THE PREEMPTION OF CONTRACTUAL ANTI- … · SURVEY OF CASES FROM FCX TO ... 2 Issues surrounding the enforceability of anti ... By virtue of the Supremacy Clause of the United States

THE PREEMPTION OF CONTRACTUAL ANTI-ASSIGNMENT PROVISIONS IN BANKRUPTCY: ASURVEY OF CASES FROM FCX TO FEDERAL-MOGUL

Kenneth Pasquale, Elizabeth Taveras, and Jonathan Can�eld*

Introduction

The law does not typically restrict assignment of contract rightsunless the assignment would, among other things, materiallychange the duties of the contractual parties, reduce the value ofthe contract, or is otherwise forbidden by law or public policy.1 Toprotect against an undesired assignment, a contract may containa “no assignment” or “anti-assignment” clause. Some anti-assignment clauses broadly prohibit the right to assign, whileothers prohibit assignment without the a�rmative consent of theother contracting party. The enforceability of anti-assignmentprovisions in the bankruptcy context has been the subject ofnumerous decisions, commonly arising in the context of asbestoslitigation when a debtor seeks to assign its insurance policies (orthe proceeds of such policies) to a post-con�rmation trust createdpursuant to 11 U.S.C.A. § 524(g).2 In these circumstances, insur-ers often argue that anti-assignment provisions contained withinthe policies prevent their assignment to the section 524(g) trust.

In its decision in In re Fed.-Mogul Global, Inc.,3 the Court ofAppeals for the Third Circuit provided a detailed analysis of the

*Mr. Pasquale is a partner and Ms. Taveras and Mr. Can�eld are associ-ates in the Financial Restructuring practice group of Stroock & Stroock &Lavan LLP.

1See Restatement (Second) of Contracts § 317 (1981).

2Issues surrounding the enforceability of anti-assignment provisions in

the bankruptcy context have also arisen in connection with the assumption andassignment of executory contracts, which is governed by section 365 of theBankruptcy Code. The enforceability of anti-assignment clauses in connectionwith contract assumption and rejection is beyond the scope of this article.

3This article discusses three Fed.-Mogul decisions at length: In re Federal-

Mogul Global Inc., 385 B.R. 560, 49 Bankr. Ct. Dec. (CRR) 201 (Bankr. D. Del.2008), a�'d, 402 B.R. 625 (D. Del. 2009), judgment a�'d, 684 F.3d 355, 56 Bankr.Ct. Dec. (CRR) 112 (3d Cir. 2012) (“Federal-Mogul I”); In re Federal-MogulGlobal, 402 B.R. 625 (D. Del. 2009), judgment a�'d, 684 F.3d 355, 56 Bankr. Ct.

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anti-assignment issue in the context of an asbestos bankruptcycase. Part I of this article will discuss the doctrine of preemptionupon which the Federal-Mogul decision is premised. Part II ofthis article will survey the line of cases that have evaluatedwhether anti-assignment provisions are preempted by the Bank-ruptcy Code in situations where the debtor seeks to assign insur-ance policies to a section 524(g) trust. Lastly, Part III of thisarticle will focus directly upon the Third Circuit's ruling inFederal-Mogul III and, in particular, the court's discussion of thepreemptive reach of section 1123 of the Bankruptcy Code.

Part I: The Doctrine of PreemptionBy virtue of the Supremacy Clause of the United States Consti-

tution, federal law supersedes state laws that “interfere with, orare contrary to, federal law.”4 The essence of the SupremacyClause is to ensure the removal of all obstacles in the operationof federal law and the doctrine of preemption is used to determinewhether federal law has preempted state law.5 Under the doc-trine of preemption, federal law can preempt state law in in-stances when there is (i) express preemption, (ii) “�eld” preemp-tion, or (iii) con�ict preemption.6 Express preemption occurs whenthe express language of a congressional enactment declares itsintent to displace state law. In the absence of express preemptivelanguage in a statute, preemption may be inferred when the“federal interest is so dominant that the federal system will beassumed to preclude enforcement of state laws on the same

Dec. (CRR) 112 (3d Cir. 2012) (“Federal-Mogul II”); and In re Federal-MogulGlobal Inc., 684 F.3d 355, 56 Bankr. Ct. Dec. (CRR) 112 (3d Cir. 2012) (“Federal-Mogul III”).

4Hillsborough County, Fla. v. Automated Medical Laboratories, Inc., 471

U.S. 707, 712, 105 S. Ct. 2371, 85 L. Ed. 2d 714 (1985) (quoting Gibbons v.Ogden, 22 U.S. 1, 211, 6 L. Ed. 23, 1824 WL 2697 (1824)) (internal quotationmarks omitted); see also Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 540, 121S. Ct. 2404, 150 L. Ed. 2d 532, 29 Media L. Rep. (BNA) 2121 (2001) (“Article VI,cl. 2, of the United States Constitution commands that the laws of the UnitedStates ‘shall be the Supreme Law of the Land; . . . any Thing in the Constitu-tion or Laws of any State to the Contrary notwithstanding.’ ”).

