The Supreme Court held oral arguments in what apparently is the only bankruptcy case that the Supremes will hear this term. The transcript is available here. These transcripts are often an interesting read and people more well-versed in Supreme Court tea-leaf reading than I might be able to glean a sense of which way the Court ultimately will rule. That isn't my area of expertise but I'll offer a little bankruptcy perspective.
At is core the Travelers case is about whether bankruptcy courts may enjoin actions commenced by a debtor's creditors against third-party defendants. The question arises in all sorts of different contexts but in this instance is about asbestos. Quickly stated, Travelers was part of a settlement years ago in which Travelers aided Johns Manville's reorganization in exchange for being relieved of direct liability to Johns Manville's asbestos claimants.
The comments of Justices Breyer and Souter indicate that they seemed to understand what's going on in asbestos bankruptcy cases. Starting at about page 25 of the transcript, Justice Breyer has a discussion with counsel for the asbestos plaintiffs in which Justice Breyer cuts to the crux of the question:
JUSTICE BREYER: I thought this was about the case of the meaning of the words in the statute that they have authority in the bankruptcy court to issue any order, process or judgment that is necessary or appropriate to carry out the provisions of the title. And we've said that the test is whether the outcome of the proceeding -- this is the other State proceeding -- could conceivably have any effect on the estate being administered in bankruptcy. So, as I understood it, that's the test.
MR. ISSACHAROFF: I agree.
JUSTICE BREYER: That's what -- that's what this Court said. Now, they may be few and far between, an order like this, but where there are special reasons for it -- suppose it's a pension fund and you want to reorganize the company and this is the employees' -they're -- the employees' pension fund's worried about claims which are related directly. Or suppose it's an officer, or suppose it's a worker, and to reorganize the company you must cut the claims off. And otherwise, it is down the drain for everyone, no more money in the fund, no more jobs for the employees.
Now, what is it here that would say there is no special circumstance such that a bankruptcy judge can ever do it, no matter what?
MR. ISSACHAROFF: In -- in your example, Justice Breyer, you rely upon this Court's decision in Celotex, which adopted the Pacor test from the Third Circuit. And in each case that has applied that, the question is whether there is a potential impact upon the estate of the bankrupt. The critical issue in this case is that not a single one of the claims that is presented ir seeks to be enjoined here has any potential impact on the -
JUSTICE BREYER: Is what you are saying also true of the various other asbestos cases that have, I think, done this?
MR. ISSACHAROFF: There is no asbestos case that I am aware of that has released third party claims that have no impact on the debtor. I am not aware of a single one.
JUSTICE BREYER: Well, of course, this has enormous practical impact on the debtor. If not him - not this one, because it's already a done deal -- you will never get insurance companies –
MR. ISSACHAROFF: No, I don't -
JUSTICE BREYER: -- to go into this kind of thing if they are going to be sued for the very act of helping the debtor defend the asbestos cases. And so, I can't imagine an insurance company in its right mind going into that when in fact all these suits are still open. That presumably is why the bankruptcy judge cut it off.
A few pages later, Justice Souter makes a similar point:
JUSTICE SOUTER: May I then raise a question there? I mean, I think there is a legitimate question about that, given the -- given the rather general terms of the -- of the scope of the order. And I would like your response to this. It seems to me as a background consideration that we should have in mind in interpreting how broad that order was. It's been raised a couple times; Justice Breyer raised it a moment ago. And it's this: It is one argument to say that the bankruptcy court does not have jurisdiction, and derivatively an order that it issued should not be interpreted to cover, any claim that does not affect or cannot deplete the bankruptcy estate taken as a given fact at the time this later case is brought.
Another view of jurisdiction would be that the bankruptcy court has jurisdiction and hence an order might be interpreted to cover any cases which, if contemplated, would have precluded the settlement that created the bankruptcy estate. If Travelers had thought that it was going to be liable for these cases of insurer misconduct, it might very well have said: We're not forking over X hundred millions of dollars, leaving this exposure open. So that the bankruptcy estate would never have attained the size that it attained if the -if the insurer and everybody else had not understood that these later claims would be -- were being cut off.
Justices Breyer and Souter seem to perceive that the issue at stake is not so much whether lawsuit against Travelers can proceed, but rather whether insurance companies in the future will be able to rely upon channeling injunctions of bankruptcy courts to shield them from claims asserted by their customers' creditors. If the insurance companies can't rely on these injunctions, the insurance companies will be less likely to participate in the kinds of settlements that helped facilitate the Johns Manville case years ago.
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