In re Kaiser Aluminum Corp.

• Decision Date: 11 May 2006
• Docket Number: No. 06-41-JJF.,No. 02-10429 (JFK).,02-10429 (JFK).,06-41-JJF.
• Parties: In re: KAISER ALUMINUM CORP., et al., Debtors.
• Court: U.S. District Court — District of Delaware

343 B.R. 88

In re: KAISER ALUMINUM CORP., et al., Debtors.

No. 02-10429 (JFK).

No. 06-41-JJF.

United States District Court, D. Delaware.

May 11, 2006.

Carmela P. Keener, of Rosenthal, Monhalt & Goddess, P.A., Wilmington, DE, Carroll, Burdick & McDonough LLP, San Francisco, CA (Rodney L. Eshelman, Alison V. Lippa, and Raymond J. Tittmann, of counsel), Lewis S. Rosenbloom, David C. Christian, II and Mohsin N. Khambati, of McDermott Will & Emery LLP, Chicago, IL, for Appellants, Columbia Casualty Company, Transcontinental Insurance Company, Harbor Insurance Company and Continental Insurance Company.

Michael G. Gallerizzo, of Gebhardt & Smith LLP, Wilmington, DE, Steptoe & Johnson, LLP, Washington, D.C. (Harry Lee, John O'Connor, and George R. Calhoun, V, of counsel), for Appellants, TIG Insurance Company, as Successor by Mergers to International Surplus Lines Insurance Company.

Thomas G. Whalen, Jr., of Stevens & Lee, P.C., Wilmington, DE, Stevens & Lee, P.C., Philadelphia, PA (Leonard P. Goldberger, of counsel), for Appellants, Century Indemnity Company (Successor to Cigna Specialty Insurance Company, formerly known as California Union Insurance Company, and Successor to CCI Insurance Company, Successor to Insurance Company of North America, and as Administrative Agent of Former Members of AFIA, including St. Paul Mercury Insurance Company); Ace Property & Casualty Company (formerly known as Cigna Property & Casualty Company, formerly known as Aetna Insurance Company); Industrial Indemnity Company; Industrial Underwriters Insurance Company; Pacific Employers Insurance Company and Central National Insurance Company of Omaha by and through Cravens, Dargen and Company, Managing General Agent.

Richard W. Riley, of Duane Morris LLP, Wilmington, DE, Duane Morris LLP, Los Angeles, CA (Russell W. Roten, Peter B. Ackerman, and Jeff D. Kahane, of counsel), Mitchell L. Lathrop, and Bridget K. Moorhead, of Duane Morris LLP, San Diego, CA, for Appellants, Republic Indemnity Company and Transport Insurance Company (formerly known as Transport Indemnity Company).

Joanne B. Wills, and Jennifer L. Scoliard, of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Wilmington, DE, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C. (Duane D. Morse, and James R. Wrathall, of counsel), for Appellant, First State Insurance Company; Hartford Accident and Indemnity Company; New England Reinsurance Company and Nutmeg Insurance Company.

Laurie Schenker Polleck, of Jaspan Schlesinger Hoffman LLP, Wilmington, De, Zeichner Ellman & Krause LLP, New York, Ny (Michael S. Davis, and Jantra Van Roy, of counsel) for Appellants MU Insurance Company; Granite State Insurance Company; Insurance Company of the State of Pennsylvania; Landmark Insurance Company; Lexington Insurance Company; National Union Fire Insurance Company of Pittsburgh, Pa. and New Hampshire Insurance Company.

Daniel K. Hogan, of the Hogan Firm, Wilmington, DE, Stutzman, Bromberg, Esserman & Plifka, P.C. (Sander L. Esserman, Steven A. Felsenthal, and Peter C. D'Apice, of counsel), for Future Silica Claimants' Representative.

Daniel DeFranchesci, and Kimberly Newmarch, of Richards, Layton & Finger, Wilmington, DE, Jones Day, Dallas, TX (Gregory Gordon, and Daniel Winikka, of counsel), for Reorganizing Debtors and Reorganizing Debtors-In-Possession.

William Bowden, and Gregory Taylor, of Ashby & Geddes, Wilmington, DE, Akin Gump Strauss Hauer & Feld, New York, NY (Lisa Beckerman, of counsel), Brian Kilmer, of Akin Gump Strauss Hauer & Feld, Dallas, TX, for the Official Committee of Unsecured Creditors, of counsel.

Marla Eskin, and Mark Hurford, of Campbell & Levine, Wilmington, DE, Caplin & Drysdale, New York, NY (Elihu Inselbuch, of counsel), Peter Van N. Lockwood, of Caplin & Drysdale, Washington, D.C., for Official Committee of Asbestos Claimants.

James Patton, Jr., Edwin Harron, and Sharon Zieg, of Young Conaway Stargatt & Taylor, Wilmington, DE, Counsel to Martin J. Murphy, the Legal Representative for Future Asbestos Claimants.

Laurie Polleck, of Jaspan Schlesinger Hoffman, Wilmington, DE, Orrick, Herrington & Sutcliffe, San Francisco, CA (Frederick Holden, of counsel), for the Official Committee of Retired Salaried Employees.

