In re Federal–Mogul Global Inc.

Citation684 F.3d 355,56 Bankr.Ct.Dec. 112
Decision Date01 May 2012
Docket NumberNos. 09–2230,09–2231.,s. 09–2230
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)
PartiesIn re FEDERAL–MOGUL GLOBAL INC., et al., Reorganized Debtors. Hartford Accident and Indemnity Company; First State Insurance Company; New England Insurance Company; <SUP>*</SUP>Allianz Global Corporate & Specialty AG, (as successor-by-partial-merger to Allianz Vericherungs AG as to Policy No. H O 001 456); <SUP>*</SUP>Allianz Global Risks U.S. Insurance Company, (f/k/a Allianz Insurance Company); <SUP>*</SUP>Allianz Underwriters Insurance Company, (f/k/a Allianz Underwriters, Inc.); Columbia Casualty Company; Continental Casualty Company; The Continental Insurance Company, (both in its individual capacity and as successor to certain interests of Harbor Insurance Company); Fireman's Fund Insurance Company; National Surety Company; Certain Underwriters at Lloyd's London; Certain London Market Companies, Appellants. (* Dismissed pursuant to Court Order dated 12/28/10).

OPINION TEXT STARTS HERE

Danielle M. Spinelli, Esquire (Argued), Craig Goldblatt, Esquire, Wilmer Cutler Pickering Hale & Dorr, Washington, D.C. Attorneys for Appellants, Hartford Accident and Indemnity Company; First State Insurance Company; New England Insurance Company.

David C. Christian II, Esquire, Seyfarth Shaw, Chicago, IL, Attorney for Appellants, Columbia Casualty Company; Continental Casualty Company; The Continental Insurance Company.

John D. Demmy, Esquire, Stevens & Lee, Wilmington, DE, Attorney for Appellants, Fireman's Fund Insurance Company; National Surety Company.

Eileen T. McCabe, Esquire, Mendes & Mount, New York, NY, Michael A. Shiner, Esquire, Tucker Arensberg, Pittsburgh, PA, Russell W. Roten, Esquire (Argued), Duane Morris, Los Angeles, CA, Richard W. Riley, Esquire, Duane Morris, Wilmington, DE, Attorneys for Appellants, Certain Underwriters at Lloyd's London; Certain London Market Companies.

William A. Evanoff, Esquire, Jeffrey C. Steen, Esquire, Sidley Austin, Chicago, IL, Laura D. Jones, Esquire, James E. O'Neill, III, Esquire, Pachulski Stang Ziehl & Jones, Wilmington, DE, Attorneys for Appellees, Federal–Mogul Global, Inc., et al.

Kathleen C. Davis, Esquire, Campbell & Levine, Wilmington, DE, Peter Van N. Lockwood, Esquire (Argued), Caplin & Drysdale, Washington, D.C., Attorneys for Appellee, Official Committee of Asbestos Claimants.

Edwin J. Harron, Esquire, Sharon M. Zieg, Esquire, Young Conaway Stargatt & Taylor, Wilmington, DE, Attorneys for Appellee, Eric D. Green, Legal Representative for Future Asbestos Claimants of Federal–Mogul Global Inc., et al.

Before: SCIRICA, SMITH and JORDAN, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

Federal–Mogul Global and its affiliates filed for Chapter 11 bankruptcy and sought to resolve asbestos-related liability through the creation of a personal-injury trust under 11 U.S.C. § 524(g).1 As part of its reorganization plan, it sought to transfer rights under insurance liability policies to the trust. Appellants Insurers 2 had provided liability policies to the debtors prior to bankruptcy and objected that the transfer violated the policies' anti-assignment provisions. Federal–Mogul contended that 11 U.S.C. § 1123(a)(5)(B) preempts those provisions, and the bankruptcy and district courts agreed. We will affirm.

I.
A.

For almost two decades, Chapter 11 bankruptcies have employed a statutory mechanism created by 11 U.S.C. § 524(g) to resolve massive asbestos liability and to evaluate claims and allocate payments to current and future asbestos claimants. When this provision's requirements are satisfied, the bankruptcy court may issue an injunction channeling all current and future claims based on the debtor's asbestos liability to a personal injury trust. This case centers on these trusts.

The salience of § 524(g) trusts stems from the ongoing dilemma of asbestos liability, “the longest-running mass tort litigation in the United States.” Stephen J. Carroll et al., RAND Inst. for Civil Justice, Asbestos Litigation 21–24 (2005).3 As courts and commentators have noted, a just and efficient resolution of asbestos claims has often eluded the traditional tort system.4See In re Congoleum Corp., 426 F.3d 675, 693 (3d Cir.2005); In re Combustion Eng'g, Inc., 391 F.3d 190, 200 (3d Cir.2004); see also Richard A. Nagareda, Mass Torts in a World of Settlement x-xiii (2007). The aggregate pressure of such claims has led to a variety of quasi-administrative approaches to asbestos liability,5 but Congress has yet to create the “national asbestos dispute-resolution scheme” requested by the Supreme Court, Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 598, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997) (citing Judicial Conference of the U.S., Report of the Judicial Conference Ad Hoc Committee on Asbestos Litigation 3, 27–35 (1991)); see also Ortiz v. Fibreboard Corp., 527 U.S. 815, 821 & n. 1, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999).6 Initial attempts to employ the class action device to resolve the claims of present and future asbestos victims failed to adequately protect the interests of absent class members. Amchem, 521 U.S. at 625–28, 117 S.Ct. 2231;Ortiz, 527 U.S. at 848–59, 119 S.Ct. 2295.

