Opposition Brief — MacArthur Co. v. Johns-Manville Corp.

No. 87-2082 ent. SE

—— FILED

JUL 20 1988

IN THE JOSEPH E. SPANIOL, JR,

CLERK

Supreme Court of the Unit

OCTOBER TERM, 1987

MACARTHUR COMPANY and WESTERN

MACARTHUR COMPANY,

JOHNS-MANVILLE CORPORATION,

MANVILLE CORPORATION, et al.,

On Writ of Certiorari to the

United States Court of Appeals for the Second Circuit

BRIEF IN OPPOSITION TO PETITION FOR WRIT OF CERTIORARI

S LOWELL G ON H

LAUREEN F. BEDELI

N & WEINTRAUB & CRAMES DAVIS POLK & WARDW

5 , One Chase Manh:

‘ N A, Yi K N y ' N

212) 530-400

i

QUESTION PRESENTED

Does the Bankruptcy Court, with jurisdiction over an

item of property in which the debtor has title, possession, and

an unquestioned interest, have the authority to dispose of the

whole of that property and to require that any claimed interest

of any non-debtor in a portion of that property be asserted

only against the proceeds of the disposition?

u

RULE 28.1 STATEMENT

Respondent Manville Corporation is a public corpora-

tion organized under Delaware law. The other respondents

(or their predecessors) are (or were) direct or indirect

wholly-owned subsidiaries of respondent Manville Corpora-

tion. Respondent Manville Corporation owns all of the capi-

tal stock of Manville Forest Products Corporation, a

Delaware corporation, and various foreign corporations

located in Europe, South America, and the Far East.

TABLE OF CONTENTS

PAGE

ee i

a ii

pp iV

BRIEF IN OPPOSITION TO PETITION FOR WRIT.......... 1

COUNTERSTATEMENT OF THE CASE................. 2

REASONS FOR DENYING THE WRIT ............-.2205- 6

ee Gag iis écu wa bu se se 12

iv

TABLE OF AUTHORITIES

Cases

In re Abraham, 421 F.2d 226 (Sth Cir. 1970) .......

A.H. Robins Co v. Piccinin, 788 F.2d 994 (4th Cir.

| Sr errr re rr Ty yore tr rere ye re

Burlingham v. Crouse, 228 U.S. 459 (1913) ........

Chauncey v. Dyke Bros., 119 F. 1 (8th Cir. 1902) ....

In re Davis, 730 F.2d 176 (Sth Cir. 1984) ..........

Farmers Bank v. Julian, 383 F.2d 314 (8th Cir.), cert.

dented, SO9 US. TURE CISGT) coin cc inc connexes

Fierman v. Seward National Bank, 37 F.2d 11 (2d Cir.

Ss ar ek Rea e eens skeen tee ak ke

GAF Corp. v. Johns-Manville Corp., 26 B.R. 405

(Bankr. S.D.N.Y. 1983), affd, 40 B.R. 219

Cee over haan ee ekweusasees

Gotkin v. Korn, 182 F.2d 380 (D.C. Cir. 1950) ......

In re Pearl-Wick Corp., 15 B.R. 143 (Bankr.

S.D.N.Y. 1981), affd, 26 B.R. 604 (S.D.N.Y.

1982), aff d, 697 F.2d 295 (2d Cir. 1982) ........

Ray v. Norseworthy, 90 U.S. (23 Wall.) 128 (1875) ..

Rubenstein v. Nourse, 70 F.2d 482 (8th Cir. 1934) ...

Shawhan v. Wherritt, 48 U.S. (7 How.) 627 (1849)...

Siraton v. New, 263 US. 318 CI931) . «ccc cc cca:

United States v. Whiting Pools, Inc., 462 U.S. 198

9 A AR ean oe ig rie hr par 7 et

“I Cc CO OC

Van Huffel v. Harkelrode, 284 U.S. 225 (1931) .....

Wedgeworth v. Fibreboard Corp., 706 F.2d 541 (Sth

Sen I EN Cie Coes ane ee eae hae

Williams v. United States Fidelity & Guaranty Co.,

Be We Oe IPED 6 8855 hxb a nek ek eee hake

In re Wiltse Bros., 361 F.2d 295 (6th Cir. 1966) .....

