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Court to rule on bankruptcy powers, ship tax

UPDATED 5:15 p.m.  This is a revised and expanded version of a post filed earlier Friday, which was abbreviated because of computer problems.


In a case with major implications for enforcement of bankruptcy decrees, the Supreme Court agreed on Friday to rule on the authority of a federal bankruptcy court to bar new lawsuits that are claimed to be skirting a lawsuit ban written into the Johns-Manville Corp. reorganization plan. That plan sought to provide payments and limit liability for injury and death due to exposure to asbestos.

This was one of two cases the Court on Friday accepted for review, with oral arguments likely in both in late March. In the other case, the Court plans to rule on the constitutionality of a city tax imposed on cargo ships that use its port.

The case of Polar Tankers v. City of Valdez (08-310) involves a property tax that Valdez, a town of 4,500 people in Alaska, imposed on oil tankers and other large vessels putting into its port, mainly to pick up crude oil for delivery elsewhere.

The Alaska Supreme Court upheld the tax, rejecting arguments that it violated a constitutional clause that bars taxes on vessels merely for the privilege of using a port (the Tonnage Cluase), as well as other constitutonal protections.  The validity of the tax is challenged in a case pursued by Polar Tankers, Inc., the oil-transporting subsidiary of ConocoPhillips Co., based in Houston.

The new bankruptcy case to be heard is actually a pair of cases, which the Court consolidated for a one-hour hearing.  The cases are Travelers Indemnity Co., et al., v. Bailey, et al. (08-295) and Common Law Settlement Counsel v. Bailey, et al. (08-307).

Johns-Manville, a major asbestos mining and manufacturing company at the center of a landmark plan to reorganize in bankruptcy, is not involved directly in the new cases; rather, its primary insurer, Travelers Indemnity Co., along with related companies, are the targets of a new round of lawsuits by persons seeking damages.

The new case, however, is closely related to the bankruptcy reorganization plan that was Johns-Manville’s method of ending more than 12,500 lawsuits representing claims of more than 16,000 individuals.  The lawsuits made claims of harm from exposure to the company’s asbestos products.

That plan was approved in bankruptcy court in 1986. The judge in charge indicated that the key to the plan was the creation of a trust, with money provided by the insurers, to compensate the victims.  The insurance companies, that judge indicated, would not have put money into the trust if they did not have protection against liabilities growing out of their ties to Johns-Manville.  The Travelers companies put up $80 million of the trust’s $850 million, created with money Johns-Mansville had collected from all of its insurers.. In return, the insurers received a broad court order against lawsuits aimed at them.

Still, lawsuits filed later in various courts around the country contended that the individuals were harmed by Travelers’ conduct as Johns-Manville’s insurer, on theories based on state law and the common law that the insurers knew about the harms from asbestos exposure, yet influenced Johns-Manville not to disclose that information.  The harms done, according to the lawsuits, are entirely independent of the earlier claims against Johns-Manville itself.

The insurers contended in their new petitions to the Supreme Court that the new lawsuits are closely tied to the earlier litigation that preceded Johns-Manville’s bankruptcy, and are simply cleverly drafted legal claims seeking to get around the lawsuit ban imposed as part of the Johns-Manville reorganization.

In response to the new lawsuits, settlement discussions began, resulting in a new fund of about $440 million, provided by Travelers.  But Travelers provided the money on the condition that the lawsuits against it would end.

The bankruptcy court and a federal District Court agreed, and made clear that the lawsuit ban in the 1986 reorganization plan did apply to such lawsuits — present and future — against Travelers.  The case, however, then went to the Second Circuit Court in appeals filed by those with claims who did not join in the Travelers $440 million settlement. The Circuit Court ruled that the bankruptcy court did not have jurisdiction in 1986 to stop the lawsuits directly against the insurers.

The Travelers companies and a group known as the Common Law Settlement Counsel filed separate petitions for review in the Supreme Court.  They contended that the issue at stake was “of exceptional importance,” going to the core of bankruptcy courts’ jurisdiction.

The Settlement Counsel plea, for example, argued that the Circuit Court decision “threatens the finality of  confirmed plans in mass tort and complex business cases. It complained that the Circuit Court ruling required a separate jurisdictional basis for one part of the 1986 reorganization plan, thus retroactively unsettling the finality of that plan.