5See M'Culloch v. State, 17 U.S. 316, 427, 4 L. Ed. 579, 42 Cont. Cas. Fed.

(CCH) P 77296, 4 A.F.T.R. (P-H) P 4491, 1819 WL 2135 (1819) (“It is of the veryessence of supremacy, to remove all obstacles to its action within its own sphere,and so to modify every power vested in subordinate governments . . .”).

6Farina v. Nokia Inc., 625 F.3d 97, 115 (3d Cir. 2010), cert. denied, 132 S.

Ct. 365, 181 L. Ed. 2d 231 (2011) (citing Hillsborough, 471 U.S. at 713).

Norton Annual Survey of Bankruptcy Law, 2013 Edition

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subject.”7 This concept is recognized as “�eld” preemption. Indeed,�eld preemption may be inferred when “the scheme of federalregulation is su�ciently comprehensive to make reasonable theinference that Congress left no room for supplementary stateregulation.”8 Even where federal law does not completely displacestate law, con�ict preemption will operate to invalidate state lawinsofar as such law presents an actual con�ict with federal law.9

Such a con�ict may arise either when compliance with both stateand federal law is impossible, or when state law creates an obsta-cle to the “accomplishment and execution of the full purposes andobjectives of Congress.”10 Federal regulations have the samepreemptive e�ect as congressional statutes.11

Courts are guided by two well-established principles in analyz-ing preemption. First, congressional intent is the “ultimate touch-stone”12 and the preemption analysis will rely on a “fair under-standing of congressional purpose.”13 Such purpose will primarilybe discerned from the “language of the preemption statute andthe statutory framework surrounding it.”14 In addition to the textof the statute, courts consider the structure and purpose of thestatute as a whole, as revealed through “the reviewing court's

7Farina, 625 F.3d at 115 (quoting Hillsborough, 471 U.S. at 713).

8Hillsborough, 471 U.S. at 713 (quoting Rice v. Santa Fe Elevator Corp.,

331 U.S. 218, 230, 67 S. Ct. 1146, 91 L. Ed. 1447 (1947)) (internal quotationmarks omitted).

9See Hillsborough, 471 U.S. at 713; see also Savage v. Jones, 225 U.S. 501,

533, 32 S. Ct. 715, 56 L. Ed. 1182 (1912) (“[W]hen the question is whether aFederal act overrides a state law, the entire scheme of the statute must, ofcourse, be considered, and that which needs must be implied is of no less forcethan that which is expressed. If the purpose of the act cannot otherwise be ac-complished—if its operation within its chosen �eld else must be frustrated andits provisions be refused their natural e�ect—the state law must yield to theregulation of Congress within the sphere of its delegated power.”).

10Hillsborough, 471 U.S. at 713; see also Farina, 625 F.3d at 115.

11Farina, 625 F.3d at 115.

12Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112 S. Ct. 2608, 120

L. Ed. 2d 407, Prod. Liab. Rep. (CCH) P 13199, 17 U.C.C. Rep. Serv. 2d 1087(1992); Gade v. National Solid Wastes Management Ass'n, 505 U.S. 88, 96, 112S. Ct. 2374, 120 L. Ed. 2d 73, 15 O.S.H. Cas. (BNA) 1673, 1992 O.S.H. Dec.(CCH) P 29709, 22 Envtl. L. Rep. 21073 (1992).

13Medtronic, Inc. v. Lohr, 518 U.S. 470, 485–86, 116 S. Ct. 2240, 135 L. Ed.

2d 700, Prod. Liab. Rep. (CCH) P 14634, 29 U.C.C. Rep. Serv. 2d 1077 (1996)(quoting Cipollone, 505 U.S. at 529 n.27).

14See Medtronic, 518 U.S. at 486 (quoting Gade, 505 U.S. at 111) (internal

quotation marks omitted); see also In re Federal-Mogul Global Inc., 684 F.3d355, 365, 56 Bankr. Ct. Dec. (CRR) 112 (3d Cir. 2012).