No. 87-2082

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

MACARTHUR COMPANY and WESTERN

MACARTHUR COMPANY,

Petitioners,

JOHNS-MANVILLE CORPORATION,

«& MANVILLE CORPORATION, er a/.,

Resp: mdents

s

On Writ of Certiorari to the

United States Court of Appeals for the Second Circuit

BRIEF IN OPPOSITION TO PETITION FOR

WRIT OF CERTIORARI

The respondents Manville Corporation and affiliated deb

tors (‘‘respondent’’) oppose the petition of MacArthur Com

pany and Western MacArthur Company (“‘petitioner’’) tor a

writ of certiorari. As set forth below, the requirements

issuance of a wnt of certiorari are not satisfied, and no

whatsoever exists for further review of this matter

2

COUNTERSTATEMENT OF THE CASE

Respondent will not enumerate all of the factual inaccura-

cies or unsupported statements contained in the petition.*

These matters are irrelevant for purposes of upholding the

authority of a bankruptcy court over the whole property in

which a debtor has title, possession and an interest. The facts

necessary for assessing the petition are set forth in the opin-

ion of the court of appeals (see Appendix, D-3 — D-5) and

the various other opinions growing out of this reorganization

case referred to therein. In addition to the facts set forth in

the opinion of the court of appeals, respondent will elucidate

certain facts more fully.

One of respondent's principal assets at the time of the filing

of the Chapter 11 case was its insurance policies. Respondent,

like most major corporations, maintained substantial amounts

of comprehensive general liability insurance. These policies

were issued to respondent (of its predecessors) from the late

1920's through 1978. They provided respondent with indem-

nity for, inter alia, losses incurred oy the named insured

* Petitioner's statements (Pet. at 6, 7) as to the testimony at the approval

hearing, the nature of their objections, and the nature of the bankruptcy

court's ruling are maccurate. Petitioner's statements concerning the

number and types of suits against it (Pet. at 5) are nowhere contained in

the record. Nor us there any basis in the record or in any offer by peu-

uoner for determining whether petitionerfas been held liable for its own

acts of negligence or, as peutioner tries to suggest, only for passive negli-

gence as a mere distributor of products manufactured by respondent. The

court of appeals noted the uncertainty as to whether petitioner had any

clan. See Appendix D-4

7)

for product liability claims asserted against it.

respondent

the policies were issued to respondent and the named

was respondent (or its predecessors), under the

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4

The importance of these insurance assets to respondent’s

reorganization was obvious. After the Chapter 11 filing, how-

ever, various asbestos health claimants attempted to bring

direct action suits against respondent’s insurers, claiming a

right to the insurance proceeds deriving from respondent’s

right under the policies to an indemnity for product liability

losses. Although there had been a prior order of the ban-

kruptcy court enjoining such attempts by third parties to

assert rights to respondent’s insurance policies outside the

Chapter 11 case,* a decision by the United States Court of

Appeals for the Fifth Circuit seemed to endorse such direct

actions where permitted by state procedural law.** A district

court, however, held that these very insurance policies were

property of respondent’s estate regardless of who might ulti-

mately be entitled to proceeds, and enjoined, inter alia,

attempts by any person to proceed directly against

respondent’s insurers. The Court of Appeals for the Fifth Cir-

cuit then altered its view, agreeing that these policies were

property of respondent’s estate and refusing to permit such

direct action suits against the insurers based on these poli-

cies.*** Notwithstanding these rulings, however, the insurers

insisted that any settlement terminate all obligations under

these policies.

*See GAF Corp. v. Jonhns-Manville Corp., 26 B.R. 405 (Bankr.

S.D.N.Y. 1983), aff d, 40 B.R. 219 (S.D.N.Y. 1984).

** See Wedgeworth v. Fibreboard Corp., 706 F.2d 541 (Sth Cir. 1983).

*** See In re Davis, 730 F.2d 176 (Sth Cir. 1984).

5

The provisions of the settlement agreements to which peti-

tioner objects are termed the ‘‘channeling’’ and ‘‘injunctive’”’

provisions. The petition does not quote or discuss the actual

language of such provisions or the actual order entered by the

bankruptcy court. The provisions and impact of these orders

are as follows. The $770 million that respondent received

from the insurers - the res - is subject to the jurisdiction of the

bankruptcy court. E.g., Appendix A-4 (Clause 1.2(A)).

Under the order of the bankruptcy court, every person is

enjoined from suing the settling insurers, but only on any

claim based upon, arising out of, or related to these policies

which have been settled. E.g., Appendix A-5 (Clause

1.2(D)). Thus, any direct action claimant or asserted ‘‘co-

insured’’ under these policies is enjoined from proceeding

against the settling insurers for any claim under these poli-

cies. However, any asserted rights to or under the settled pol-

icies are channeled away from the policies themselves and to

the proceeds of the settlement, which are under the control of

the bankruptcy court. F.g., Appendix A-4 (Clause 1.2(B)).

