NU Online News Service, June 19, 12:22 p.m. EDT

WASHINGTON–A provision in a bankruptcy court settlement for asbestos injury claimants that barred individual lawsuits against carriers was upheld by the U.S. Supreme Court yesterday.

The decision, which has limited application, concerned the settlement agreement involving the formerly bankrupt manufacturer Johns-Manville and its insurer Travelers Indemnity Company that was reached in 1986. The agreement in addition to creating an insurer funded trust to pay claimants barred individual suits.

Ten years later, plaintiffs began filing suits in state courts against Travelers, despite the agreement that was approved by a bankruptcy court in New York.

Barry Ostrager, attorney for Traveler’s at Simpson, Thacher & Barlett in New York, said the decision upheld his argument before the Supreme Court that the “1986 injunction did and always has, barred the direct actions.”

Specifically, the court said in its decision “that the terms of the 1986 injunction bar the direct actions against Travelers, and the finality of the Bankruptcy Court’s 1986 Orders generally stands in the way of challenging their enforceability.”

The case titled Travelers Indemnity Co. et al. v. Bailey et al. was decided on a 7-2 vote.

The majority decision, by Justice David Souter, added that “While it would be possible to suggest that a ‘claim’ only relates to Travelers’ insurance coverage if it seeks recovery based upon Travelers’ specific contractual obligation to Manville, ‘allegations’ is not amenable to such a narrow construction and clearly reaches factual assertions that relate in a more comprehensive way to Travelers’ dealings with Manville.”

The lawsuits at issue were filed in 2001 against Travelers accusing the carrier of breaking consumer protection laws and other laws because it allegedly hid the dangers of asbestos while serving as Manville’s primary liability insurer until 1976. Moreover, the company failed to warn the public, the suits claimed.

Travelers settled with several plaintiffs in 2004, agreeing to pay $500 million. It did so in exchange for an order from the Bankruptcy Court that reiterated that its 1986 decision barred such lawsuits.

The 2nd Circuit U.S. Court of Appeals based in New York overturned the bankruptcy court order last year. That decision found the bankruptcy court had no authority to block the lawsuits because they involved insurers and not the bankrupt Manville estate.

Mr. Ostrager argued in briefs and oral arguments before the Supreme Court that upholding the Circuit Court ruling could open the door to a fresh round of asbestos litigation and reduce the number of insurers willing to contribute to asbestos trusts.

Some individual claimants and Chubb Indemnity Insurance Company defended the 2nd Circuit’s decision before the Supreme Court.

In presenting the case to the 2nd Circuit, the objectors argued that the direct actions fall outside the scope of the 1986 orders and that the clarifying order erroneously expands those orders to bar actions beyond the Bankruptcy Court’s subject-matter jurisdiction and statutory authority, the Supreme Court noted in its opinion.

A majority of the Supreme Court agreed with Travelers. “The 1986 orders became final on direct review over two decades ago,” Justice Souter said.

“Whether the bankruptcy court had jurisdiction (to bar lawsuits) in 1986 was not properly before the Court of Appeals in 2008 and is not properly before us…Almost a quarter-century after the 1986 orders were entered, the time to prune them is over.”

Justice John Paul Stevens disagreed with the decision, and was joined by Justice Ruth Bader Ginsburg.

Justice Stevens argued that the 1986 order bars only those claims against Manville’s insurers seeking to recover from the bankruptcy estate for Manville’s misconduct, not those claims seeking to recover against the insurers for their own misconduct.

In its majority decision, the court cautioned that its decision was a narrow one, and that it did not resolve the issue of whether a bankruptcy court, in 1986 or currently, “could properly enjoin claims against nondebtor insurers that are not derivative of the debtor’s wrongdoing.”