In re Federal-Mogul Global Inc.

• Decision Date: 19 March 2008
• Docket Number: No. 01-10578 (JKF).,01-10578 (JKF).
• Citation: 385 B.R. 560
• Parties: In re FEDERAL-MOGUL GLOBAL INC., T & N Limited, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

385 B.R. 560

In re FEDERAL-MOGUL GLOBAL INC., T & N Limited, et al., Debtors.

No. 01-10578 (JKF).

United States Bankruptcy Court, D. Delaware.

March 19, 2008.

James E. O'Neill, Laura Davis Jones, Michael Paul Migliore, Scotta Edelen McFarland, Curtis A. Hehn, Michael Seidl, Pachulski Stang Ziehl & Jones LLP, Eric

Michael Sutty, Bayard, P.A., John S. Spadaro, Murphy Spadaro & Landon, Maribeth L. Minella, Timothy Edward Lengkeek, Young, Conaway, Stargatt & Taylor, Wilmington, DE, Jay R. Bender, Bradley Arant Rose & White, LLP, Birmingham, AL, Julia S. Kreher, Buffalo, NY, Sheldon Samuel Toll, Sheldon S. Toll PLLC, Southfield, MI, for Debtors.

Edward D. Robertson, Jr., Bartimus, Frickleton, Robertson, Gorny, Jefferson City, MO, for U.S. Trustee.

MEMORANDUM OPINION REGARDING ASSIGNMENT AND PREEMPTION ISSUE¹

JUDITH K. FITZGERALD, Bankruptcy Judge.

Before the court is an issue related to but bifurcated from the plan confirmation process. The court's jurisdiction is not disputed. As stated by the parties, the issue is: "Whether, under the Bankruptcy Code as a matter of law, the [assignment of Asbestos Insurance Policies to a § 524(g) trust] is valid and enforceable against the Insurers notwithstanding anti-assignment provisions in or incorporated in the Policies and applicable state law."²

A hearing to consider confirmation of the Plan was held on June 18-21, July 9-10, 2007, and October 1-2, 2007, at which all objections to confirmation were considered. Thereafter, after devoting a considerable amount of time and effort, the Debtors, Plan Proponents,³ Objecting Insurers,⁴ and other interested parties were able to resolve all remaining objections to confirmation except those related to the Assignment and Preemption Issue.⁵

On October 17, 2007, the Plan Proponents and the certain Objecting Insurers filed a Joint Motion Seeking Determination of Asbestos Insurance Assignment and Preemption Issues Pursuant to the Plan⁶ and seeking court approval of the Stipulation to Preserve Appeals on the Asbestos Insurance Assignment and Preemption. Issue.⁷ This stipulation was entered into by and among the Plan Proponents and certain Objecting Insurers. A separate stipulation was entered into by and among the Plan Proponents and Certain Underwriters at Lloyd's, London and Certain London Market Companies (collectively "LMI"), ("LMI" Stipulation).⁸ The LMI Stipulation was subsequently added to the October 17, 2007, Joint Motion.⁹ The certain Objecting Insurers' stipulation and the LMI Stipulation shall be collectively referred to herein as the "Stipulations." A hearing was held on October 25, 2007, and the court entered the Stipulation Orders on November 8, 2007.¹⁰

On November 8, 2007, this court entered an order (the "Confirmation Order")¹¹ confirming the Fourth Amended Joint Plan of Reorganization For Debtors and Debtors-In-Possession (As Modified) (the "Plan")¹² of Federal-Mogul Global Inc., T & N LIMITED, et al.,¹³ ("Debtors") and also entered Findings of Fact and Conclusions of Law Regarding Confirmation of the Fourth Amended Joint Plan of Reorganization for Debtors and Debtors-in-Possession (As Modified) (the "Findings of Fact and Conclusions of Law").¹⁴ On November 13, 2007, the United States District Court for the District of Delaware entered an order (the "Affirmance Order")¹⁵ affirming the Confirmation Order and adopting the Findings of Fact and Conclusions of Law. Consistent with the terms of the Order and Stipulation to Preserve Appeals on the Asbestos Insurance Assignment and Preemption Issue¹⁶ and the Order and Stipulation Regarding Remaining London Market Objections to the Plan¹⁷ (collectively, the "Stipulation Orders"), the Confirmation Order did not constitute or contain a ruling on the objections¹⁸ of the Objecting Insurers to the confirmation of the Plan on the ground that assignment of the Insurance Rights to the Trust is not permitted, as a matter of law, under the Bankruptcy Code ("Assignment and Preemption Issue"). The Stipulation Orders provided that this court would address the Assignment and Preemption Issue separately from the confirmation of the Plan.¹⁹ The question before this court, regarding the Assignment and Preemption Issue, is whether under the Bankruptcy Code, as a matter of law, the assignment of the Asbestos Insurance Policies to a § 524(g) trust is valid and enforceable, notwithstanding any anti-assignment or consent to assignment provisions incorporated in the Asbestos Insurance Policies and applicable state law. There is a dispute among the parties as to whether any anti-assignment provision of the policies is violated under state law at all, given the insurance neutrality provisions²⁰ in the Plan, which preserve the insurers' right to argue state law in state courts. However, this court is not addressing whether the provisions of the policies and applicable state law are violated, only whether or not, in this case, they are preempted by the Bankruptcy Code.

