Third Circuit Affirms Bankrupt Asbestos Defendants’ Transfer of Insurance Recovery Rights to Personal Injury Trusts Notwithstanding Insurance Policies’ Anti-Assignment Provisions

The U.S. Court of Appeals for the Third Circuit, in its May 1, 2012, decision in In re: Federal-Mogul Global, Inc. held that asbestos defendants who file Chapter 11 petitions and seek to resolve their asbestos-related liabilities through the creation of a personal injury trust under Section 524(g) of the Bankruptcy Code may transfer their rights under their liability insurance policies to the trust notwithstanding the policies’ anti-assignment provisions.

Section 524(g) is unique to the asbestos context and permits a debtor, through a confirmed plan of reorganization, to consolidate and channel all of its asbestos-related assets and liabilities into a single personal injury trust for the benefit of present and future asbestos claimants. Under Federal-Mogul’s approved plan of reorganization, a Section 524(g) trust was created and Federal-Mogul’s rights to recovery under its insurance policies were assigned to the trust subject to all available coverage defenses, excepting only the defense that the transfer to the trust violated the policies’ anti-assignment provisions. In rejecting various insurers’ objections that the assignment to the trust of the debtor’s insurance rights violated the policies’ anti-assignment provisions, the Court held that the plain language of Section 1123(a)(5)(B) of the Bankruptcy Code, which permits the transfer of estate property to the trust “notwithstanding any otherwise applicable nonbankruptcy law,” expressly preempts the insurers’ state law contract rights under the policies’ anti-assignment provisions.

In its ruling, the Court rejected the insurers’ arguments for a narrow reading of Section 1123(a) which would prevent preemption of their private contact rights. While noting that the preemptive effect of Section 1123(a) is not unlimited, the Court found that the anti-assignment provisions at issue do not implicate state laws concerned with protecting public health, safety and welfare and preemption in this context furthers the fresh start purposes of the Bankruptcy Code as well as Congress’s intent in enacting Section 524(g) both to alleviate a debtor’s oppressive asbestos liability and maximize trust assets to pay asbestos claimants.

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