Any person like petitioner who claims rights under these set-

tled insurance policies may come into the bankruptcy court,

establish as a matter of fact and as a matter of law its night,

and be paid out of the res. Only then are the net proceeds of

the settlements allocated under the plan of reorganization.

The interrelated purpose and effect of the channeling and

injunctive provisions of the order are to preclude suits against

the settling insurers, which have, in effect, bought back their

insurance policies, and to channel any claim based on those

policies to the proceeds of the settlement.

The petition refers intermittently, and without citation, to

respondent’s plan of reorganization. The plan of reorganiza-

tion was confirmed after the insurance settlements had been

6

approved. The order of confirmation was affirmed by the dis-

trict court and by the court of appeals. The order of

confirmation, independent of the orders approving the

insurance settlement agreements, contains, inter alia, injunc-

tions against suits against the settling insurers based on, aris-

ing under, and related to the settled insurance policies. Peti-

tioner did not object to the plan or the order of confirmation

and did not appeal therefrom.

REASONS FOR DENYING THE WRIT

The petition for certiorari should be denied. The decision

of the Second Circuit does not conflict with any decision of

this Court or any court of appeals. To the contrary, as shown

below that decision faithfully follows and applies the deci-

sions of this and other courts. All courts that have been faced

with these issues agree on both the rationale and the result.

Petitioner does not even contend that there is a conflict among

the circuits, much less a conflict concerning a substantial,

recurring issue of national significance. Rather, petitioner

argues factual matters and tries to invoke principles that are

simply not involved in this case. Moreover, the decision

below was a correct application of federal bankruptcy law

governing the authority of a bankruptcy court over property in

a proceeding under Title 11. Petitioner cannot and does not

refute the analysis or application of these established princi-

ples of federal law.

Petitioner does not even attempt to argue that the decision

of the Second Circuit conflicts with any decision of this Court

or any court of appeals. While the petition is couched in

7

terms that the bankruptcy court supposedly exceeded its ‘‘jur-

isdiction,’’ petitioner does not state what it means by ‘‘juris-

diction.’” There is, however, no conflict that a bankruptcy

court does have, by specific legislation, exclusive jurisdiction

over property of the debtor.* As this Court wrote, that juris-

diction under Section 541(a) extends to the whole property if

the debtor has an interest in that property.** There is no

conflict that the ‘‘property’’ over which a bankruptcy court

has jurisdiction was broadly defined by Congress.*** There

*Both Section 541 of Title 11, and Section 1334(d) of Title 28,

specifically give the bankruptcy court exclusive jurisdiction over property

of the debtor wherever located. This grant of jurisdiction reflects the pur-

pose of bankruptcy law long articulated by this Court. The fundamental

basis for action by a court of bankruptcy, first articulated by this Court

almost 140 years ago, is jurisdiction over the property of the debtor.

Shawhan v. Wherritt, 48 U.S. (7 How.) 627, 643 (1849). The purpose of

bankruptcy law is to place property of the debtor under control of a court,

e.g., Straton v. New, 283 U.S. 318, 320-21 (1931), and to convert that pro-

perty to cash for distribution to creditors. E.g., Williams v. United States

Fidelity & Guaranty Co., 236 U.S. 549, 554 (1915).

** In United States v. Whiting Pools, Inc., 462 U.S. 198, 204 n.8 (1983),

the Court held that the estate included property seized by a secured party

prior to the filing, because ownership (title) still resided in the debtor, even

if the market value of the property may have been less than the lien. This

Court rejected the notion that Section 541(a) limited jurisdiction only to

the debtor’s interest, rather than the entire property in which the debtor

had an interest.

“Section 541(a)(1) speaks in terms of the debtor’s ‘interests .. .in

property,’ rather than property in which the debtor has an interest, but

this choice of language was not meant to limit the expansive scope of

the section.”’ /d. at 204 n.8.

This concept is routinely applied. See, e.g., U.S.C. § 363 (h), (i), (j).

*** The breadth of the definition of ‘‘property’’ contained in Section

541(a) of the Bankruptcy Code was emphasized by this Court in United

States v. Whiting Pools, Inc., 462 U.S. 198, 204-05 & nn.8-10 (1983).

