Johns-Manville Corp. v. Asbestos Litigation Group (In Re Johns-Manville Corp.)

Citations: 33 B.R. 254; 9 Collier Bankr. Cas. 2d 731; 1983 Bankr. LEXIS 5414; 11 Bankr. Ct. Dec. (CRR) 1002Docket: 19-35203

Court: United States Bankruptcy Court, S.D. New York; September 15, 1983; Us Bankruptcy; United States Bankruptcy Court

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In the case of In re Johns-Manville Corporation, the Bankruptcy Court addressed motions regarding the automatic stay provisions under Sections 362 and 105 of the Bankruptcy Code as they pertain to various adversary proceedings involving Johns-Manville Corporation and its affiliates. The court examined how these provisions affect actions against or involving former, present, and future officers, directors, employees, contractors, consultants, insurers, sureties, agents, and similar entities associated with Johns-Manville. The findings aimed to clarify the scope of the automatic stay in protecting these individuals and entities from legal actions during the bankruptcy proceedings.

Following the re-hearing of Decision No. 2, the Court issued a Counter-Order establishing multiple directives: 

1. Suits and discovery against former Employees, Agents, and Others may proceed.
2. All entities are stayed from conducting discovery against current Employees, Agents, and Others who are not individually named in a suit, except as authorized by Bankruptcy Rules.
3. Suits and discovery against current Employees, Agents, and Others named in a suit may proceed, but entities are barred from action against key Manville personnel listed in Exhibit 'A.'
4. Related Orders remain effective; however, this Order supersedes any inconsistencies.
5. Plaintiffs Jeffrey Hermann and Linda J. Hermann are enjoined from continuing their litigation during Manville's chapter 11 proceedings.
6. Entities are restrained from direct actions against Manville's insurers and sureties, including any related discovery.
7. Entities are prohibited from seeking discovery of Manville's trade secrets or confidential information, with a provision for relief applications.
8. Applications from Occidental Chemical Corporation, Keene Corporation, and Lake Asbestos of Quebec, Ltd. for modifications to Decision No. 3 are denied.
9. The injunctive relief regarding key personnel remains effective throughout Manville's exclusive plan filing period.
10. Manville is authorized to spend up to $100,000 to monitor and enforce this Order, including payments to local counsel.
11. The Order allows affected parties to seek further relief as deemed appropriate, upon notice.

Additionally, on May 25, 1983, the Fifth Circuit Court of Appeals ruled that a District Court had wrongly denied plaintiffs leave to amend complaints against Manville's insurers under Louisiana's direct action statute.

The Fifth Circuit concluded that the Court had overstepped its authority regarding the Counter-Order on Decision No. 2, which had stayed actions against Manville's insurers. Consequently, it vacated the stay orders from the District Courts in the Wedgeworth and Davis cases, reversed the denial of leave to amend complaints to include Manville's insurers in Wedgeworth, and affirmed the District Court's denial of a stay in the Fontenot case. In response, Travelers Indemnity Company filed a Petition for Rehearing and a Suggestion for Rehearing In Banc as an aggrieved non-party, which were granted leave to file and submitted to the Fifth Circuit on June 6, 1983, remaining pending as of the trial date. On June 16, 1983, Travelers requested an Order to Show Cause for: 1) an extension of the stay under the Bankruptcy Code to cover actions against Manville's officers and employees, and 2) notification to plaintiffs that advancing such actions could lead to contempt citations. This order was served on over 90 interested parties on June 17, 1983. A hearing on Travelers' application took place on June 24, 1983, during which Manville's attorney requested an adjournment to file a similar relief application. Manville was granted additional adjournments to July 19, 1983, and filed its own Order to Show Cause, seeking to extend the stay against actions involving its directors, officers, or employees, along with any other appropriate relief.

On July 19, 1983, the Court held an oral argument regarding the applications from Travelers and Manville, resulting in a transcript of about 60 pages. The Court reaffirmed its exclusive jurisdiction over the Manville Bankruptcy due to the filing of Manville's Petitions in this Court, referencing Title 28 U.S.C. 1471(e). The Court also reinforced its previous determination that Manville's insurance policies were considered 'property of the estate,' supported by the Supreme Court's ruling in United States v. Whiting Pools, Inc. 

