Federal-Mogul Global Inc.: Third Circuit Holds Bankruptcy Code Preempts Anti-Assignment Provisions, Allowing Transfer of Policy Rights to Asbestos Trust

Federal-Mogul Global Inc.: Third Circuit Holds Bankruptcy Code Preempts Anti-Assignment Provisions, Allowing Transfer of Policy Rights to Asbestos Trust

Jennifer Strutt   By Jennifer Black Strutt, Associate, McCarter & English, LLP

Federal-Mogul Global, Inc., one of the world's largest manufacturers of automobile parts, and its affiliates filed for Chapter 11 bankruptcy, seeking to resolve asbestos-related liability through the creation of a personal injury trust under 11 U.S.C. § 524(g).  As part of the reorganization plan, Federal-Mogul sought to transfer rights under its insurance liability policies to the trust, but its insurers objected on the basis that the transfer would violate the anti-assignment provisions in the policies.  The bankruptcy and district courts held that the Bankruptcy Code, 11 U.S.C. § 1123(a)(5)(B), preempted the policies' anti-assignment provisions.

In its decision affirming the judgment of the district court, the Third Circuit first discussed the importance of the Bankruptcy Code regarding the resolution of mass tort liability, such as asbestos litigation - i.e., the Bankruptcy Code provides a statutory mechanism for creating a personal injury trust that evaluates asbestos claims and allocates payments to current and future claimants.  In considering whether the preemption provision of § 1123(a) applied to an anti-assignment clause in an insurance policy that the debtor sought to transfer to the personal injury trust, the court was mindful of the principles that congressional intent may be discerned from the language of a statute, and there is a presumption against preemption.  The court found the plain and unambiguous text of the statute indicated a clear intent that § 1123(a) preempts state law, including private contracts (such as insurance policies) that would be enforced by state common law, and overcame the presumption against preemption.  Finally, the court considered public policy arguments and reasoned that preemption in this instance furthered the purpose of the Bankruptcy Code and a § 524(g) trust.

Ms. Strutt is an Associate in the Stamford, Connecticut office of McCarter & English, LLP. She may be reached by e-mail at jstrutt@mccarter.com. The opinions in this article are those of the author alone and do not represent the views of McCarter & English, LLP or any of its clients.

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