A consequence of the failure to create a comprehensive resolution to asbestos litigation has been a reliance on the Bankruptcy Code to provide some predictability and regularity in addressing mass tort liability. Bankruptcy has proven an attractive alternative to the tort system for corporations because it permits a global resolution and discharge of current and future liability, while claimants' interests are protected by the bankruptcy court's power to use future earnings to compensate similarly situated tort claimants equitably. S. Elizabeth Gibson, Fed. Judicial Ctr., Judicial Management of Mass Tort Bankruptcy Cases 1–2 (2005). The primary bankruptcy innovation for addressing mass tort liability has been the post-confirmation trust, which first appeared in the bankruptcy proceedings of the Johns–Manville Corporation, the largest producer of asbestos-containing products. Lloyd Dixon et al., RAND Inst. for Civil Justice, Asbestos Bankruptcy Trusts: An Overview of Trust Structure and Activity with Detailed Reports on the Largest Trusts 5 (2010) [hereinafter RAND Trust Report ]. In that case, the bankruptcy court issued a channeling injunction under 11 U.S.C. § 105 requiring future asbestos claims be brought against a trust created to compensate victims, and barring actions against the reorganized debtor, its subsidiaries, or any settling insurance company.7In re Johns–Manville Corp., 68 B.R. 618, 624–28 (Bankr.S.D.N.Y.1986), aff'd,78 B.R. 407 (S.D.N.Y.1987), aff'd sub nom., Kane v. Johns–Manville Corp. (In re Johns–Manville Corp.), 843 F.2d 636 (2d Cir.1988).

Congress codified the Johns–Manville trust mechanism as a “creative solution to help protect ... future asbestos claimants,” H.R.Rep. No. 103–835, at 47 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3348, in the Bankruptcy Reform Act of 1994, Pub.L. 103–394, § 111, 108 Stat. 4106, 4113–17 (codified at 11 U.S.C. § 524(g)-(h)). Congress intended the trusts as a means to give “full consideration” to the interests of future claimants by ensuring their claims would be compensated comparably to present claims, while simultaneously enabling corporations saddled with asbestos liability to obtain the “fresh start” promised by bankruptcy.8H.R.Rep. No. 103–835, at 46–48. To achieve these goals and “protect the due process rights of future claimants,” section 524(g) imposed “many statutory prerequisites” that must be satisfied before a channeling injunction may issue.9Combustion Eng'g, 391 F.3d at 234 n. 45.

As of May 2011, there were fifty-six asbestos personal-injury trusts, with several more in process. Lloyd Dixon & Geoffrey McGovern, RAND Inst. for Civil Justice, Asbestos Bankruptcy Trusts and Tort Compensation 1 n. 1 (2011). Through 2010, the trusts have paid about 3.3 million claims valued at roughly $17.5 billion. U.S. Gov't Accountability Office, supra, at 16. There is substantial similarity among the various trusts in structure and function. Nearly all the trusts are governed by trustees who manage financial affairs, while a committee of advocates, consisting of representatives of current and future claimants, must approve substantial trust activities.10RAND Trust Report, supra, at 11–14. Moreover, like the Johns–Manville trust on which they are modeled,11 asbestos personal-injury trusts receive funding from three primary sources: debtor cash, debtor stock, and insurance settlements. See id. at app. B (categorizing the initial funding of the 26 largest asbestos trusts as “Cash from debtor(s),” “Stock from debtors(s) [sic],” “Insurance settlements,” or “Other assets”). While some trusts have been funded primarily with an initial infusion of cash from the debtor, id. at 65, 105, 137, and others have consisted primarily of funds obtained from insurance, id. at 55, 79, 115, 123, most rely on a mix of assets. Finally, all trusts have Trust Distribution Protocols (TDPs) to govern how claims are processed and compensated.12 These procedures are approvedas part of the bankruptcy reorganization plan but may later be modified. Id. at 14.

As a quasi-administrative scheme, § 524(g) trusts have drawn considerable commentary.13 While Congress sought to protect the interests of current claimants by requiring that 75% of them approve the trust, some have suggested that this provision, without the “cram down” otherwise available in bankruptcy, grants plaintiffs' attorneys a de facto veto over reorganization, allowing them to leverage concessions at the expense of other stakeholders. 14 S. Todd Brown, Section 524(g) Without Compromise: Voting Rights and the Asbestos Bankruptcy Paradox, 2008 Colum. Bus. L.Rev. 841, 856–70;cf. In re Congoleum Corp., 426 F.3d at 680 & n. 4 (noting that, in the absence of a cramdown provision, [t]he realities of securing favorable votes from...

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