Federal-Mogul Court Confirms That Bankruptcy Law Trumps Anti-Assignment Provisions In Insurance Policies

On May 1, 2012, the United States Court of Appeals for the Third Circuit in In re Federal–Mogul Global, Inc. confirmed that anti-assignment provisions in a debtor's insurance liability policies are preempted by the Bankruptcy Code to the extent they prohibit the transfer of a debtor's rights under such policies to a personal-injury trust pursuant to a chapter 11 plan. In re Federal-Mogul Global Inc., — F.3d —, 2012 WL 1511773 (3d Cir. 2012). In so holding, the Third Circuit follows its prior dicta as well as the precedent of its sister circuits, and provides its most definitive ruling on the issue to date.

Preemption of Anti-Assignment Provisions

It is a well-established principle that the Supremacy Clause of the Constitution invalidates state laws that "interfere with, or are contrary to, federal law." State law may be preempted "by express language in a congressional enactment, by implication from the depth and breadth of a congressional scheme that occupies the legislative field, or by implication because of conflict with a congressional enactment." Pursuant to this precedent, the Fourth and Ninth Circuit Courts of Appeals have held that section 1123(a)(5)(B) of the Bankruptcy Code preempts anti-assignment provisions in insurance policies that prohibit a debtor from assigning its rights under such policies to third-parties pursuant to a chapter 11 plan. See Pac. Gas & Elec. Co. v. Cal. ex rel. Cal. Dep't of Toxic Substances Control, 350 F.3d 932, 946 (9th Cir. 2003); In re FCX, Inc., 853 F.2d 1149, 1154-55 (4th Cir. 1988).

Section 1123(a)(5)(B) provides that "[n]otwithstanding any otherwise applicable nonbankrutpcy law, a plan shall . . . provide adequate means for the plan's implementation, such as . . . transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan." The congressional intent behind a "notwithstanding" clause, which prefaces numerous sections in the Bankruptcy Code, has been interpreted as express preemption. Other support for preemption of anti-assignment provisions comes from section 541(c)(1) of the Bankruptcy Code, which provides that "an interest of the debtor in property becomes property of the estate . . . notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law — (A) that restricts or conditions the transfer of such interest by the debtor."

The Third Circuit has addressed this issue...