Anti-Assignment Provisions Preempted by Bankruptcy Code in the Creation of Asbestos-Related Trusts

According to a recent Third Circuit decision, asbestos defendants may properly transfer their insurance rights to personal-injury trusts created under § 524(g) of the Bankruptcy Code. In the case of In re: Federal-Mogul Global, Inc., Federal-Mogul, one of the nation’s largest automobile part manufacturers, had previously filed for Chapter 11 bankruptcy in the wake of over 500,000 pending asbestos claims. Pursuant to §524(g) of the Bankruptcy Code, Federal-Mogul incorporated the creation of a personal-injury trust into its reorganization plan. The trust was funded with numerous assets, but most notably included Federal-Mogul’s right to recover under a variety of insurance policies. Although the terms of reorganization contained “insurance neutrality”, a provision allowing insurers to assert any defenses available under the original agreements, it prohibited them from claiming that the rights were improperly transferred. Consequently, Federal-Mogul’s insurers sued, challenging the transfer of rights despite the existence of anti-assignment provisions in their contracts.

Following unfavorable decisions in the bankruptcy and district courts, Federal-Mogul’s insurers appealed to the Third Circuit where a three-judge panel considered whether the anti-assignment provisions were preempted by the provisions of the Bankruptcy Code. In an opinion penned by Judge Anthony Scirica, the Court of Appeals ultimately held that the transfer of insurance rights to the §524(g) trust was permissible because the Bankruptcy Code expressly preempts private contracts that include anti-assignment provisions. Initially, the Court noted that a similar issue had been reached in the case of In re: Combustion Eng’g, Inc., 391 F.3d 190 (3rd Cir. 2004), where the Third Circuit stated that “even if the subject insurance policies purported to prohibit assignment [of] . . . insurance proceeds, these provisions would not prevent the assignment of proceeds to the bankruptcy estate.”

However, the Court moved beyond the holding in Combustion Eng’g to examine the language and construction of § 1123(a)(5)(b) of the Bankruptcy Cole which provides for corporate reorganization by the transferring of property to one or more entities “notwithstanding otherwise applicable non-bankruptcy law.” While the insurers argued that a scarcity of legislative history required narrow preemption, Judge Scirica readily concluded that the “thin and vague legislative history . . . says nearly nothing about the intended preemptive scope of § 1123(a)” and was not enough “to overcome the plain and unambiguous meaning of the words Congress chose.” The Second Circuit then readily applied this preemption to insurance contracts founded on state law, consistent with the Supreme Court’s 1991 decision in Norfolk & W. Ry. Co. v. Am. Train Dispatchers Ass’n, 499 U.S. 117.

Finally, the Court of Appeals touched upon certain policy considerations that supported preemption in this context. Specifically, the Court noted that assignment to a personal-injury trust did not impose a greater risk on insurers than they had originally bargained for, and that preemption furthered the Congressional design of § 524(g) by ensuring adequate compensation for asbestos litigants.

http://www.ca3.uscourts.gov/opinarch/092230p.pdf

 Thanks for Adam Gomez, law clerk, for this submission.  If you have any questions or comments, please email Paul at pclark@wcmlaw.com