For the reasons explained in detail below, the Objecting Insurers' objections regarding the assignment and preemption issue will be overruled. The assignment of rights in certain insurance policies to the asbestos trust, as provided in part by Section 4.3 of the Plan, is valid and enforceable under §§ 524(g), 541(c)(1), 1123(a)(5)(B) and 1129(a)(1) of the Bankruptcy Code. The anti-assignment provisions in the policies and applicable state law are preempted. Among other authorities, we rely upon the decisions in In re Global Industrial Technologies, Inc., 375 B.R. 155, 160-61 (Bankr.W.D.Pa.2007), In re Kaiser Aluminum Corporation, 343 B.R. 88 (D.Del.2006), and In re Western Asbestos Co., 313 B.R. 456 (Bankr.N.D.Cal. 2004), aff'd 2004 WL 1944792 (N.D.Cal. April 16, 2004).

DISCUSSION

Section 541 of the Bankruptcy Code defines property of the estate broadly to include "all legal or equitable interests of the debtor in property as of the commencement of the case," "[p]roceeds ... from the property of the estate," and "[a]ny interest in property that the estate acquires after commencement of the case." 11 U.S.C. § 541(a)(1), (6), and (7) respectively. The Court of Appeals for the Third Circuit has expressly concluded that an insurance policy is property of the estate within the meaning of § 541, even if the policy has not matured, has no cash value, or is otherwise contingent. Estate of Lellock v. Prudential Insurance. Co. of Am., 811 F.2d 186, 189 (3d Cir.1987).²¹

Section 1123(a) provides that "[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall ... (5) provide adequate means for the plan's implementation, such as ... (B) transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan." 11 U.S.C. § 1123(a)(5)(B). Courts that have delved into the reach of § 1123 have found that it expressly preempts nonbankruptcy rights that might otherwise interfere with the implementation of a Chapter 11 plan. See, e.g., In re FCX, Inc., 853 F.2d 1149, 1155 (4th Cir. 1988)(to the extent that any nonbankruptcy law or contract prohibits debtor from adequately implementing terms of a plan, "the plan may propose such actions notwithstanding nonbankruptcy law or agreements"), cert. denied sub nom. Universal Cooperatives, Inc. v. FCX, Inc., 489 U.S. 1011, 109 S.Ct. 1118, 103 L.Ed.2d 181 (1989); In re Stone & Webster, Inc., 286 B.R. 532, 543 (Bankr.D.Del.2002)("[§] 1123(a) can be effected without regard to otherwise applicable nonbankruptcy law ..."). Section 1123(a)(5) "is an empowering statute" that "enhanc[es] the ability of the trustee or debtor in possession to deal with property of the estate." In re FCX, Inc., 853 F.2d at 1155.

It is established in this circuit that under § 1123(a)(5) assignment of policy proceeds to a § 524(g) trust is not prohibited by anti-assignment provisions in insurance policies. In re Combustion Engineering, 391 F.3d 190 (3d Cir.2004). The Court of Appeals for the Third Circuit explained that "[p]ut simply, § 541 prohibits restrictions on the interests of the debtor, which includes the insurance policies held by [the debtor]," id. at 219, and, with respect to property of the estate, § 1123(a)(5)(B) expressly contemplates that the debtor's interests in the policies may be assigned to a trust or other entity. Id. at n. 27.

Furthermore, once an event occurs that gives rise to the insurer's liability under the policy, the policy itself can be assigned. See generally 3 Couch on Insurance § 35.7 (3d ed.1999). See also In re Western Asbestos Company, 313 B.R. 456, 462 (Bankr.N.D.Cal.2004), aff'd 2004 WL 1944792 (N.D.Cal. April 16, 2004) (policies or rights transferable under 11 U.S.C. § 1123(a)(5) notwithstanding contrary state law); Viola v. Fireman's Fund Insurance Co., 965 F.Supp. 654, 658 (E.D.Pa.1997)("[u]nder Pennsylvania law, an insurer may not limit an insured's ability to assign ... rights under a policy after the occurrence of the event which gives rise to the insurer's liability"). The court in Viola also noted as follows:

[a]fter a loss has occurred, the right of the insured or his successor in interest to the indemnity provided in the policy becomes a fixed and vested right; it is an obligation or debt due from the insurer to the insured, subject only to such claims, demands, or defenses as the insurer would have been entitled to make against the original insured.

965 F.Supp. at 658 (citation omitted). To the same effect see National Memorial Services v. Metropolitan Life Insurance Co., 355 Pa. 155, 49 A.2d 382 (1946)(anti-assignment clause does not preclude beneficiaries of life insurance policy from assigning proceeds of policy after the event giving rise to liability; it applies only to assignments before liability). For federal cases to the same effect see OneBeacon America Insurance Co. v. A.P.I., Inc. 2006 WL 1473004 at *2-*3 (D.Minn. May 25, 2006)(anti-assignment clauses are to protect insurer...