The Court indicated its discretion to expand the stay as requested by Travelers and Manville, despite contrary views from the Fifth Circuit in the Wedgeworth case, stating that Fifth Circuit rulings do not bind the Bankruptcy Court. An evidentiary hearing was deemed necessary to rule on the applications, with the Court emphasizing the importance of allowing affected parties to participate in this hearing. 

Although there was minimal opposition to the relief sought, the Court insisted on providing interested parties with opportunities to engage. Counsel for Travelers was instructed to notify all parties on the prior service list about the evidentiary hearing and to share a copy of the July 19 transcript. Additional documents reviewed included a supportive letter from the Official Committee of Unsecured Creditors and a limited objection from Lac D'Amiante du Quebec, which was later withdrawn after Travelers clarified their intentions regarding discovery provisions.

A letter from the law firm Gertler, Gertler, dated July 5, 1983, accompanied by a memorandum opposing Travelers Insurance Company's motion for an extension of stay, indicates that the firm represents over 100 of the 180 Louisiana plaintiffs with asbestos-related disease claims against Manville and related parties. Another letter from Clapp, Eisenberg, dated July 6, 1983, opposes Travelers' application on behalf of two former respirator manufacturers, Welsh Division of Textron, Inc. and Norton Company, focusing on the potential impact on their pre-trial discovery capabilities. Travelers filed a reply memorandum with an affidavit from Peter J. Schlesinger on July 15, 1983, and Owens-Illinois objected to Travelers and Manville's applications on July 18, 1983, citing concerns about their discovery abilities. Additional legal documents include a Notice to Produce and a subpoena duces tecum served upon Manville, as well as an Order to Show Cause regarding Manville's request to quash the Notice and subpoena. Support for Travelers' application was provided by an affidavit from William M. Silverman of Otterbourg, Steindler, Houston, Rosen, P.C., representing Commercial Union Insurance Company. Various memoranda supporting and opposing the applications were filed by Manville, Travelers, and Gertler, Gertler. The Court considered all documents before holding an evidentiary hearing on August 9, 1983, which involved a significant number of parties, including the Debtors, various committees, and several insurance companies. A transcript of the hearing was created, totaling approximately 270 pages.

Witnesses were presented by Travelers and Manville during an evidentiary hearing, with cross-examination conducted by the Gertler law firm. Exhibits were admitted, allowing full evidence presentation for all notified parties since June 17, 1983. The Court, after reviewing pleadings and proceedings from June 24, July 19, and August 9, 1983, issued Supplemental Findings of Fact and Conclusions of Law to complement its earlier Decision No. 2. Key findings include:

1. On January 26, 1983, the Court extended the automatic stay under Section 362 of the Bankruptcy Code to halt proceedings against Manville's insurers by third-party claimants in states allowing direct actions against insurers.
2. The Court reaffirmed its earlier Findings of Fact and Conclusions of Law reported at 26 B.R. 420, 435-437.
3. A May 24, 1983, opinion from the Fifth Circuit allowed direct actions against Manville's insurers to proceed and permitted amendments to pleadings to add insurers as defendants.
4. The Court's Counter-Order permits affected parties to seek further relief as necessary, with appropriate notice to involved parties.
5. Travelers and Manville's Orders to Show Cause reference this Counter-Order as a basis for jurisdiction in their applications.
6. The Court reiterates that insurance policies issued to Manville, including those from Travelers, constitute property of the Manville estates.
7. Approximately 1,000 lawsuits are pending against Manville’s past and present directors, officers, and employees, predominantly in New Jersey and Louisiana, with many claims arising from workplace hazard warnings.
8. Claims in Louisiana alone exceed $200 million, with nationwide potential claims exceeding $230 million.
9. Travelers was the primary insurer for Johns-Manville Corporation from 1947 to 1976, covering both the corporation and its executive officers, directors, and in certain instances, employees.

Recovery against current or former officers, directors, or employees of Manville in ongoing litigation may necessitate indemnification by Manville's insurers, potentially reducing the assets of the Manville estates. The claims against these individuals may be covered under the 'premises/operations' policy from Travelers, which could extend to corporate entities in certain circumstances, such as claims by employees against the parent corporation. Approximately 200 such claims are currently pending in California.

