Law Direct Action Plaintiffs claimed that Travelers violated certain common law duties to them when it failed to disclose what it had learned about asbestos hazards from Manville, and that Travelers conspired with Manville and other insurers to suppress such knowledge. Id. at *19, ¶¶ 80-82.

On June 19, 2002, Travelers moved the Bankruptcy Court to enjoin these suits pursuant to the 1986 Orders. Manville II, 340 B.R. at 55. The Bankruptcy Court issued a temporary restraining order prohibiting further prosecution of certain lawsuits against Travelers, and this order was subsequently extended in scope and duration. Id. The Bankruptcy Court referred the matter to mediation and appointed the Honorable Mario M. Cuomo, former Governor of the State of New York, as mediator. Id.

B.

In 2003 and 2004, Travelers entered into three settlement agreements pursuant to which it agreed to pay $360 million to the Statutory Direct Action Plaintiffs, $70 million to the Common Law Direct Action Plaintiffs, and $15 million to the Hawaii Direct Action Plaintiffs ("the Settlement Agreements").*fn3

Manville I, 2004 WL 1876046, at *22-23, ¶¶ 96, 101, 105. The Settlement Agreements provided that Travelers would make payments into funds designed to pay direct action claimants, who would be required to sign a general release of claims against Travelers to gain access to the appropriate fund. Id. at *22-23, ¶¶ 98-99, 102, 105.

The Settlement Agreements were each contingent upon the satisfaction of several conditions precedent. The two conditions precedent disputed on this appeal are as follows. First, the Settlement Agreements required entry by the Bankruptcy Court of a Settlement Approval Order and a Clarifying Order "containing prohibitions against Claims at least as broad as those contained in Exhibit A[,]" which Orders were required to "become a Final Order(s)."*fn4 (R. 4 Ex. 1 at § 2(a); R. 4 Ex. 2 at § 2(b)(d); R. 4 Ex. 3 at § 2(a).)*fn5 Exhibit A consisted of a proposed order stating, among other provisions, that all claims against Travelers "of any kind or nature whatsoever" "arising from or relating to" Travelers' handling of asbestos claims, as well as "any claims for contribution or indemnity relating in any way" to the same, "are covered by the Confirmation Order and permanently enjoined as against Travelers, which were released therefrom under the Confirmation Order."*fn6 (R. 4 Ex. 1 at Ex. A; R. 4 Ex. 2 at Ex. A; R. 4 Ex. 3 at Ex. A.) These Orders were required to become a "Final Order," which was defined by the Settlement Agreements as an order from which no appeal was taken or an order "affirmed by the highest court to which such order was appealed or certiorari has been denied and the time to take any further appeal or petition for certiorari shall have expired." (R. 4 Ex. 1 at § 1; R. 4 Ex. 2 at § 1; R. 4 Ex. 3 at § 1.) The second condition precedent required, for the Statutory Direct Action and Common Law Direct Action Settlement Agreements, the execution and delivery into escrow of a specified number of general releases from claimants, and, for the Hawaii Direct Action Settlement Agreement, the dismissals with prejudice of pending claims against Travelers. (R. 4 Ex. 1 at § 2(c); R. 4 Ex. 2 at § 2(d); R. 4 Ex. 3 at § 2(c).)

The Settlement Agreements made clear that "the non-occurrence or failure to satisfy any of the conditions precedent . . . shall relieve Travelers from any obligation whatsoever under th[e] Settlement Agreement[s], including, but not limited to, the obligation to pay any portion of the Settlement Amount[s] . . . ." (R. 4 Ex. 1 at § 3(c); R. 4 Ex. 2 at § 2; R. 4 Ex. 3 at § 3(c).)

The Settlement Agreements provided that they were governed by New York law. (R. 4 Ex. 1 at § 18; R. 4 Ex. 2 at § 17; R. 4 Ex. 3 at § 18.)

II.

A.

In 2004, the parties filed separate motions seeking the Bankruptcy Court's approval of the Settlement Agreements. Various parties filed objections, including Chubb Indemnity Insurance Company ("Chubb"), a sophisticated insurer with asbestos-related insurance policies, which risked having potential future contribution and indemnity claims against Travelers barred by the Clarifying Order. Manville II, 340 B.R. at 68. Chubb and the other objecting parties argued that the Bankruptcy Court lacked subject matter jurisdiction to enjoin such claims. Id. at 67-68. Chubb also independently objected on due process grounds, contending that it did not receive constitutionally sufficient notice of the 1986 Orders. Id. at 68-69.

Following an evidentiary hearing, the Bankruptcy Court entered an Order approving all three Settlement Agreements and clarifying that the 1986 Orders barred pending Direct Actions and "[t]he commencement or prosecution of all actions and proceedings against Travelers that directly or indirectly are based upon, arise out of or relate to Travelers['] insurance relationship with Manville or Travelers['] knowledge or alleged knowledge concerning the hazards of asbestos[,]" including "any claims for contribution or indemnity relating in any way to the foregoing . . . ." (R. 2 at ¶ 7) ("the Clarifying Order").*fn7 The language in the Clarifying Order was substantially the same as the language contained in the Exhibit As annexed to the respective Settlement Agreements. The Bankruptcy Court also issued Findings of Fact and Conclusions of Law setting forth the basis for the Clarifying Order. Manville I, 2004 WL 1876046. The Bankruptcy Court concluded that it had the constitutional and statutory authority to enter both the Clarifying Order and the 1986 Orders. Id. at *26-28, ¶¶ 1-9. The court also found that the Direct Action Suits and all contribution or indemnity claims by other insurers were barred by the terms of the 1986 Orders. Id. at *30-34, ¶¶ 17-35. In addition, the Bankruptcy Court rejected the objections of Chubb and the other insurers to the Settlement Agreements, reasoning that the judgment reduction provisions of the Clarifying Order, which ...


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