8

is no conflict that insurance policies in general, and liability

insurance policies in particular, are ‘“‘property’’ of the deb-

tor,* and indeed both the Second Circuit and the Fifth Circuit

have ruled that these very policies are property of

respondent’s estate.** There is no conflict that a bankruptcy

court may dispose of property in which the debtor has an

interest and transfer any asserted interest of a non-debtor

from the property to the cash proceeds of the disposition.***

Finally, there is no conflict that a bankruptcy court has

authority to enforce such an order by injunctive means.****

*This Court in Burlingham v. Crouse, 228 U.S. 459, 471 (1913), and

numerous other courts, e.g., In re Pearl-Wick Corp., 15 B.R. 143, 148

(Bankr. $.D.N.Y. 1981), aff'd, 26 B.R. 604 (S.D.N.Y. 1982), aff d, 697

F.2d 295 (2d Cir. 1982), have held insurance policies issued to the debtor

to be property of the estate. All courts of appeals agree that product liabil-

ity policies issued to a debtor are property of the estate. See A.H. Robins

Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir.), ceri. denied, 107 S. Ct. 251

(1986); In re Davis, 730 F.2d 176, 184 (Sth Cir. 1984).

** See Appendix D-6 and /n re Davis, 730 F.2d 176, 184 (Sth Cir. 1984).

*** This principle was articulated by this Court over 100 years ago in

Ray v. Norseworthy, 90 U.S. (23 Wall.) 128, 134-35 (1875). This author-

ity is ‘‘granted by implication’’ in every bankruptcy codification, Van

Huffel v. Harkelrode, 284 U.S. 225, 227 (1931), and is routinely applied

by courts of appeals, see, e.g., Farmers Bank v. Julian, 383 F.2d 314, 322

(8th Cir.), cert. denied, 389 U.S. 1021 (1967); Rubenstein v. Nourse, 70

F.2d 482, 484 (8th Cir. 1934); Fierman v. Seward Nat'l Bank, 37 F.2d 11,

13 (2d Cir. 1930).

++* EF 9., In re Abraham, 421 F.2d 226, 227-28 (Sth Cir. 1970); In re

Wiltse Bros., 361 F.2d 295, 299 (6th Cir. 1966); Gotkin v. Korn, 182 F.2d

380, 382 (D.C. Cir. 1950); Chauncey v. Dyke Bros., 119 F. 1, 3 (8th Cir.

1902).

9

The uniform agreement among courts of appeals on the

principles articulated and applied by the Second Circuit

shows that petitioner has not established the basic prere-

quisite for further review by this Court. Petitioner attempts to

avoid the reach of Section 541 and the established case law

that liability insurance policies are ‘‘proverty’’ of the estate

by asserting that its “‘interests’’ in the insurance policies are

somehow separate from and unrelated to the respondent’s

interest. This factual contention, however, was rejected by the

courts below as unsupported by the record, and presents no

issue worthy of review. Moreover, even if petitioner’s

asserted interest in respondent’s policies were ‘‘separable,”’

because the bankruptcy court has jurisdiction over the whole

property (the policies) by virtue of the undisputed fact that the

debtor has title, possession and interests in the policies, that

court necessarily has jurisdiction over any asserted, third-

party interests in the property.* The failure of the petition to

address either the explicit criteria required by Rule 17 or the

actual reasoning of, and the numerous, uniform authorities

relied upon by, the court of appeals is a tacit but telling con-

cession that review by certiorari is utterly inappropriate.

* Were this not the case, any third party couid frustrate a reorganization

simply by asserting that it had a claim against property, which under

petitioner’s view would divest the bankruptcy court of jurisdiction over a

portion of the property. It is precisely because of petitioner’s ability to

significantly affect the debtor’s estate via such direct claims that the courts

below rejected as unsupported by the record petitioner’s contention that its

“‘interests were “too remote’ from the debtors’ to come within the jurisdic-

tion of the bankruptcy court.’’ See Appendix D-6 — D-7.

10

Petitioner’s attempt to invoke principles not involved in

this case further demonstrates the impropriety of review. The

argument that a guarantor’s obligation to a creditor cannot be

‘‘discharged’’ by a plan of reorganization (Pet. at 11-13) is

irrelevant. As the court of appeals wrote, the order is not a

‘‘discharge in bankruptcy.’’ See Appendix D-5. Rather, any

rights petitioner might have in the policies, which rights are

totally derivative of respondent’s rights as the named insured,

are merely channeled from the policies to the $770 million

res. Petitioner’s further extended argument that review

should be granted because of the supposedly ‘“‘erroneous’’

factual determinations and ‘“‘erroneous’’ factual applications

below (Pet. at 17-20) ignores the repeated admonition that

this Court does not sit to review such matters. Finally, even

the issue as petitioner defines it presents no immediate issue

of national significance even arguably necessitating review.