Travelers has acknowledged that its policies cover both product liability and premises/operations claims, each with separate funds and limits. Travelers asserts its total liability for premises/operations claims is capped at $16 million, contending that any indemnification payment reduces the available amount for other corporate claims. Manville disputes this finite limit, arguing for broader coverage interpretation, particularly regarding the term 'per occurrence,' which is central to the ongoing Coordinated Asbestos Coverage Litigation in California.

In addition to Travelers, Manville holds excess insurance from over two dozen other carriers spanning from 1947 to present, providing liability coverage for its officers, directors, and employees. An example is the Home Insurance Company policy from 1963-1966, which includes coverage for individuals associated with Manville. Furthermore, Travelers' policies for 1974-1976 contain a 'Priority' clause, which may prioritize indemnification claims from Johns-Manville Corporation over those from other corporate entities and individuals.

Travelers has notified Manville that it will assert various defenses and limitations regarding coverage in cases involving Manville's officers, directors, or employees, as outlined in Debtors' and Louisiana Plantworkers' Exhibit 2. The relevant insurance policies are central to the Coordinated Asbestos Coverage Litigation in California. Should Travelers invoke these defenses, Manville will need to independently manage its interests, which includes hiring outside counsel and experts for each case, thereby diverting resources and attention from its reorganization efforts. This distraction will persist even if Travelers waives some defenses. Additionally, there is a substantial risk of inconsistent verdicts regarding key issues relevant to the ongoing litigation. If insurers contest coverage successfully, Manville could face financial liability due to indemnification claims from its officers, directors, and employees, creating a new class of creditors. Some individuals have already made such claims. If Travelers' interpretation of its coverage is upheld, it could lead to significant administrative claims against Manville, further impacting the value of recoverable claims for other creditors. The ongoing lawsuits will also necessitate Manville's cooperation with its insurers, further diverting its focus from crucial restructuring activities.

In terms of legal conclusions, the relief sought by both Travelers and Manville is subject to the legal standards for a preliminary injunction, which in the Second Circuit requires the movant to demonstrate possible irreparable harm and either a likelihood of success on the merits or serious questions regarding the merits, alongside a favorable balance of hardships.

The preliminary injunction sought by Travelers and Manville has met the criteria for potential irreparable harm due to immediate financial impacts on the J-M estate, particularly with an upcoming trial date. Additionally, there are significant questions regarding the merits of the case that warrant further litigation. The Court has confirmed that Manville's insurance rights are considered property of the estate under the Bankruptcy Code, supported by a recent Supreme Court ruling. Upon filing for Chapter 11, the Court has exclusive jurisdiction over the estate's property. Decisions regarding the estate and creditor rights can be reviewed by the U.S. District Court for the Southern District of New York and subsequently by the U.S. Court of Appeals for the Second Circuit. A previous Fifth Circuit ruling on 'Direct Actions' does not bind this Court due to its vacated status. The automatic stay under Section 362 of the Bankruptcy Code prevents appellate courts from permitting actions that would violate it. The Court retains the authority, under Section 105(a), to extend the automatic stay to non-debtors if their actions could negatively affect the estate or hinder the reorganization process.

A stay and injunction have been imposed by the Court under Section 105(a) and Section 362(a) of the Bankruptcy Code, prohibiting all individuals and entities from initiating or continuing legal actions against current, former, or future officers, directors, or employees of Manville and its corporate entities. This measure aims to protect the proceeds from insurance pools for the benefit of the Manville estates, which could be threatened by lawsuits against these individuals.

The necessity of a unified forum for resolving insurance coverage issues is emphasized, referencing Judge Haight's ruling in the In re Johns-Manville Corp. case. He highlighted the inefficiency of piecemeal litigation across different jurisdictions, which could lead to conflicting judgments regarding the same insurance coverage matters. The Court also noted that extending the stay is essential to prevent divergent interpretations of insurance policy terms that could interfere with ongoing litigation in California.

