In re Federal-Mogul Global

• Decision Date: 24 March 2009
• Docket Number: Civil Action No. 08-230.,Bankruptcy No. 01-10578.,Civil Action No. 08-0229.
• Citation: 402 B.R. 625
• Parties: In re FEDERAL-MOGUL GLOBAL., et al., Certain Underwriters at Lloyds's London, et al., Appellants, v. Federal-Mogul Global Inc., et al., Appellees.
• Court: U.S. District Court — District of Delaware

Page 625

402 B.R. 625

In re FEDERAL-MOGUL GLOBAL., et al.,

Certain Underwriters at Lloyds's London, et al., Appellants, v. Federal-Mogul Global Inc., et al., Appellees.

Bankruptcy No. 01-10578.

Civil Action No. 08-0229.

Civil Action No. 08-230.

United States District Court, D. Delaware.

March 24, 2009.

COPYRIGHT MATERIAL OMITTED

Laura Davis Jones, Esq., James O'Neill, Esq., Pachulski, Stang, Ziehl & Jones, LLP, Wilmington, DE, Jeffrey Steen, Esq., Sidley Austin, LLP, Chicago, IL, for Appellee Debtor.

Kathleen Campbell Davis, Esq., Campbell & Levine Wilmington, DE, Peter Van N. Lockwood, Esq. Caplin & Drysdale, Washington, D.C., for Appellee Asbestos Claimants Committee.

Edwin J. Harron, Esq., Young, Conaway, Stargatt & Taylor, Wilmington, DE, for Appellee Future Claimants Representative.

Richard W. Riley, Esq., Duane Morris, LLP, Wilmington, DE, Russel Roten, Esq., Duane Morris, LLP, Los Angeles, CA, for Appellants, Certain Underwriters at Lloyd's London and Certain London Market Companies.

Michael W. Yurkewicz, Esq., Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, Sean J. Bellew, Esq., Ballard, Spahr, Andrews & Ingersoll, LLP, John D. Demmy, Esq., Stevens & Lee, James S. Yoder, Esq., White and Williams, LLP, Wilmington, DE, Craig Goldblatt, Esq., Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., David C. Christian II, Esq., Seyfarth Shaw, LLP, Chicago, IL, Michael S. Davis, Esq., Zeichner Ellman & Krause, LLP, New York, NY, for Certain Appellants.

OPINION

RODRIGUEZ, Senior District Judge:^*

This matter comprises two consolidated matters, 08-0229 and 08-0230, arising from an appeal of the Preemption Order and Memorandum Opinion issued by the United States Bankruptcy Court for the District of Delaware in Case No. 01-10578.¹ In the case below, the Bankruptcy Court held that the assignment of rights in certain insurance policies to an asbestos trust, as provided by the Reorganization Plan ("the Plan"), is valid under § 524(g), § 541(c)(1), § 1123(a)(5)(B), and § 1129(a)(1) of the United States Bankruptcy Code. In re Federal-Mogul Global Inc., 385 B.R. 560, 576 (Bankr.D.Del.2008). The Court based this conclusion on its holding that § 1123(a)(5)(B) preempts anti-assignment provisions in relevant insurance policies under applicable state law. Id. Appellants directly challenge that holding. As a result, the issue remains 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

I. JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. § 158(a), as this matter is on appeal from the U.S. Bankruptcy Court for the District of Delaware.

II. PROCEDURAL AND FACTUAL BACKGROUND

Appellees Federal-Mogul Global Corporation and various of its subsidiaries ("Appellees" or "FMC") filed for bankruptcy in October 2001 due to overwhelming debts accrued from asbestos-related litigation. (Appellee Br. 2.) Pursuant to 11 U.S.C. § 524(g), FMC proposed a reorganization plan to resolve all current and future liability claims. (Id.) Under the proposal, a § 524(g) trust was created "to which all of [FMC's] asbestos personal injury liabilities ... would be transferred for resolution and payment ..." (Id.) Funding for the trust included 50.1 percent of FMC stock and the rights to all remaining FMC insurance coverage for the transferred asbestos liabilities. (Id. at 2-3.) Known as the "Central Deal", this proposal went through several amendments before finally being confirmed in 2007 by the U.S. Bankruptcy Court for the District of Delaware. (See Order Confirming Fourth Am. Joint Plan of Reorganization, filed Nov. 8, 2007.) This District Court affirmed that Confirmation Order on November 13, 2007. (Dock. No. 13698.) Shortly thereafter, the Plan became effective and was substantially consummated on December 27, 2008. (Dock. No. 13940.)

Appellants Certain Underwriters at Lloyd's, London, London Market Insurers, Certain London Market Companies ("LMI") and Certain Appellants have maintained throughout the confirmation process that the Plan violates their contractual rights under the applicable insurance policies.³ (See, e.g., LMI Br. 15; see also Certain Appellants' Br. 5.) Specifically, they claimed that the anti-assignment provisions contained in the insurance policies prevented the assignment of insurance rights into the § 524(g) trust. (Id.) In order to proceed with the confirmation process however, both parties agreed that the dispute over the anti-assignment provisions would be resolved as a separate matter following confirmation of the Plan. (See Joint Mot. Seeking Determination of Asbestos Insurance Assignment and Preemption Issue Pursuant to Plan, filed Oct. 17, 2007) ("Joint Motion"). Appellants also stipulated that they would not object to the "entry by the Bankruptcy Court of the Preemption Order", reserving only their right to appeal. (See Objection Stipulation, ¶ 1, filed July 24, 2007) ("Stipulation").

