Third Circuit Ruling Provides Bankruptcy Plans With Broad Preemption Rights

On May 1, 2012, the 3rd U.S. Circuit Court of Appeals ruled on an issue that is of particular importance to insurers, but it may also have wider application to the crafting of plans of reorganization in the asbestos arena and elsewhere. Specifically, the court held that debtor Federal-Mogul could transfer its rights to recover under liability insurance policies to a trust set up under its plan of reorganization for the benefit of asbestos victims, even though the policies contained provisions prohibiting their assignment. In re Federal-Mogul Global Inc., No. 09-2230, 2012 WL 1511773 (3d Cir. 2012).

The 3rd Circuit based its ruling on the preemption language contained in Section 1123(a) of the federal Bankruptcy Code, which provides for the implementa-tion of a plan of reorganization, including by the transfer of property to a non-debtor, "[n]otwithstanding any otherwise applicable non-bankruptcy law." The court dismissed the attempts made by insurer appellants to limit the effects of the preemptive language on the basis of theories of statutory construction and appeals to legislative history.

The circuit court's decision in Federal-Mogul put to rest a dispute relating to a critical component of a plan of reorganization that was confirmed four and a half years ago in a case that was, by then, already six years old. Although the long-awaited decision is narrow in focus, it establishes Section 1123(a) as broad in application.

BACKGROUND

The procedural and factual background of the Federal-Mogul decision is as follows:

The Federal-Mogul corporate group, dating back to 1899, is an original equipment and aftermarket automotive parts manufacturer and distributor. Today, it operates worldwide through 169 manufacturing, distribution and technical facilities with operations in 34 countries. In 2011, it had sales of $6.9 billion. See Federal-Mogul Corp. annual report pursuant to Section 13 and 15(d) (Form 10-K), at 12 (Feb. 28, 2012).

In 2001, however, Federal-Mogul faced significant asbestos-related litigation liability that resulted from the manufacture of asbestos and asbestos-related products at subsidiaries acquired in 1965 and 1998. Federal-Mogul claimed that 500,000 personal injury claims were pending at that time, with many more anticipated in the future, and the corporation asserted that it had spent more than $350 million in the preceding year defending and indemnifying asbestos claims. Federal-Mogul, 2012 WL 1511773 at *4.

In an attempt to finally resolve its asbestos-related exposure, on Oct. 1, 2001, Federal-Mogul Global Inc and more than 150 affiliates filed Chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the District of Delaware.

In late 2007, after six years of bankruptcy court proceedings, including much negotiation on the resolution of asbestos-related claims and their treatment and multiple iterations, Federal-Mogul was finally able to present its fourth amended joint plan of reorganization (as modified) for confirmation.

A critical feature of the plan was that all asbestos personal injury and wrongful-death claims against Federal-Mogul and its affiliates under the plan were to be assumed by an asbestos trust created pursuant to Section 524(g) of the Bankruptcy Code1 and that the reorganized Federal-Mogul would be relieved of that responsibility. Critically, the asbestos trust was to be funded by, among other things, an assignment of the rights to...