Additionally, the Court's prior Counter-Order has been modified to remove certain paragraphs and to add a new provision that extends the stay to all suits against any current, former, or future Manville officer, director, employee, or their insurers, regardless of the legal basis for such actions. The modifications will also influence the discovery rights of the parties involved, with further details to be issued in a separate order. Overall, the Counter-Order will remain in effect, except for the specified modifications.

Travelers Indemnity has filed an application for further relief from a Counter-Order related to Decision Number 2 issued by the Court on April 14, 1983. The application seeks to extend the automatic stay under Section 362 of the Code, invoking Section 105, to protect current and former officers, directors, and employees of Manville from legal actions for which Travelers has been requested to provide defense and indemnification. The current stay, established by the Court on April 14, 1983, protects certain key Manville personnel but does not extend to former employees, prompting Manville to seek broader relief.

Earlier, on January 10, 1983, the Court had limited the automatic stay to certain Manville employees and related entities, excluding Manville's insurers and sureties. Following a re-hearing on January 26, 1983, the stay was extended to include protections for Manville's insurers against direct third-party lawsuits. The April 14 order continued this limited protection but faced challenges, particularly from the Fifth Circuit Court of Appeals, which allowed direct actions against liability insurers in Louisiana, citing the state's constitutional rights for injured parties in the case of Wedgeworth v. Fiberboard Corporation.

The Fifth Circuit's ruling did not consider the full record of the hearings that led to the Counter-Order or the potential impact of ongoing direct action suits on the Manville estate's assets. It also did not address the Supremacy Clause implications regarding federal bankruptcy law or the risk of inconsistent rulings across jurisdictions. In response to the Wedgeworth decision, Travelers filed a Petition for Rehearing with the Fifth Circuit, which was granted, highlighting the urgency of the situation as Louisiana cases are being expedited by local courts.

Louisiana State Judge Wicker ordered the continuation of lawsuits against executive officers, while on June 21, 1983, District Judge Charles Brieant issued a stay on all direct action suits against Manville's insurers pending appeal. This stay aligns with the jurisdictions of the Bankruptcy Court, District Court, and the Second Circuit concerning the Manville estate. Judge Brieant's order restrains all individuals and their attorneys with notice from initiating or continuing any discovery proceedings related to these suits, regardless of their statutory or legal basis. 

The court must evaluate applications to extend this stay to all current and former Manville employees, considering the implications of Judge Brieant's recent order and the Fifth Circuit's stance on the Wedgeworth decision. Case law and legislative history confirm that the pool of insurance funds is considered property of the Manville estate and deserves protection. Under Bankruptcy Code Section 541(a)(1), a debtor's estate includes all legal or equitable interests in property at the case's commencement, emphasizing a broad interpretation that covers various property forms, including causes of action.

The Supreme Court reinforced this expansive understanding of "property of the estate" in United States v. Whiting Pools, Inc., where it ruled that property seized by a creditor before reorganization filing is included in the estate. The Court clarified that the definition of "estate" serves to include rather than limit property, aligning with Congress's intent to promote successful reorganization efforts by ensuring that essential assets remain within the bankruptcy estate. Any narrow interpretation of Section 542(a) would undermine the bankruptcy process and Congressional goals for rehabilitation.

Manville's insurance policies are deemed property of the bankruptcy estate due to their critical role in the company's reorganization efforts, as established in the Whiting Pools case. These policies represent one of Manville's largest assets and are essential for addressing numerous tort actions against the company. Despite the uncertain value of these policies, they are significant for the estate, especially since they may cover liabilities that the company is facing. Various courts have recognized that insurance coverages and rights under insurance policies constitute property of the estate, further supporting this position.

However, the Fifth Circuit's decision in Wedgeworth raises questions about this interpretation. It allowed direct actions against Manville's insurers, contradicting earlier rulings that extended the automatic stay to such suits. The Wedgeworth court emphasized that the protections of Section 362(a)(1) are limited and do not encompass actions that do not benefit the debtor financially. Thus, in this case, payments from the liability insurer would not affect the bankruptcy estate's value, highlighting a potential conflict in how insurance assets are treated under bankruptcy law.

