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In re Johns-Manville Corp.

United States District Court, S.D. New York

July 25, 2018

MARSH USA, INC., Appellee, THE BOGDAN LAW FIRM, as counsel for Salvador Parra, Jr., Appellant,


          JED S. RAKOFF, U.S.D.J.

         This appeal arises out of the long-running bankruptcy of the Johns-Manvilie Corporation ("Manville"), once the largest supplier of raw asbestos in the United States. Salvador Parra, Jr. (collectively with his estate, "Parra") brought suit in Mississippi state court against Marsh USA, Inc. ("Marsh"), Manville's principal insurance broker. Parra alleged that Marsh knew of the dangers of asbestos but did not disclose them, and conspired with Manville and others to prevent the public and the government from learning the truth. Marsh moved to enjoin that litigation, and the bankruptcy court held that claims like these were enjoined and channeled into the bankruptcy as part of an order issued in 1986. Parra appealed, and the district court remanded for consideration of whether Parra was adequately represented during the 1986 proceedings with regard to these types of claims, and, if he was not, whether he suffered any prejudice. The bankruptcy court held that he was adequately represented and, in any event, was not prejudiced because he could recover from the trust set up as part of the bankruptcy.

         For the reasons that follow, the Court reverses and holds that Parra was not adequately represented in the 1986 proceedings and was thereby prejudiced. Parra is therefore not precluded from challenging the bankruptcy court's jurisdiction to enjoin Parra's state law case, and, on the merits, Parra succeeds in that challenge.

         I. Facts and Procedural History

         A. The 1986 Orders

         Facing enormous liability for decades of asbestos-related injuries, Manville filed for Chapter 11 bankruptcy in 1982. In 1984, Manville reached a settlement in principal with various insurers (the "1984 Insurance Settlement Agreement"), requiring the insurers to contribute to a settlement fund that would compensate present and future claimants, contingent on the bankruptcy court channeling to that fund all related, future claims against the settling insurers. Record on Appeal ("RCA") 1887-1926, Bankr. Dkt. 4277-1 at 1-41.[1] The bankruptcy court appointed a future claims representative ("FCR") to represent the interests of those whose injuries were not yet manifest, ROA 913-916, Bankr. Dkt. 3919-20 at 1-4, and set about the herculean task of ensuring that the settlement would maximize recovery for the huge No. of known and unknown victims. Over the next year, the No. of settling parties expanded to include, among others, Marsh, which Manville had sued for failing to procure sufficient insurance coverage.

         In 1986, following several years of objections and negotiations, the bankruptcy court confirmed the various settlements between Manville and its insurers (the "1986 Orders"). ROA 223-397, Bankr. Dkt. 3916-2. As contemplated by the 1984 Insurance Settlement Agreement, the 1986 Orders created a single settlement fund (the "Manville Trust" or "Trust"), funded in part with payments from the settling insurers, and channeled all future claims against the settling insurers into the Trust, effectively immunizing settling parties from future liability. As relevant here, Marsh contributed $29.75 million to the Manville Trust and received a release of claims "arising out of or relating to services" performed by Marsh for Manville or "in connection with insurance policies issued to" Manville, and an injunction channeling any future such claims into the Manville Trust. ROA 321-25.

         Both the district court and the Second Circuit upheld the 1986 Orders against a challenge from a Manville distributor who asserted that the bankruptcy court had no jurisdiction to enjoin its derivative claims against Manville's other insurers. See MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 90 (2d Cir. 1988). The process for making claims has been adjusted, see In re Joint E. & S. Dist. Asbestos Litig., 129 B.R. 710 (E.D.N.Y. 1991), but the channeling injunction remains in place and the Trust continues making payments to eligible claimants.

         B. The Travelers Litigation

         The ever-enterprising plaintiffs' bar, however, spent the following two decades endeavoring to evade the 1986 Orders and access the pockets of the surviving insurance companies. Eventually, they hit upon bringing state suits against the insurers themselves for allegedly independent torts, such as failing to warn the public and conspiring to hide the danger of the asbestos Manville sold. These suits proliferated, and Manville's principal insurer, Travelers Indemnity Co. ("Travelers"), sought to enforce the channeling injunction against them. Following a temporary injunction and mediation, many of the parties reached a settlement in 2003 by which Travelers would pay $445 million into a new settlement fund, separate from the Manville Trust. Travelers conditioned that settlement, however, on an order from the bankruptcy court clarifying that these claims were covered by the 1986 order. In 2004, over objection from the FCR, the bankruptcy court provided that clarification, noting that the injunction was intended to cover "100% of everything Manville-related." In re Johns-Manville Corp., No. 82-B-11656, 2004 WL 1876046 at *30 (Bankr. S.D.N.Y. Aug. 17, 2004); see also ROA 2293, Bankr. Dkt. No. 4277-12 (FCR objection).