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Bankruptcy: A Survey of Cases from FCX to Federal-Mogul

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reasoned understanding of the way in which Congress intendedthe statute and its surrounding regulatory scheme to a�ect busi-ness, consumers, and the law.”15

Second is the assumption that Congress does not intend todisplace state law.16 This is often referred to as the “presumptionagainst preemption,” and is premised on the notion that, becausethe states are independent sovereigns in the federal system,Congress will “not cavalierly pre-empt state-law causes ofaction.”17 This presumption against preemption is applied withparticular force in �elds that are within the scope of the policepower of the state and is generally not applicable when stateregulation has traditionally been absent.18 The presumption maybe overcome when congressional intent to preempt is clear andmanifest.19

Part II: The Preemptive Power of Federal BankruptcyLaw

The doctrine of preemption is equally applicable in the bank-ruptcy context20 and depending on the text of the particular Bank-ruptcy Code section, a court may �nd any one of the three typesof preemption to be applicable.21 Indeed, cases concerningcontractual restrictions on assignment are generally centeredaround whether the Bankruptcy Code would preempt suchassignment. Although some cases involved the Bankruptcy Code'spreemption of state law restrictions on the assignability ofclaims,22 a line of cases has emerged speci�cally concerningwhether transfers of insurance policies are permissible in the

15Medtronic, 518 U.S. at 486; see also Farina, 625 F.3d at 115.

16Farina, 625 F.3d at 116.

17Medtronic, 518 U.S. at 485.

18See, e.g., Farina, 625 F.3d at 116.

19See, e.g., Federal Mogul III, 684 F.3d at 365; Savage v. Jones, 225 U.S.

501, 537, 32 S. Ct. 715, 56 L. Ed. 1182 (1912).20

See, e.g., Integrated Solutions, Inc. v. Service Support Specialties, Inc.,124 F.3d 487, 492–93, 31 Bankr. Ct. Dec. (CRR) 422, 38 Collier Bankr. Cas. 2d(MB) 805 (3d Cir. 1997).

21See, e.g., In re FCX, Inc., 853 F.2d 1149, 18 Bankr. Ct. Dec. (CRR) 342,

Bankr. L. Rep. (CCH) P 72396 (4th Cir. 1988) (�nding express preemption); Inre Congoleum Corp., 2008 WL 4186899 (Bankr. D. N.J. 2008) (�nding expresspreemption with respect to section 1123(a)(5) and con�ict preemption based onsection 524(g)); In re Thorpe Insulation Co., 677 F.3d 869, 67 Collier Bankr.Cas. 2d (MB) 437 (9th Cir. 2012) (�nding con�ict preemption).

22See, e.g., In re LandAmerica Financial Group, Inc., 470 B.R. 759, 779–80

(Bankr. E.D. Va. 2012) (holding that the trustee of the liquidating trust had


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face of contractual provisions restricting such transfers. To ad-dress this question, courts have determined whether, and to whatextent, the Bankruptcy Code preempts such contractual provi-sions or state law.

A. Universal Coops., Inc. v. FCX, Inc. (In re FCX, Inc.)23

An earlier case often cited for its discussion on the preemptivereach of the Bankruptcy Code, particularly that of section1123(a)(5), is FCX. The debtor in FCX was a member (or patron)of Universal Cooperatives, Inc. (“Universal”), a non-pro�t agricul-tural cooperative association. As a patron of Universal, the debtorreceived dividends in the form of “patronage certi�cates.” Suchcerti�cates served as collateral for any indebtedness of the debtorto Universal. At the time of �ling, the debtor had an outstandingdebt to Universal for certain purchases it had made and its pat-ronage certi�cates secured this outstanding debt.

By order of the bankruptcy court, the debtor was authorized torelease a portion of patronage certi�cates securing its indebted-ness to Universal in full satisfaction of Universal's claim. Univer-sal appealed the order, asserting that such release was incontravention of the restrictions on redemption found in Unive-rsal's by-laws.24 The debtor argued that section 1123(a)(5)(D)25 ofthe Bankruptcy Code would override any restrictive provisions of

standing to pursue the debtors' causes of action against their directors and of-�cers assigned to the trust, notwithstanding Virginia law that would otherwiserestrict the assignability of those claims to such trust).

23In re FCX, Inc., 853 F.2d 1149, 18 Bankr. Ct. Dec. (CRR) 342, Bankr. L.

Rep. (CCH) P 72396 (4th Cir. 1988) (“FCX”).24

See FCX, 853 F.2d. at 1151–53.25

Section 1123(a) of the Bankruptcy Code provides: “(a) Notwithstandingany otherwise applicable nonbankruptcy law, a plan shall— . . . (5) provide ad-equate means for the plan's implementation, such as—(A) retention by thedebtor of all or any part of the property of the estate; (B) transfer of all or anypart of the property of the estate to one or more entities, whether organizedbefore or after the con�rmation of such plan; (C) merger or consolidation of thedebtor with one or more persons; (D) sale of all or any part of the property ofthe estate, either subject to or free of any lien, or the distribution of all or anypart of the property of the estate among those having an interest in such prop-erty of the estate; (E) satisfaction or modi�cation of any lien; (F) cancellation ormodi�cation of any indenture or similar instrument; (G) curing or waiving ofany default; (H) extension of a maturity date or a change in an interest rate orother term of outstanding securities; (I) amendment of the debtor's charter; or(J) issuance of securities of the debtor, or of any entity referred to insubparagraph (B) or (C) of this paragraph, for cash, for property, for existing se-curities, or in exchange for claims or interests, or for any other appropriatepurpose . . .” 11 U.S.C.A. § 1123(a)(5) (2012).



