Supreme Court Holds in Travelers v. Bailey That a Bankruptcy Court's Final Order Is Enforceable Even If the Court Lacked Jurisdiction to Enter the Order in the First Place

GM objection due tomorrow, so no time to pontificate on today's "narrow" holding of the United States Supreme Court in Travelers Indem. Co. v. Bailey, No. 08-295 (pdf / WL).  Suffice it to say that those who sit by idly while their rights against third parties are enjoined from further prosecution do so at their peril. 

Here's the "Reader's Digest" version of the holding, written by Justice Souter for a 7-2 majority:

The Second Circuit erred in holding the 1986 Orders unenforceable according to their terms on the ground that the Bankruptcy Court had exceeded its jurisdiction in 1986.  On direct appeal of the 1986 Orders, any objector was free to argue that the Bankruptcy Court had exceeded its jurisdiction, and the District Court or Court of Appeals could have raised such concerns sua sponte.  But once those orders became final on direct review, they became res judicata to the parties and those in privity with them.

As I learned early on in law school from one of the smartest guys around, if you really want to find out what the case is about, read the dissent.  And if you want to know "what's bothering Ruthie?", you'll find it in dissent of Justice Stevens, in which she joined.  Justice Stevens dissented, he wrote, because:

In my view, the injunction 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.  This interpretation respects the limits of the Bankruptcy Court’s power....

We should not lightly assume that the Bankruptcy Court entered an order that exceeded its authority.  When a bankruptcy proceeding is commenced, the bankruptcy court acquires control of the debtor’s assets and the power to discharge its debts.  A bankruptcy court has no authority, however, to adjudicate, settle, or enjoin claims against nondebtors that do not affect the debtor’s estate.  Because Travelers’ insurance policies were a significant asset of the Manville bankruptcy estate, the Bankruptcy Court had the power to channel claims to the insurance proceeds to the Manville Trust.  But this by no means gave it the power to enjoin claims against nondebtors like Travelers that had no impact on the bankruptcy estate.  Thus, even accepting the Bankruptcy Court’s representation in 2004 that it had “meant to provide the broadest protection possible” to the settling insurers, such relief could not include protection from independent actions. (Emphasis added.)

The limits of the Bankruptcy Court's power will be on display in the GM case as Judge Gerber is asked to do what Judge Gonzalez was unwilling to do in the Chrysler case; that is, respect the jurisdictional boundaries of the Court and the statutory directives of Congress and refuse GM's request to bar present and future claims of product liability claimants from being asserted against the purchaser post-closing under applicable state law theories of successor liability. 

Much more on that to follow.

Happy hunting!

© Steve Jakubowski 2009

Written By:Robert White On June 28, 2009 5:46 PM

I am a creditor in a not so big chapter 11 where the judge snuck in a successor liability injunction (two short sentences) in a 363 sale order which no one noticed.
The stalking horse who lost the bidding did not have a successor injunctions in its proposed sale order - the one that got served and noticed.

The ultimate buyer was a stockholder who the court found committed perjury and could not secure a good faith finding ( no 363(m) finality) but closed the sale anyway.
At the sale hearing the injunction was not litigated, adjudicated, protected by a finding of fact, or mentioned in any manner.

I appreciate the Supreme Court footnote # 6 in Travelers v. Bailey on this point - that jurisdiction can be collaterally challenged - after the fact - if the bankruptcy court failed to properly consider and assert its jurisdiction; ie., no notice, hearing, adjudication, finding of facts, or open ruling. I do not know what it is about the Bankruptcy Code that makes ****** out of so many judges, maybe it is the reliance on the code on equity, which ****** by definition lack.

Written By:Ann Moses On July 13, 2009 12:05 PM

I've been watching this and keeping up, b/c my dad was involved in these settlements and passed away over a year ago. I am a bit confused. So this means they have approved the settlement?


Ed Note: I believe the settlements were approved long ago... this only prevents third parties from trying to get more out of the insurance companies that funded the settlement.