         That decision was appealed by some plaintiffs in the state law cases and by non-settling insurer Chubb Indemnity Insurance Co. ("Chubb"), which sought to preserve its right to bring state law contribution and indemnity claims against a Manville insurer. The district court affirmed, but the Second Circuit reversed, holding that the bankruptcy court did not have jurisdiction to enjoin non-derivative claims against third parties. In re Johns-Manville Corp., 517 F.3d 52, 62-65 (2d Cir. 2008). The Supreme Court, however, held that the 1986 Order had become final after direct appeal, so attacks on the bankruptcy court's jurisdiction to issue such a broad order were barred by claim preclusion. Travelers Indem. Co. v. Bailey, 557 U.S. 137, 152-54 (2009) ("Bailey"). The Supreme Court also held that the 1986 Orders unambiguously channeled into the Manville Trust even non-derivative claims against insurers, as long as they were "based upon, arising out of or relating to" their coverage of Manville. Id. at 148-51.[2] The Court did note that parties who did not receive due process leading up to the 1986 Orders would not be precluded from challenging the bankruptcy court's jurisdiction, but it did not determine which parties had received due process or resolve the underlying jurisdictional question. Id. at 155.

         On remand, the Second Circuit held that, while Chubb had preserved its due process claim, the objecting plaintiffs in the state law cases had not, as they had failed to raise the issue until after the Supreme Court's remand. In re Johns-Manvi1le Corp., 600 F.3d 135, 147-48 (2d Cir. 2010) ("Chubb"). The Second Circuit then held that Chubb's claims were in personam, so the unique due process considerations for in rem claims did not apply. Id. at 154. The Court then looked to the due process principles applicable in class action settlements, as outlined in Amchem Prod., Inc. v. Windsor, 521 U.S. 591 (1997), and held that Chubb (1) had not been adequately represented in the 1986 proceedings because the FCR only represented those who were exposed to asbestos and the represented parties' interests conflicted with Chubb's, and (2) did not receive constitutional notice because it could not have predicted that the bankruptcy court would overstep its jurisdiction. Chubb, 600 F.3d at 156-58. Chubb was therefore free to attack the bankruptcy court's subject matter jurisdiction regarding the breadth of the 1986 Orders, and the Second Circuit affirmed its prior holding that the bankruptcy court could not enjoin non-derivative claims against non-debtors arising from independent conduct that did not affect the debtor's estate. Id. at 153. Therefore, the court concluded, Chubb was not bound by the 1986 Orders, and its claims were not channeled into the Trust. Id. at 158.

         C. Parra's Claims

         Salvador J. Parra, Jr. developed asbestosis and other conditions after he was exposed to asbestos while working as an insulator in the 1960s and 1970s. In 2009, he hired The Bogdan Law Firm (the "Bogdan Firm") to bring suit against numerous Manville-related entities, including Marsh, in Mississippi state court. ROA 1200-52, Bankr. Dkt. 4088 at 4-56. Parra alleged that Marsh, among other things, conspired with asbestos producers, distributors, and insurers to withhold information from the public regarding the dangers of asbestos inhalation. ROA 1218-24. Like the claims in Chubb, Parra brought "in personam claims against Marsh for Marsh's independent misconduct." In re Johns-Manville Corp., 551 B.R. 104, 120 (S.D.N.Y. 2016) ("Bogdan I").

         Salvador Parra passed away on June 30, 2010 and his wife, Peggy Parra, became the administrator of his estate. See Dkt. No. 15. On August 6, 2010, Marsh filed a motion in the bankruptcy court to enforce the 1986 Orders against Parra and the Bogdan Firm. ROA 39-55, Bankr. Dkt. No. 3915. In July 2015, the bankruptcy court held that Parra's claims against Marsh were barred by the express terms of the 1986 Orders and Parra's due process rights were not violated, so Parra had to bring his claims against the Trust. See In re Johns-Manville Corp., 534 B.R. 553, 563-568 (Bankr. S.D.N.Y. 2015).

         On appeal, Judge Scheindlin affirmed that Parra's claims were "related to" Marsh's insurance relationship with Manville, as that phrase was broadly interpreted by the Supreme Court in Travelers, and thus barred by the 1986 Orders. Bogdan I, 551 B.R. at 117-18, 123. However, the Court remanded in part, ordering the bankruptcy court to further develop the factual record to determine "the extent to which the FCR was charged with representing Parra (and other future asbestos claimants) with respect to in personam claims against Marsh and, if the FCR was so charged, determine whether the quality of that representation was sufficient to satisfy due process." Id. at 123-24. This factual finding, she held, should be guided by the due process analysis the Second Circuit applied in Chubb. Id. at 124. Second, the bankruptcy court was to determine "whether a denial of due process would have resulted in prejudice," because Parra perhaps could have collected from the Manville Trust and had not explained why he did not. Id.

         On remand, the bankruptcy court held that Parra received due process as to his non-derivative claims against Marsh because, as a matter of fact, he was adequately represented by the FCR as to those claims, and, in any case, he was not prejudiced by any alleged due process defect. In re Johns-Manville Corp., 581 B.R. 38, 54, 58-59 (Bankr. S.D.N.Y. 2018) ("Bogdan II"). The bankruptcy court therefore issued another order (the "January 2018 Order") enjoining Parra's Mississippi claim and stating that ...

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