Travelers Indemnity Co. v. Bailey

The Johns-Manville Corporation (Manville) (debtor) supplied asbestos-related products. The Travelers Indemnity Company (Travelers) (creditor) was one of Manville’s insurers. Studies linked asbestos to serious health risks. Travelers’ knowledge of asbestos-related risks came mainly from Manville. Manville faced overwhelming liability for asbestos-related health claims. Travelers, as well as Manville’s other insurers, also faced asbestos-related litigation when third parties such as factory workers sued Travelers for payment under Manville’s insurance policies. In 1982, Manville declared bankruptcy. Manville’s reorganization plan created a trust from which all asbestos-related claims were to be paid. Manville’s insurers funded the trust, with Travelers contributing $80 million. In exchange, the bankruptcy court enjoined anyone from bringing a claim based on an insurer’s policy with Manville against the contributing insurers. The injunction defined “policy claims” as those based upon, arising out of, or relating to the insurers’ Manville policies. An insurance-settlement order, including the injunction, and an order confirming Manville’s reorganization plan were called the 1986 orders. In 1987, the 1986 orders were affirmed by a district court and then by the Second Circuit Court of Appeals. The issues addressed on appeal included the bankruptcy court’s subject-matter jurisdiction. However, plaintiffs continued to sue Travelers directly. Some direct actions were brought under state consumer-protection law, and some were brought at common law. In these direct actions, Travelers itself was alleged to have violated state law. In 2002, Travelers asked the bankruptcy court to enjoin 26 direct actions. The court ruled that the direct actions arose from Travelers’ defense of Manville and were enjoined by the 1986 orders. Travelers settled the direct actions and was released from further liability. The Chubb Indemnity Insurance Company (Chubb) (creditor), which had been a codefendant in some of the direct actions and had sought indemnification from Travelers, objected to Travelers’ release. Ultimately, the Second Circuit Court of Appeals reversed the bankruptcy court’s order, holding that the bankruptcy court lacked jurisdiction to enjoin claims based on Travelers’ conduct rather than Manville’s conduct. The case was appealed to the United States Supreme Court.