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Universal's by-laws, and therefore preempted the by-laws' re-striction on the debtor's redemption of the patronage certi�cates.26

The Court of Appeals for the Fourth Circuit cited to the languageof section 1123(a) and held that, by its plain language“§ 1123(a)(5)(D) overrides nonbankruptcy law restrictions on thedistribution of collateral to satisfy a claim . . .”27 In so �nding,the FCX court distinguished In re Schauer,28 which held thatstate law restrictions on the transfer of the patronage certi�cateswere not preempted by the Bankruptcy Code. The FCX court �rstnoted that the trustee in Schauer did not rely on section1123(a)(5)(D), but instead argued that sections 363(b)(1) and 704of the Bankruptcy Code had provided the requisite authority tosell the patronage certi�cates without the issuer's approval asrequired by the by-laws.29 Second, the FCX court observed thatsection 1123(a)(5)(D) is substantively di�erent from sections 363and 704 because sections 363 and 704 are “enabling statutes thatgive the trustee authority to sell or dispose of property if thedebtor would have had the same right under state law.”30

Conversely, the court noted, section 1123(a)(5) is an empoweringstatute and the alternatives set forth therein are self-executing.31

The FCX court found that section 1123(a)(5)(D) “enlarges thescope of [the debtor's pre-bankruptcy] rights, thus enhancing theability of a trustee or debtor in possession to deal with propertyof the estate.”32 The FCX court therefore held that section1123(a)(5)(D) “supersedes the discretionary power over surrenderof the patronage certi�cates bestowed on [the creditor-appellant]. . . by its by-laws.”33 The decision in FCX established that sec-

26FCX, 853 F.2d at 1154.

27FCX, 853 F.2d at 1154.

28In re Schauer, 62 B.R. 526, 15 Collier Bankr. Cas. 2d (MB) 191 (Bankr.

D. Minn. 1986).29

FCX, 853 F.2d at 1154–55.30

FCX, 853 F.2d at 1155 (quoting Schauer, 835 F.2d at 1225) (internal cita-tions omitted).

31FCX, 853 F.2d at 1155 (citing 5 Collier on Bankruptcy ¶ 1123.01 and

explaining that “[s]ection 1123(a)(5)(D) then does not simply provide a means toexercise the debtor's pre-bankruptcy rights . . .”).

32FCX, 853 F.2d at 1155.

33FCX, 853 F.2d at 1154.


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tion 1123(a), by its plain language, preempts any con�icting non-bankruptcy law.34

B. Pac. Gas & Elec. Co. v. California35

The Ninth Circuit, in Paci�c, challenged the notion that sec-tion 1123(a)(5) had broad preemptive powers.36 In Paci�c, theNinth Circuit determined the extent to which a reorganizationplan proposed by the debtor and its corporate parent under sec-tion 1123(a)(5) would preempt otherwise applicable nonbank-ruptcy law.

The plan proponents argued that section 1123(a) wouldpreempt any otherwise applicable nonbankruptcy law that mightbe contrary to its provisions and asserted that a plan may containprovisions that might otherwise be impermissible under non-bankruptcy law.37 The plan proponents, relying on a broad inter-pretation of section 1123(a)'s preemptive power, thus soughtcon�rmation of their plan despite the plan's express violation ofnumerous state and local laws and regulations. In response, theCalifornia Public Utility Commission, the State of California, theCity and County of San Francisco and the California HydropowerReform Coalition objected to con�rmation of the plan, arguingthat the con�icting state and local laws were not preempted bysection 1123(a)(5).38

34See FCX, 853 F.2d at 1154. The FCX court noted that it did not

understand the amendment to section 1123 (adding the phrase “[n]otwithstand-ing any otherwise applicable nonbanktupcy law”) to be a substantive changeand cited to 124 Cong. Rec. 34,005 (1978), which explained that “under1123(a)(5), ‘[i]f the plan is con�rmed, then any action proposed in the plan maybe taken notwithstanding any otherwise applicable nonbakruptcy law . . .’ ”FCX, 853 F.2d at 1154 n.7 (quoting 124 Cong. Rec. 34,005 (1978)).

35Paci�c Gas and Elec. Co. v. California ex rel. California Dept of Toxic

Substances Control, 350 F.3d 932, 42 Bankr. Ct. Dec. (CRR) 46, 51 CollierBankr. Cas. 2d (MB) 445, Bankr. L. Rep. (CCH) P 80007 (9th Cir. 2003), asamended, (Dec. 9, 2003) (“Paci�c”).

36Although the Paci�c decision did not consider anti-assignment issues, it

is routinely cited by insurers seeking to limit the preemptive scope of section1123(a) of the Bankruptcy Code and thereby enforce in bankruptcy the anti-assignment provisions contained in their policies.

