Federal-Mogul Global : A Victory For Bankruptcy Asbestos Trusts

Affirming the bankruptcy and district courts below, the Third Circuit Court of Appeals, in In re Federal-Mogul Global Inc., 684 F.3d 355 (3d Cir. 2012), held that a debtor could assign insurance policies to an asbestos trust established under section 524(g) of the Bankruptcy Code, notwithstanding anti-assignment provisions in the policies and applicable state law.

ASBESTOS TRUSTS IN BANKRUPTCY

One of the mechanisms available to a company seeking to address its asbestos liabilities is the creation of an "asbestos trust" by means of confirmation of a chapter 11 plan of reorganization. Asbestos trusts are an innovation of the 1982 bankruptcy case of Johns-Manville Corporation, which was once the largest producer of asbestos-containing products. In 1994, Congress seized on this innovation and enacted section 524(g) of the Bankruptcy Code, which established a statutory procedure for dealing with future personal-injury asbestos claims against a bankrupt company.

This procedure entails the creation of a trust to pay future claims and the issuance of an injunction to prevent future claimants from suing the debtor. All claims based upon asbestos-related injuries are channeled to the trust. The statute contains detailed requirements governing the nature and scope of any injunction issued under section 524(g) in connection with the confirmation of a chapter 11 plan under which a trust is established to deal with asbestos claims. Almost every section 524(g) trust is funded at least in part by the proceeds of insurance policies that the debtor has in effect to cover asbestos or other personal-injury claims. The debtor's plan of reorganization typically provides for an assignment of both the policies and their proceeds to the trust. Such an assignment, however, may violate the express terms of the policies or applicable nonbankruptcy law.

THE ESTATE, THE PLAN, AND PRE-EMPTION

Section 541 of the Bankruptcy Code provides that the filing of a bankruptcy case creates an estate. With some exceptions, the estate comprises all legal or equitable interests of the debtor in property as of the commencement of the case. Specifically included within this estate are all "[p]roceeds . . . from property of the estate" and "[a]ny interest in property that the estate acquires after commencement of the case." The majority of courts have concluded that a debtor's insurance policies (as well as policy proceeds) are property of the bankruptcy estate.

Section 1123 of the Bankruptcy Code provides that "[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . . provide adequate means for the plan's implementation, such as . . . [a] transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the...