PHILADELPHIA - (Mealey's) The U.S. Bankruptcy Code trumps anti-assignment provisions in insurance policies, the Third Circuit U.S. Court of Appeals held May 1 (In re: Federal-Mogul Global Inc., et al., Nos. 09-2230 and 09-2231, 3rd Cir.; 2012 U.S. App. LEXIS 8814).
(Opinion. Document #48-120529-001Z.)
Facing hundreds of thousands of asbestos personal injury claims, Federal-Mogul Global Inc., one of the world's largest manufacturers of automobile parts, and more than 150 affiliates filed Chapter 11 bankruptcy petitions in 2001 in the U.S. Bankruptcy Court for the District of Delaware.
In its proposed plan for reorganization, Federal-Mogul sought to obtain an injunction under Section 524(g) of the Bankruptcy Code to channel present and future asbestos claims to a post-confirmation trust. The plan assigned various assets to the trust, including Federal-Mogul's rights to recovery under liability insurance. The plan also contained "insurance neutrality" provisions granting insurers the right to assert against the trust any defense to coverage already available under the policies except the defense that the transfer to the trust violated the policies' anti-assignment provisions.
Insurance companies that had issued liability policies to Federal-Mogul before its bankruptcy objected to the plan's confirmation, arguing that the plan violated the policies' anti-assignment provisions barring the insured from transferring the policies or insurance rights without the insurers' consent. Federal-Mogul contended that the anti-assignment provisions were preempted under Section 1123(a)(5)(B) of the Bankruptcy Code, which provides that a Chapter 11 reorganization plan will provide adequate means for its implementation, potentially including transfer of estate property, "notwithstanding otherwise applicable nonbankruptcy law."
The parties agreed to bifurcate the proceedings and resolve this issue separately, with the right to appeal the Bankruptcy Court's preemption judgment. In 2007, with all other objections resolved, the Bankruptcy Court confirmed the reorganization plan, the U.S. District Court for the District of Delaware affirmed and the plan went into effect.
In 2008, the Bankruptcy Court issued its preemption order and opinion, holding that the Bankruptcy Code preempted the anti-assignment provisions in the insurers' policies (In re Federal-Mogul Global Inc., 385 B.R. 560 [Bankr. D. Del. 2008]). The court held that Section 541 of the Bankruptcy Code permitted the assignment of insurance rights to the bankruptcy estate and that Section 1123(a)(5) allowed transfer of the rights to the Section 524(g) trust. In 2009, the District Court affirmed (In re Federal-Mogul Global, 402 B.R. 625 [D. Del 2009]).
Hartford Accident and Indemnity Co., First State Insurance Co., New England Insurance Co., Columbia Casualty Co., Continental Casualty Co., the Continental Insurance Co., Fireman's Fund Insurance Co., National Surety Co., Certain Underwriters at Lloyd's London and Certain London Market Companies filed two appeals to the Third Circuit, which consolidated the appeals.
In an opinion written by Circuit Judge Anthony Joseph Scirica, joined by Circuit Judges D. Brooks Smith and Kent A. Jordan, the Third Circuit agreed with the lower courts that the "notwithstanding" clause in Section 1123(a) showed clear congressional intent to expressly preempt conflicting state law, as well as private contracts.
"Many of the transactions listed under § 1123(a)(5) implicate contractual rights, and so demonstrate clear congressional intent that the phrase 'nonbankruptcy law' encompass private contracts. The Fourth Circuit endorsed this view when it held that § 1123(a) preempts the contractual provisions of patronage certificates. Moreover, the Supreme Court has held that the phrase 'all other law' in a preemption provision preempts private contracts," the panel said, citing In re FCX, Inc. (853 F.2d 1149 [4th Cir. 1988]) and Norfolk & W. Ry. Co. v. Am. Train Dispatchers Ass'n (499 U.S. 117 ).
The Third Circuit panel rejected the insurers' argument that a broad reading of the preemptive scope of Section 1123(a) is inconsistent with Section 1142 of the Bankruptcy Code, which governs implementation of a reorganization plan.
The panel said it finds "no textual support to limit the scope of the 'notwithstanding' clause only to part of § 1123(a), to state enactments, or to the preemptive reach of § 1142(a). The plain language of § 1123(a) evinces clear congressional intent for a preemptive scope that includes the transactions listed under § 1123(a)(5) as 'adequate means' for the plan's implementation, including the transfer of property authorized by (a)(5)(B). The plain language also reaches private contracts enforced by state common law, and overcomes the presumption against preemption" that is rooted in the respect for states as independent sovereigns in the federal system and is detailed by the U.S. Supreme Court in Wyeth v. Levine (555 U.S. 555, 565 n.3 ).
The Third Circuit also rejected the insurers' contention that Section 1123(a) should be construed narrowly based on prior practice and legislative history, which shows that Congress intended the 1984 revisions to the Bankruptcy Code to be minor. The panel said that "whatever the proper characterization of prior practice, it deserves little weight here. We decline to rely on it, or on a thin and vague legislative history that says nearly nothing about the intended preemptive scope of § 1123(a), to overcome the plain and unambiguous meaning of the words Congress chose."
Purposes Of Bankruptcy
The panel also pointed out that preemption of insurance anti-assignment clauses furthers the purposes of the Bankruptcy Code and its Section 524(g) provisions to provide for asbestos claims.
The panel said that "Congress believed the transfer of a corporation's assets to a trust to ensure the equitable compensation of present and future claimants, in return for a release from future liability, served the 'fundamental' purposes of bankruptcy. The anti-assignment provisions at issue would impede these objectives by depriving both debtors and claimants access to assets specifically intended to compensate for potential losses. In these circumstances, construing § 1123(a) to preempt these contracts is consonant with congressional intent and public policy."
Federal-Mogul is represented by William A. Evanoff and Jeffrey C. Steen of Sidley Austin in Chicago and Laura D. Jones and James E. O'Neill III of Pachulski Stang Ziehl & Jones in Wilmington, Del. The Official Committee of Asbestos Claimants is represented by Kathleen C. Davis of Campbell & Levine in Wilmington and Peter Van N. Lockwood of Caplin & Drysdale in Washington, D.C. Eric D. Green, legal representative for future asbestos claimants of Federal-Mogul, is represented by Edwin J. Harron and Sharon M. Zieg of Young Conaway Stargatt & Taylor in Wilmington.
Hartford Accident and Indemnity, First State Insurance and New England Insurance are represented by Danielle M. Spinelli and Craig Goldblatt of Wilmer Cutler Pickering Hale & Dorr in Washington. Columbia Casualty, Continental Casualty and Continental Insurance are represented by David C. Christian II of Seyfarth Shaw in Chicago. Fireman's Fund and National Surety are represented by John D. Demmy of Stevens & Lee in Wilmington. Certain Underwriters and Certain London Market Companies are represented by Eileen T. McCabe of Mendes & Mount in New York; Michael A. Shiner of Tucker Arensberg in Pittsburgh; Russell W. Roten of Duane Morris in Los Angeles; and Richard W. Riley of Duane Morris in Wilmington.
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