37Paci�c, 350 F.3d at 935.

38Paci�c, 350 F.3d at 936–37. The United States appeared as an amicus

and also objected to the plan, arguing that its implementation could displaceother federal law. Paci�c, 350 F.3d at 937.



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The bankruptcy court, rejecting the plan proponents' “across-the-board, take-no-prisoners preemption strategy,”39 held “thereis no express preemption of non-bankruptcy law that permits awholesale unconditional pre-emption of numerous state laws. . .”40 On appeal, the district court reversed the bankruptcycourt's holding on the issue of express preemption and found thatsection 1123(a) expressly preempted nonbankruptcy laws.41 TheNinth Circuit agreed with the district court's decision in partonly, holding that a reorganization plan proposed under section1123(a)(5) of the Bankruptcy Code expressly preempts otherwiseapplicable non-bankruptcy laws, but only to a limited extent.42 Inthe court's view, section 1142(a)43 of the Bankruptcy Code, whichgoverns the implementation of a con�rmed plan of reorganiza-tion, de�nes the preemptive scope of a reorganization plan.44

Therefore, the court reasoned, the preemptive scope of the“notwithstanding” clause of section 1123(a) could not exceed thatof the “notwithstanding” clause of section 1142(a), which limitspreemption to “otherwise applicable nonbankruptcy laws ‘relat-ing to �nancial condition.’ ”45 Such limitation, the Ninth Circuitconcluded, was warranted because the overall structure of theBankruptcy Code, congressional purpose and the legislative his-

39Paci�c, 350 F.3d at 937.

40Paci�c, 350 F.3d at 937. The bankruptcy court concluded that some non-

bankruptcy laws might be preempted by the plan under section 1123(a)(5), butthe court reserved any ruling on preemption until the debtor produced a planthat did not rely so heavily on the “broad express preemption” asserted in theoriginal plan. Paci�c, 350 F.3d at 937.

41Paci�c, 350 F.3d at 937. The court noted that the district court relied on

In re Public Service Co. of New Hampshire, 108 B.R. 854, 19 Bankr. Ct. Dec.(CRR) 1902, 110 Pub. Util. Rep. 4th (PUR) 259 (Bankr. D. N.H. 1989), vacatedas moot, (June 28, 1991) when it held that “all nonbankruptcy laws otherwiseapplicable to the restructuring transactions necessary to an e�ective andfeasible reorganization are expressly preempted.” Paci�c, 350 F.3d at 937.(internal quotation marks omitted).

42See Paci�c, 350 F.3d at 934–35.

43Speci�cally, section 1142(a) provides that “[n]otwithstanding any

otherwise applicable nonbankruptcy law, rule, or regulation relating to �nancialcondition, the debtor and any entity organized or to be organized for the purposeof carrying out the plan shall carry out the plan and shall comply with anyorders of the court.” 11 U.S.C.A. § 1142(a) (2012).

44See Paci�c, 350 F.3d at 937.

45See Paci�c, 350 F.3d at 934–35 (emphasis added).


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tory of sections 1123 and 1142 con�rmed that these two sectionsshould be read together.46

Finding that sections 1123 and 1142 were intended to becoextensive, the Ninth Circuit explained that these sections wereconcurrently enacted in 1978 and that both directly concernedthe contents and implementation of a reorganization plan.47 Thecourt observed that as enacted in 1978, section 1123 did notcontain a “notwithstanding” clause while section 1142 did,thereby de�ning the preemptive e�ect of a con�rmed plan to belimited to the laws relating to �nancial condition. Thus, the courtconsidered the subsequent 1984 amendment to section 1123, add-ing the “notwithstanding” clause, as being “purely technical,”48

and for this reason found that the modi�cation was not intendedto change the preemptive scope of a con�rmable plan set forth insection 1142.49 Indeed, the court presumed that such an importantchange would not have been made to the Bankruptcy Codewithout a clear indication of such intent.50

In further support of this interpretation, the Ninth Circuitindicated that the legislative history of these Bankruptcy Codesections suggests that the sections should be read in “a parallelor complimentary manner,” particularly emphasizing that paral-lel word changes were made to both sections when they wereamended in 1984.51 The court also relied upon the �oor statementof Senator DeConcini leading up to the 1978 enactment in whichhe “explicitly linked the prescribed contents of a con�rmable planunder § 1123(a) and the preemptive e�ect of a con�rmed plan

46Paci�c, 350 F.3d at 942 (“[W]e do not agree that [the ‘notwithstanding’

clauses of §§ 1123(a)(5) and 1142(a)] can be read independently. Rather, we holdthat the clauses must be read together, and that the express preemption of§ 1123(a)(5) is limited to otherwise applicable nonbankruptcy laws ‘relating to�nancial condition,’ as speci�ed in § 1142(a).”).

