In re Federal-Mogul Global Inc.

In re Federal-Mogul Global Inc., Case No. 09-2230, 2012 WL 1511773 (3d Cir. May 1, 2012)
The Court of Appeals for the Third Circuit held that the Debtor Federal-Mogul could transfer its insurance rights to recovery under liability policies to a post-confirmation section 524(g) trust, also known as an asbestos trust, notwithstanding the policies' anti-assignment provisions—the standard clauses in liability policies that bar the insured from transferring the policies or insurance rights without the insurers' consent. The Third Circuit analyzed the statutory language, structure, legislative history and scope of section 1123(a) of the Bankruptcy Code and concluded that Congress clearly intended to preempt state law when it used explicit language "Notwithstanding any otherwise applicable nonbankruptcy law" to deal with the transactions listed under 1123(a), including the transfer of property authorized by 1123(a)(5)(B) as "adequate means" for implementation of a debtor’s plan of reorganization. Further, the Third Circuit concluded that the plain language of section 1123(a) reaches private contracts enforced by state law and overcomes the presumption against preemption. The Third Circuit stated that while section 1123(a)’s preemptive scope is not unlimited, it is broad enough to encompass the anti-assignment provisions of insurance policies that purport to bar transfer of insurance rights to an asbestos trust.
Procedural context: 
On March 19, 2008, the Bankruptcy Court for the District of Delaware resolved the dispute between Federal-Mogul and their insurers as to whether the Federal-Mogul’s plan of reorganization violated the liability policies' anti-assignment provisions. The bankruptcy court held that the Bankruptcy Code preempted the anti-assignment provisions contained in the insurers' policies. The bankruptcy court explained that section 541 of the Bankruptcy Code authorized the assignment of Federal-Mogul's insurance rights to the bankruptcy estate, and section 1123(a)(5) authorized the transfer of the estate's rights to the post-confirmation section 524(g) trust. Further, the bankruptcy court relied on state insurance-law doctrine that assignment after the occurrence giving rise to liability does not violate anti-assignment provisions because "there will be no additional risk to the insurance companies by virtue of the assignments." The bankruptcy court rejected the insurers' various contentions, including the presumption against preemption and limited preemptive scope of section 1123(a)(5). The District Court for the District of Delaware affirmed, concluding that the “notwithstanding” clause in section 1123(a) shows clear congressional intent to expressly preempt conflicting state law and insurance policies’ anti-assignment provisions. The district court, among other things, addressed the insurers’ arguments regarding the scope of preemption and statutory interpretation, distinguishing as contrary to the Third Circuit’s precedent and plain statutory meaning a Ninth Circuit holding that limited the scope of section 1123(a), based on legislative history, to preempting only non-bankruptcy law “relating to financial condition”. Consequently, Appellant Insurers filed the appeal.
On October 1, 2001, Federal-Mogul Global, Inc. ("Federal-Mogul"), one of the world's largest manufacturers of automobile parts, and over 150 affiliates filed their petitions for protection under chapter 11 of the Bankruptcy Code in order to resolve Federal-Mogul's enormous asbestos-related liabilities. Federal-Mogul filed a plan of reorganization seeking to obtain an injunction under section 524(g) of the Bankruptcy Code to channel present and future asbestos-related claims to a post-confirmation trust. The plan assigned various assets to the asbestos trust, including Federal-Mogul's rights to recovery under certain liability insurance policies issued by insurers to Federal-Mogul prior to bankruptcy. Insurers objected to the plan's confirmation, arguing that the plan violated the policies' anti-assignment provisions that bar the insured from transferring the policies without the insurers' consent. In response, Federal-Mogul argued that the anti-assignment provisions were preempted under section 1123(a)(5)(B), which provides that a plan of reorganization must provide adequate means for the plan's implementation, including, among other things, transfer of estate property, "notwithstanding any otherwise applicable nonbankruptcy law". On November 8, 2007, the Bankruptcy Court for the District of Delaware confirmed Federal-Mogul's plan of reorganization, resolving all objections to confirmation, but leaving the dispute between Federal-Mogul and the insurers as to whether the plan violated the policies' anti-assignment provisions. The parties agreed to resolve their dispute separately, with the right to appeal the bankruptcy court’s judgment.
Anthony J. Scirica, D. Brooks Smith and Kent A. Jordan