The Wedgeworth Court indicated that insurance policies should not be considered part of the Manville estate since their proceeds cannot go directly to Manville. However, the Debtor retains a property interest in the insurance policies regardless of the immediate beneficiary. Congress intended Section 541(a) to encompass all forms of property or property interests. Insurance proceeds are finite and non-replenishable; thus, any payments to asbestos litigants from Manville’s liability carriers would diminish the pool of assets available for distribution among all claims, potentially undermining the goal of providing reasonable compensation to all asbestos victims. To ensure fair compensation for all claimants, the estate must include the insurance policies and their proceeds. The Court reaffirms that Manville's insurance policies and related causes of action are property of the Manville estate. The Bankruptcy Court has exclusive jurisdiction over the Debtor's property, and any interference with its stay order is an invasion of that jurisdiction. The document cites several cases reinforcing that only the court that has issued a stay may alter it, emphasizing the principle that the first court to assume jurisdiction over property maintains that jurisdiction to the exclusion of others.

The document outlines several legal precedents that affirm the exclusive jurisdiction of Bankruptcy Courts over debtors and their assets, emphasizing Congress's intention to centralize bankruptcy proceedings to prevent interference from state courts. Key cases cited include Mandeville v. Cantebury, which allows Bankruptcy Courts to enjoin state court actions that disrupt their jurisdiction, and a decision from the Eighth Circuit, which upheld the Bankruptcy Court's authority to prevent state officials from interfering with bankruptcy assets, despite the automatic stay's applicability. The excerpt notes that while the Fifth Circuit ruled that a Bankruptcy Court exceeded its jurisdiction in issuing a stay, Congress's authority in bankruptcy matters supersedes such rulings, as outlined in 28 U.S.C. Section 1471(e). The document references the case of Coleman American Companies, where a Kansas Bankruptcy Court maintained jurisdiction even against actions in a Colorado Court, reinforcing that multiple court interferences could undermine the debtor's ability to manage their affairs effectively. Additionally, Travelers, along with Manville, claims that recent developments justify extending the stay to include former key personnel, but asserts that current evidence lacks sufficient strength to support this request without an evidentiary hearing.

Travelers argues that the per occurrence provision in its insurance policies constitutes a strict limit for claims related to plantworkers, suggesting that all Manville officers, directors, and employees must be protected to preserve the finite insurance pool. However, this assertion lacks substantiation and requires an evidentiary hearing to evaluate the impact of these claims on the insurance pool and the estate. Travelers maintains that ongoing lawsuits would hinder settlement discussions and the development of a reorganization plan due to uncertain financial exposure. It also claims that honoring indemnity payments under its contracts with Manville would be violated, as its policies prioritize Manville's obligations over those of other insurers.

Travelers may argue in California litigation that Manville is not entitled to coverage, potentially leading to a claim that would reduce Manville's estate. Furthermore, Travelers states that these direct lawsuits would distract Manville from focusing its resources on formulating a reorganization plan. Section 362 of the Bankruptcy Code provides an automatic stay to protect the estate from actions that could have a negative financial impact. An extension of this stay requires a demonstration of irreparable harm, akin to a preliminary injunction. 

The court indicates that the extension of the stay and the need for an evidentiary hearing to evaluate these claims is necessary and appropriate. While the court reaffirms that insurance coverage is an asset of the estate, it defers a ruling on the requested relief pending further hearings to ensure all parties have a chance to participate. The court invites suggestions for scheduling this evidentiary hearing.

A five-minute recess was granted by the Court at Mr. Schlesinger's request to allow him to consult with his office regarding a mutually agreeable date. After the recess, the Court proposed August 9th at 10:00 a.m., which was accepted by both Mr. Edelman and Mr. Schlesinger. Mr. Schlesinger indicated he would send the necessary documents via Express Mail and planned to obtain a transcript that night for distribution the following morning. 

Subsequently, the Court noted that after an evidentiary hearing concerning the extension of the automatic stay to directors, officers, and employees of Manville, the Fifth Circuit had denied rehearing on September 12, 1983. The Fifth Circuit vacated part of its previous ruling related to direct action suits, affirming that the district court did not abuse its discretion in denying the plaintiffs' request to amend their complaints to include the liability insurance carriers of Johns-Manville and Unarco. Consequently, direct action suits in Louisiana remain stayed, but this stay is just one aspect of the relief sought by Travelers and Manville, making their application to the Court not moot.