47Paci�c, 350 F.3d at 947 (noting that section 1123 speci�es what a plan

must do, including, provide for adequate implementation of the plan, while sec-tion 1142 speci�es the duties of the entity responsible for implementation of theplan).

48Paci�c, 350 F.3d at 947.

49See Paci�c, 350 F.3d at 947 (“When the 1984 amendments to the Bank-

ruptcy Code were adopted, there was absolutely no indication that those amend-ments were intended by Congress to make any important changes to the 1978[Bankruptcy] Code.”).

50See Paci�c, 350 F.3d at 947 (“Our conclusion is based not only on the

presumption that Congress would not have made an important change in the[Bankruptcy] Code without clearly indicating its intent to do so.”).




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under § 1142(a).”52 Additionally, the court found it logical thatthe preemptive scope of what must be included in the plan,governed by section 1123, mirror the express preemptive scope ofwhat is in fact included in the plan, as speci�ed in section 1142.53

It also found it logical for these two sections to preempt laws re-lating to �nancial condition.54 The court therefore more narrowlyinterpreted section 1123(a)'s preemptive power, holding that “thescope of preemption under the ‘notwithstanding’ clause of§ 1123(a) is the same as under the ‘notwithstanding clause’ of§ 1142(a), and that otherwise applicable nonbankruptcy laws ‘re-lating to �nancial condition’ are expressly preempted under both§§ 1123(a) and 1142(a).”55 Following the Ninth Circuit's decisionin Paci�c, however, a number of courts have distinguished itsholding and found section 1123 to have a more expansive preemp-tive power.

C. In re The Babcock & Wilcox Co.56

Babcock was among the �rst cases to discuss the assignment ofinsurance policies to an asbestos trust formed under section524(g) of the Bankruptcy Code. In Babcock, the bankruptcy courtexamined the debtor's reorganization plan, which (among otherthings) called for the assignment of the debtor's insurance rightsto an asbestos personal injury trust. Various insurers objected tothe plan, arguing that a plan may not alter provisions of insur-

52Paci�c, 350 F.3d at 947; see also Paci�c, 350 F.3d at 941–42 (“Section

1123 of the House amendment represents a compromise between similar provi-sions in the House bill and Senate amendment. The section has been clari�ed toclearly indicate that both secured and unsecured claims, or either of them, maybe impaired in a case under title 11. Moreover, section 1123(a)(1) has beensubstantively modi�ed to permit classi�cation of certain kinds of priority claims.This is important for purposes of con�rmation under section 1129(a)(9).

“Section 1123(a)(5) of the House amendment is derived from a similarprovision in the House bill and Senate amendment but deletes the languagepertaining to ‘fair upset price’ as an unnecessary restriction. Section 1123 isalso intended to indicate that a plan may provide for any action speci�ed in sec-tion 1123 in the case of a corporation without a resolution of the board of direc-tors. If the plan is con�rmed, then any action proposed in the plan may betaken notwithstanding any otherwise applicable nonbankruptcy law in accor-dance with section 1142(a) of title 11.”).


54Paci�c, 350 F.3d at 947–48 (“It also makes perfect sense that the express

preemptive scope of what must be in a con�rmable and con�rmed plan would belaws ‘relating to �nancial condition.’ ”).

55Paci�c, 350 F.3d at 949.

56In re Babcock & Wilcox Co., 2004 WL 4945985 (Bankr. E.D. La. 2004),

order vacated, 2005 WL 4982364 (E.D. La. 2005).


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ance policies, including the anti-assignment provisions.57 TheBabcock court found that the plan contemplated the assignmentof insurance rights to the trusts—including the right to receiveinsurance proceeds from various policies and settlement agree-ments—and not the transfer of the policies themselves.58 More-over, the court reasoned that an anti-assignment provision isonly e�ective as to assignments that occur prior to the eventsgiving rise to an insurer's liability because anti-assignment pro-visions in insurance contracts are designed to shield insurersfrom the increased risk that may result from a change in theinsured.59 Accordingly, the court held that the plan did not violatethe fundamental purpose of the anti-assignment clauses in theunderlying policies, because the assignment contemplated in theplan would not materially increase the insurers' risk or liability,given that the injuries giving rise to the insurers' liability (i.e.,the asbestos-related exposures and injuries relevant to asbestosclaims) had already occurred.60

Further, the Babcock court considered the plan proponents'argument that section 1123(a)(5) of the Bankruptcy Code wouldpreempt con�icting nonbankruptcy law, including the anti-assignment clause and other contractual provisions.61 The Bab-cock court addressed the seemingly con�icting directives of FCX

57In re Babcock & Wilcox Co., 2004 WL 4945985, *14 (Bankr. E.D. La.