In accordance with the Joint Motion and Stipulation, the Bankruptcy Court issued its Preemption Order and Memorandum Opinion on March 19, 2008—four months after the plan was confirmed. See Federal-Mogul, supra. The Court held that the Plan "is valid and enforceable pursuant to 11 U.S.C. §§ 524(g),⁴ 541(c)(1),⁵ 1123(a)(5)(B)⁶ and § 1129(a)(1)⁷ of the Bankruptcy Code notwithstanding anti-assignment provisions in or incorporated in the policies and applicable state law." Id. at 576. That decision was appealed by LMI,⁸ case no. 08-0229, and Certain Other Insurers (Certain Appellants),⁹ case no. 08-0230. The cases have been consolidated on appeal, (see Stipulation and Order Regarding Consolidation of Appeals, Waiver of Mediation, and Briefing Schedule filed May 6, 2008), which brings the Court to the present dispute.

LMI and Certain Appellants advance several contentions in support of their main claim that § 1123(a)(5)(B) does not preempt anti-assignment provisions in private contractual agreements or applicable state law. First, Certain Appellants emphasize the presumption against preemption, and contend that the presumption "is heightened in the insurance context". (Certain Appellants Br. 17.) Second, Certain Appellants contend that § 1123(a)(5) does not preempt private contracts, which are separate and distinct from law. (Certain Appellants Br. 19-20.) Third, LMI and Certain Appellants contend that any preemption discerned from § 1123(a) only applies to laws relating to financial condition. On this point, LMI and Certain Appellants rely heavily on the Ninth Circuit's opinion in Pacific Gas & Elec. Co. v. Cal. Ex rel. Cal. Dept. of Toxic Substances Control, 350 F.3d 932, 949 (9th Cir.2003) (holding that § 1123(a)(5) only preempts otherwise applicable nonbankruptcy law relating to financial condition). Fourth, LMI contends that there is a distinction between proceeds and rights; while § 1123(a)(5)(B) permits the vesting of insurance proceeds, that section does not go so far as to permit the vesting of insurance rights. (See, e.g., LMI Br. 18-19; See also Hr'g Tr. 12:23-25, 13:1) ("[W]e're not talking about proceeds, but ... insurance rights, which is the right to sue for coverage, and that is an entirely different ball of wax than proceeds.") With respect to this point, LMI contends that the Bankruptcy Court misconstrued Third Circuit precedent on the preemption issue. See Federal-Mogul, 385 B.R. at 567 (citing In re Combustion Eng'g, Inc., 391 F.3d 190 (3d Cir.2004)). LMI also contends that § 363(l) and § 365 are the proper sections to apply to anti-assignment clauses in this context, not § 1123(a)(5)(B). In light of the foregoing, LMI and Certain Appellants contend that the Bankruptcy Court below should be reversed.

Appellees¹⁰ answer that the Bankruptcy Court correctly held that the anti-assignment provisions were preempted by § 1123(a)(5)(B), along with applicable sections of the Bankruptcy Code. In doing so, they contend that any presumption against preemption is rebutted by a plain reading the statute, which in their view, expresses a clear desire of Congress to preempt. Refuting LMI and Certain Appellants' charge of faulty analysis, Appellees contend that the Bankruptcy Court correctly followed controlling Third Circuit precedent. See In re Combustion Eng'g, supra. Furthermore, Appellees contend that Certain Appellants' construction of § 1123(a)(5) is overly narrow and restrictive; a proper reading, they contend, reveals that the section does preempt the anti-assignment provisions in the insurance policies at issue. Consequently, Appellees contend that its preemptive scope is not limited to laws relating to financial condition. Finally, Appellees reject LMI's distinction between proceeds and rights, as well as Certain Appellant's distinction between private contracts and law. These contentions are discussed below.

III. STANDARD OF REVIEW

A District Court sitting in an appellate posture reviews a Bankruptcy Court's legal determinations de novo. See In re Old Summit Mfg., LLC, 523 F.3d 134, 137 (3d Cir.2008). Factual determinations are reviewed for clear error. In re Old Summit Mfg., LLC, 523 F.3d at 137; accord Fed. R. Bankr.P. 8013.

IV. DISCUSSION

A. Anti-Assignment Clauses and Preemption Doctrine

Preemption doctrine is rooted in the Supremacy Clause. See U.S. Const., art. VI, cl. 2 ("This Constitution, and the laws of the United States which shall be made in pursuance thereof ... shall be the supreme law of the land."). Under the doctrine, a state law yields to a federal law in any case where the state law either contravenes or interferes with the stated purpose of the federal law. See Hillsborough County, Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 712, 105 S.Ct. 2371, 85 L.Ed.2d 714 (1985) (citing Gibbons v. Ogden, 22 U.S. (9 Wheat) 1, 211, 6 L.Ed. 23 (1824)). Thus, "the...