March 30, 2009 9:00 AM

The Am Law Litigation Daily: March 30, 2009

Posted by Alison Frankel

Appellate / Product Liability / Mass Torts
Supreme Court to Hear Asbestos Case Involving 'Worst Advice Any Lawyer Ever Gave a Client'
Simpson Thacher & Bartlett partner Barry Ostrager isn't exactly mincing words in his assessment of the counsel that guided Chubb Insurance to the U.S. Supreme Court, where on Monday it will square off against Ostrager's insurance company client, Travelers Indemnity. "Whoever has been advising Chubb," he told the Litigation Daily on Friday, on a train en route to Washington, "gave them the worst advice any lawyer ever gave a client."

Those are fighting words and Chubb counsel Jacob Cohn of Cozen O'Connor has picked up the gauntlet. But before we tell you about Chubb's response to Ostrager, we have to give you some background or you won't understand it. Trust us--it's worth following the details of this case, which has the potential to throw the tort system back into asbestos-driven chaos.

Way back in 1986, Manhattan federal bankruptcy court judge Burton Lifland confirmed the Chapter 11 reorganization plan of the granddaddy of all asbestos companies, the Johns-Manville Corporation. The plan was groundbreaking. It created a trust, to be funded by Johns-Manville and its insurers, through which all asbestos claims against the company would be processed. The trust offered advantage for asbestos plaintiffs and for the company: Plaintiffs wouldn't have to spend years litigating, and the company could isolate its asbestos liability. And for Manville's insurers, including Travelers, it was worth putting hundreds of millions of dollars into the trust because they received protection from future suits involving asbestos claims against Manville. Simpson Thacher's Supreme Court brief lays out the history in more detail.)

The U.S. Court of Appeals for the Second Circuit upheld Judge Lifland's confirmation of Johns-Manville's plan. The Manville Trust became a model for companies laden with asbestos liability and was later the basis of a new, congressionally approved section of the bankruptcy code that permits the segregation of asbestos claims into such trusts.

Fast-forward to 2001, when asbestos plaintiffs lawyers began testing new theories of liability against insurance companies. They filed tortious interference suits--which have become known as "direct action" claims--asserting that insurers had an independent duty to warn potential victims of the dangers of asbestos. In 2002, Travelers asked Judge Lifland--the Manville bankruptcy judge--to enjoin the "direct action" cases. At the same time, however, according to Cozen O'Connor's Supreme Court brief for Chubb, the insurance company entered into settlement talks with asbestos plaintiffs. Chubb says Travelers was prepared to pay almost $500 million to settle various claims in exchange for an order from Judge Lifland stating that the "direct action" cases were enjoined by the 1986 Manville bankruptcy agreement.

At this point, Chubb became involved. Chubb hadn't been part of the Manville deal but it was worried that if Judge Lifland approved the Travelers settlement, it would be precluded from suing Travelers in cases in which they shared liability. Chubb aligned with the asbestos plaintiffs lawyers to challenge the bankruptcy court's power to enjoin suits against parties other than the debtor. (That's the decision that Ostrager has scorned.)

After hearings before Judge Lifland, the judge enforced his original injunction barring suits against Manville insurers. The district court upheld his ruling. But in 2008 the U.S. Court of Appeals for the Second Circuit overturned the lower court, finding that Judge Lifland erred in enjoining suits alleging wrongdoing against Travelers that wasn't connected to Manville.

Ostrager (who told us he's being assisted in the Supreme Court case by "wicked smart" Harvard Law School professor Elizabeth Warren) said the Second Circuit ruling has the potential not only to blow up the asbestos trust mechanism that has imposed order on asbestos litigation, but also to undermine Congress's constitutional power to regulate bankruptcy. And if asbestos trusts are outlawed, he said, Chubb will be in trouble as deeply as the rest of the insurance industry, facing sky-high asbestos liability. (The company, he noted, already tried and failed to cap its asbestos exposure in the famous Ortiz Supreme Court case.)

But Chubb insists the case has nothing to do with undermining asbestos trusts or injunctions protecting insurers from cases against their bankrupt policyholders. In an e-mail statement to the Litigation Daily via Cozen's Cohn, Chubb contends the issue is narrow: the power of a bankruptcy judge to enjoin claims against a nondebtor. "If these restrictions are not observed, the door may be opened for other nondebtors to enter into inflated settlements of nonderivative claims for which they would seek reimbursement from their insurers," Chubb says.

And what of Ostrager's comment about the worst advice ever? "In our view," Chubb says in its statement, "Mr. Ostrager is in a poor position to comment on the quality of legal advice, given his apparent advice that Travelers pay nearly half a billion dollars to settle claims that already have been proven to be spurious."

Oooh, snap! Luckily, we can leave the resolution of this little feud to the ultimate arbiters: the justices of the Supreme Court.

Antitrust / Appellate
Will Whole Foods Case Make It Easier for FTC to Block Future Mergers?
Whole Foods spent $28 million in legal fees battling with the Federal Trade Commission over its $556 million deal with Wild Oats. But in the process, the grocery chain's effort may have given the FTC an easier path to block future mergers.
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White-Collar
Government Drops Charges Against Former Peregrine GC Eric Deller
The U.S. attorney's office in San Diego decided Friday to drop charges against former Peregrine general counsel Eric Deller. The decision came a week after a criminal case that ended in a mistrial.
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International / Torts
Plaintiffs Get a Boost from Rocket Docket Judge in Iraq War Contractor Cases
Plaintiffs suing military contractors got some good news March 18, when a federal judge in the Eastern District of Virginia denied a motion to dismiss claims that CACI International tortured Iraqi detainees. Critically, the judge did not accept CACI's theories of immunity.
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Law Firms
Sixth Circuit Says Proskauer Can Withdraw from Case of Nonpaying Client
Proskauer Rose can now say goodbye to Richard Blech. A three-judge panel on the Sixth Circuit has given the firm the green light to stop representing the former CEO of Credit Bancorp, who is behind on his legal bills.
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Reporter's Query
For an upcoming story, American Lawyer reporter Ben Hallman is looking for litigators under client pressure to reduce fees and expenses, and for litigators who have either lost or gained work due to the tightening of clients' purse strings. If you would like to share your experience, please e-mail ben.hallman@incsivemedia.com or call 212.457.9640.

Edited by Alison Frankel

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