2004), order vacated, 2005 WL 4982364 (E.D. La. 2005).58

In re Babcock & Wilcox Co., 2004 WL 4945985, *16 (Bankr. E.D. La.2004), order vacated, 2005 WL 4982364 (E.D. La. 2005).

59See In re Babcock & Wilcox Co., 2004 WL 4945985, *15–16 (Bankr. E.D.

La. 2004), order vacated, 2005 WL 4982364 (E.D. La. 2005). The Babcock courtfurther explained that such rationale is not applicable to the assignment of theright to proceed against an insurer after the loss, particularly because after aloss has occurred, the assignee stands in the shoes of the assignor and is subjectto all defenses against the original insured party. See In re Babcock & WilcoxCo., 2004 WL 4945985, *15 (Bankr. E.D. La. 2004), order vacated, 2005 WL4982364 (E.D. La. 2005). The Babcock court also commented that the loss isdeemed to occur at the time of the “insured-against accident” and not at thetime of judgment �xing the liability. In re Babcock & Wilcox Co., 2004 WL4945985, *15 (Bankr. E.D. La. 2004), order vacated, 2005 WL 4982364 (E.D. La.2005) (citing Ocean Acc. & Guarantee Corp. v. Southwestern Bell Tel. Co., 100F.2d 441, 447, 122 A.L.R. 133 (C.C.A. 8th Cir. 1939) (holding that the liabilityarose at the time of the accident and that the right to a chose in action underthe policy was assignable after the loss occurred despite an anti-assignmentclause)).

60See In re Babcock & Wilcox Co., 2004 WL 4945985, *16 (Bankr. E.D. La.

2004), order vacated, 2005 WL 4982364 (E.D. La. 2005).61

See In re Babcock & Wilcox Co., 2004 WL 4945985, *16 (Bankr. E.D. La.2004), order vacated, 2005 WL 4982364 (E.D. La. 2005).



239

and Paci�c in considering the preemptive power of section1123(a). The Babcock court held that “the weight of authority isin accord that § 1123(a)(5) preempts contrary state law orcontract provisions if such provisions are necessary to theimplementation of a plan.”62 Additionally, it recognized that Pa-ci�c was the sole instance in which section 1123(a)(5) wasconstrued narrowly to apply only to nonbankruptcy laws relatingto �nancial condition.63 The Babcock court noted that the NinthCircuit's construction of section 1123 read into the text of the sec-tion a requirement that is absent from the plain language of thestatute.64 Therefore, the Babcock court concluded that since the“notwithstanding” language appeared in the introductory portionsection 1123(a), it was applicable to all of its subsections. It ef-fectively rejected the Paci�c court's interpretation, observing thatsuch interpretation would create doubt and confusion with re-spect to certain subsections, and in certain circumstances, rendersuch subsections meaningless.65

62See In re Babcock & Wilcox Co., 2004 WL 4945985, *18 (Bankr. E.D. La.

2004), order vacated, 2005 WL 4982364 (E.D. La. 2005) (further noting that“[c]ases that have considered the issue have uniformly held that § 1123(a)(5)expressly preempts nonbankruptcy laws . . .”).


2004), order vacated, 2005 WL 4982364 (E.D. La. 2005) (noting that “[Paci�c] isthe only case to read the preemption [of section 1123(a)(5)] narrowly, to applyonly to nonbankruptcy laws relating to �nancial condition” and distinguishingthe holding in Paci�c on the basis that (i) Paci�c involved public utility regula-tion, as opposed to the implementation of injunctions pursuant to sections524(g) and 105(a) relating to asbestos and radiation injury claims, and (ii) pub-lic health and safety issues are not implicated by the preemption contemplatedin Babcock).


2004), order vacated, 2005 WL 4982364 (E.D. La. 2005). The court found thatsuch a reading of section 1123(a)(5) ignored the rules of statutory interpretationwhich require that “where a statute's language is plain, the function of thecourt is to enforce it in accordance with its terms and that a statute should beread to give e�ect to the whole, and not render super�uous any other portion ofthe same law.” In re Babcock & Wilcox Co., 2004 WL 4945985, *18 (Bankr. E.D.La. 2004), order vacated, 2005 WL 4982364 (E.D. La. 2005). (citing U.S. v. RonPair Enterprises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290, 18Bankr. Ct. Dec. (CRR) 1150, Bankr. L. Rep. (CCH) P 72575, 89-1 U.S. Tax Cas.(CCH) P 9179, 63 A.F.T.R.2d 89-652 (1989); Kawaauhau v. Geiger, 523 U.S. 57,118 S. Ct. 974, 140 L. Ed. 2d 90, 32 Bankr. Ct. Dec. (CRR) 240, 38 CollierBankr. Cas. 2d (MB) 1629, Bankr. L. Rep. (CCH) P 77643 (1998)).

