Is Asbestos Insulated Against Bankruptcy Judge Rulings?

In the end, a lawsuit is often the "straw that break's the camel's back" for businesses. Declining sales during this economic downturn take their toll. Tight credit makes things even more difficult. But when, in addition to these challenges, there is a lawsuit to defend - that marks the beginning of the end for many companies, driving them to turn to the safety net our bankruptcy courts provide.

For Sharper Image, it was a series of class action lawsuits about their Ionic Breeze air purifiers. For Peanut Corporation of America, it was a salmonella scare that cause the company to file Chapter 7 bankruptcy. Neither company felt it had sufficient financial resources to continue the legal defense effort.

Then, last year, New York-based toy manufacturer Planet Toys was accused of selling a product that contained asbestos. Now the company is filing for bankruptcy protection, saying its liabilities are much greater than its assets.

As a bankruptcy attorney in Indiana, I have helped hundreds of small business owners through the process of filing bankruptcy. Many of these situations involved a lawsuit where the business simply lacked the money to sustain a drawn-out legal process.

While my Indiana bankruptcy clients are individuals, families, and small businesses, I like to call readers' and clients' attention to bankruptcy cases in the news. It sometimes helps people understand how the bankruptcy court process works.

One very large asbestos case that hit the news less than a month ago is very big and very unusual. Johns-Manville Corporation actually began the Chapter 11 bankruptcy process twenty seven years ago due to asbestos lawsuits. To understand why this case is still not settled, you must remember that illness might not show up in people until many years after exposure to asbestos. Since this case first began, Johns-Manville's insurance company, Travelers Property and Casualty, has paid $500 million into the bankruptcy estate. In exchange for this enormous settlement, in 1986, the bankruptcy court barred further lawsuits against Travelers.

Today, all these years later, lawsuits are being filed, claiming no bankruptcy court has the authorization to bar lawsuits. Bankruptcy courts, the allegation is, have jurisdiction only over debtors. Travelers has taken this case all the way to the Supreme Court, asking the court to affirm the original bankruptcy judge's decision.

The Travelers case will no doubt be debated in law schools for generations to come. For the purposes of this blog, though, three concepts are worth emphasizing:

          - Bankruptcy is a process, not a one-time event.

          - Insurance proceeds can be considered part of a bankruptcy "estate" (assets
            that can be used to pay creditors.

          - The goal of the bankruptcy court process is to treat all parties involved in each
             case as fairly as possible, including both debtors and creditors.