Petitioner speculates that it is ‘‘likely’’ that this decision may

become a ‘“‘blueprint’’ and that the “‘danger’’ is that it may

“be repeated in numerous ... cases to follow.’’ (Pet. at 10,

24-25). Such rank conjecture that the ‘‘question’’ might

recur shows that review is inappropriate.

The decision of the court of appeals applied long-

established, codified principles of bankruptcy law. These

principles - the essential authority of a bankruptcy court over

property and the operation of that authority - are, as the

Second Circuit wrote, “‘fundamental’’ to our bankruptcy sys-

tem. The petition should be denied because review is

unnecessary and inappropriate where, as here, the reasoning

and the result are correct. In addition to the reasons set forth

by the court of appeals, the following support the determina-

tion.

State law has not, as petitioner now contends, been ‘‘dis-

placed.’’ Federal law determines the scope of the authority of

11

a federal bankruptcy court to dispose of property in which the

debtor has some interest in a federal reorganization proceed-

ing.* Federal law determines whether a bankruptcy court has

authority to dispose of property of a debtor free of the

claimed interest of a non-debtor, with the latter’s asserted

interest being channeled from the property to the proceeds.

However, whether the non-debtor in fact and in law has an

interest in the proceeds, and the amount thereof, is deter-

mined by state law. This issue was not addressed by the court

of appeals because it was unnecessary to do so. Petitioner

has never attempted to assert its claimed rights against the

$770 million res, as the orders of the bankruptcy court

specifically permit. When and if petitioner makes such a

claim, a hearing would be held and appropriate state law

would be applied.** Petitioner’s ‘“‘state law’’ contention

(Pet. at 22-23) is, like its ‘“‘discharge’’ assertion, a non-issue.

* See, e.g., 28 U.S.C. § 1334(d); 11 U.S.C. §§ 541, 363 (h), (i), G).

** To establish that it had ‘‘rights’’ under any primary policy and there-

fore to a portion of the $770 million res, petitioner would have to show at

least (1) that there was a vendor endorsement, (2) that the claim against

petitioner fell within both the endorsement and the underlying insuring

agreement, (3) that no exclusions applied, (4) that the underlying claim

triggered the policy, and (5) that the aggregate policy limits had not been

exhausted. Moreover, petitioner, which has its own insurance, would be

confronted with the ‘‘other insurance’’ provision in respondent’s policies,

even if it were a proper party to assert the rights (because if MacArthur’s

own insurers have paid, as seems to be the case, they are subrogated to

MacArthur’s “‘rights’’). With respect to excess policies (and practically

all the policies settled are excess policies), petitioner would have to show

the foregoing where the excess policies ‘‘followed form’’; where they did

not, petitioner would have to show some other basis for coverage in the

policy language. It is littke wonder that the bankruptcy court termed

petitioner’s assertion of ‘‘rights’’ under the policies ‘‘highly speculative.”

See Appendix D-4.

12

A fundamental policy of the bankruptcy laws is to maxim-

ize values for creditors. That policy is advanced by permit-

ting the sale of property in which the debtor has an interest,

with any asserted interest of a non-debtor claimant channeled

to and satisfied from the proceeds. All parties are protected:

the transferee will pay the most for unquestioned ‘‘owner-

ship’’ of the property; the non-debtor claimant has any valid

claim paid first from the proceeds; the estate and its creditors

receive the maximum net. Petitioner would reverse this goal

and prevent bankruptcy courts from maximizing values and

reducing uncertainty for all concerned.

13

CONCLUSION

The petition does not meet the criteria set forth in Rule 17

or prior decisions of this Court for the issuance of the writ.

There is no institutional reason or justification for further

review by this Court. The petition should be denied.

Dated: New York, New York

July 20, 1988

/s/ LOWELL GORDON HARRISS

LOWELL GORDON HARRISS*

LAUREEN F. BEDELL

DAVIS POLK & WARDWELL

One Chase Manhattan Plaza

New York, New York 10005

(212) 530-4000

HERBERT S. EDELMAN

LEVIN & WEINTRAUB & CRAMES

225 Broadway

New York, New York 10007

(212) 962-3300

Attorneys for Respondents

* Counsel of Record