MEMORANDUM OPINION

FARNAN, District Judge.

Pending before the Court is an appeal from and a request for de novo review by Certain Insurers¹ of the Bankruptcy Court's Order Confirming the Second Amended Joint Plan of Reorganization of Kaiser Aluminum Corporation, Kaiser Aluminum & Chemical Corporation and Certain of their Debtor Affiliates, as Modified (the "Confirmation Order") (Bankr.Docket No. 8225) entered by the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on February 6, 2006, and the accompanying Findings of Fact and Conclusions of Law Regarding Confirmation of the Second Amended Joint Plan of Reorganization of Kaiser Aluminum Corporation, Kaiser Aluminum & Chemical Corporation and Certain of Their Debtor Affiliates, as Modified (Bankr.Docket No. 8226).² The Court held a hearing on the issues raised by the parties on May 11, 2006. For the reasons discussed, the Court will affirm the February 6, 2006 Confirmation Order and adopt the accompanying Findings of Fact and Conclusion of Law of the Bankruptcy Court.

I. PARTIES' CONTENTIONS

These consolidated appeals arise in connection with insurance policies issues by the Certain Insurers to the Reorganizing Debtors prior to the commencement of the Reorganizing Debtors' bankruptcy cases. Each of these policies contain a "no assignment" or "anti-assignment" clause which prohibits the Reorganizing Debtors from assigning their rights under the policies without the consent of the Certain Insurers. However, the Reorganizing Debtors' Second Amended Joint Plan of Reorganization (the "Plan") seeks to alter and/or avoid the anti-assignment provisions by (1) allowing the Reorganizing Debtors to assign their rights under the insurance policies to the Funding Vehicle Trust without the consent of the Certain Insurers, while still binding those Certain Insurers to their obligations under the policies, and (2) requiring the Bankruptcy Court and this Court to declare the assignments "valid and enforceable."

Collectively, the Certain Insurers have filed three Opening Briefs in this action raising two issues for the Court's consideration: (1) whether the Bankruptcy Court had jurisdiction to determine whether rights to receive insurance proceeds could be assigned; and (2) whether the Bankruptcy Court erred in concluding that Section 1123(a)(5) of the Bankruptcy Code preempts the contractual rights of the Certain Insurers under California law.

A. Subject Matter Jurisdiction

With regard to the threshold question of jurisdiction, several of the Certain Insurers maintain that the Bankruptcy Court lacked subject matter jurisdiction to permit the assignment of the Reorganizing Debtors' rights to receive insurance proceeds under the policies. The Certain Insurers contend that the structure of the Plan prevents the Reorganizing Debtors, who are the policyholders, from ever being liable for the personal injury claims, and the Plan assigns all liability for the personal injury claims to the Funding Vehicle Trust. Because -the Debtors will never have any liability under the Plan, the Certain Insurers contend that they will never have any rights to the insurance proceeds. Stated another way, the Certain Insurers contend that under California law, the policyholders must be liable for the claims in order for them to have the right to receive insurance proceeds. If the Debtors have no right to receive the insurance proceeds, the Certain Insurers contend that there is no property of the estate flowing from the insurance policies, and therefore, the Bankruptcy Court lacked in rem jurisdiction to consider the assignment question.

In response to the jurisdiction issues raised by the Certain Insurers, the Reorganizing Debtors contend that the Third Circuit has expressly recognized that insurance policies are property of the estate, and the fact that certain predicates, like the adjudication of liability have not yet occurred, does not mean that the right to receive payment, although contingent, is not property of the estate under Section 541.

B. Preemption Of California Law By The Bankruptcy Code

As for the question of preemption, the Certain Insurers contend that the circumstances under which Section 1123(a) of Bankruptcy Code can preempt state law are narrow and pertain only to laws "relating to the financial condition" of the Reorganizing Debtors. The Certain Insurers contend that Congress has left the determination of property rights to state law, and therefore Section 1123 does not provide a basis for preemption. In support of their argument, the Certain Insurers also rely on the decision of the Court of Appeals for the Ninth Circuit in Pacific Gas & Electric Co. v. California, 350 F.3d 932, 934-935 (9th Cir.2003).

The Certain Insurers also contend that the Bankruptcy Court erred in relying upon Section 1123(a)(5) of the Bankruptcy Code, because the transfer of estate property is only authorized by Section 363(1). However, Section 363(1) does not contain any provisions that override the contractual rights of the Certain Insurers to withhold their consent to an assignment. According to the Certain Insurers, Section 363 only preempts contracts or legal rights that are "conditioned on the insolvency or financial condition of the debtor." Because the anti-assignment clauses of the insurance policies are not triggered by the Reorganizing Debtors' insolvency or financial condition, the Certain Insurers contend that Section 363 does not provide for their assignment.

In addition, the Certain Insurers contend that modification of the insurance policies is not permitted under Section 365 of the Bankruptcy Code, because Section 365 of the Bankruptcy Code only authorizes the...