65In re Babcock & Wilcox Co., 2004 WL 4945985 (Bankr. E.D. La. 2004),

order vacated, 2005 WL 4982364 (E.D. La. 2005).


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D. In re Combustion Eng'g, Inc.66

In Combustion, the Court of Appeals for the Third Circuitexamined the debtor's pre-packaged Chapter 11 reorganizationplan, to which a number of insurers objected. The centerpiece ofthe plan was a section 524(g) injunction to channel all of thecompany's asbestos claims to a post-con�rmation trust.67 In ad-dressing the insurers' standing, the Third Circuit considered theinsurers' objections to the plan's transfer of insurance proceeds tothe section 524(g) trust in contravention of the policies' anti-assignment provisions.68 Relying on sections 54169 and 1123 ofthe Bankruptcy Code, the Third Circuit agreed with the districtcourt's �nding that “even if the subject insurance policiespurported to prohibit assignment of [the debtor's] insuranceproceeds, these provisions would not prevent the assignment ofproceeds to the bankruptcy estate.”70 The court stated that “[s]ec-tion 541 e�ectively preempts any contractual provision thatpurports to limit or restrict the rights of a debtor to transfer orassigns [sic] its interests in bankruptcy . . . [t]he BankruptcyCode expressly contemplates the inclusion of debtor insurancepolicies in the bankruptcy estate. Section 1123(a)(5) provides:Notwithstanding any otherwise applicable nonbankruptcy law, aplan shall . . . (5) provide adequate means for the plan'simplementation, such as . . . (B) transfer of all or any part ofproperty of the estate to one or more entities, whether organizedbefore or after the con�rmation of such plan.”71 Ultimately, theThird Circuit found that section 541 prohibited restrictions on

66In re Combustion Engineering, Inc., 391 F.3d 190, 43 Bankr. Ct. Dec.

(CRR) 271, Bankr. L. Rep. (CCH) P 80206 (3d Cir. 2004), as amended, (Feb. 23,2005).

67Combustion, 391 F.3d at 201.

68See Combustion, 391 F.3d at 218. In the proceedings below, the insurers

argued that “the [p]lan impairs their rights under the anti-assignment provi-sions of the relevant insurance policies.” See Combustion, 391 F.3d at 208, 218.

69Section 541 of the Bankruptcy Code de�nes property of the estate and

speci�es what property becomes property of the estate. With respect to restric-tions on the transfer of a debtor's property, section 541(c)(1) provides that “[A]ninterest of the debtor in property becomes property of the estate . . .notwithstanding any provision in an agreement, transfer instrument, or ap-plicable nonbankruptcy law—(A) that restricts or conditions transfer of suchinterest by the debtor . . .” 11 U.S.C.A. § 541(c)(1) (2012).


71See Combustion, 391 F.3d at 219 n.27 (citing sections 541(c)(1) and

1123(a)(5)).



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the insurance policies of the debtor.72 Subsequently, the ThirdCircuit in Federal-Mogul III stated that its decision in Combus-tion set forth its conclusion that sections 541 and 1123 werepreemptive.73

E. In re Kaiser Aluminum Corp.74

The district court in Kaiser relied upon the Combustion deci-sion in holding that section 1123(a) preempted the anti-assignment clauses in the subject insurance policies. In Kaiser,the plan of reorganization sought (i) to allow the debtors to as-sign their rights in insurance policies to a section 524(g) trustwithout the insurers' consent, and (ii) a declaration from thecourt that the assignments would be valid and enforceable.75 Theinsurers, objecting to the plan, argued that section 1123(a) couldonly preempt state laws relating to the �nancial condition of thedebtors (as in Paci�c), and that the statute should not be read tohave broad preemptive power. The insurers argued that the bank-ruptcy court erred in relying on section 1123(a)(5) because thetransfer of estate property is only authorized in section 363(l)76 ofthe Bankruptcy Code, and only preempts contracts or rights re-lating to the �nancial condition of the debtor.77 The insurers alsoargued that the policies could not be modi�ed and assigned pur-suant to section 365 of the Bankruptcy Code because the policieswere not executory contracts.78 In response, the debtors con-tended, among other things, that section 1123(a)(5) expresslypreempted the anti-assignment clauses in the insurance policies


73See infra at notes 177–184.

74In re Kaiser Aluminum Corp., 343 B.R. 88 (D. Del. 2006).

75Kaiser, 343 B.R. at 91.

76Section 363(l) provides: “[s]ubject to the provisions of section 365, the

trustee may use, sell, or lease property under subsection (b) or (c) of this sec-tion, or a plan under chapter 11, 12, or 13 of this title may provide for the use,sale, or lease of property, notwithstanding any provision in a contract, a lease,or applicable law that is conditioned on the insolvency or �nancial condition ofthe debtor, on the commencement of a case under this title concerning thedebtor, or on the appointment of or the taking possession by a trustee in a caseunder this title or a custodian, and that e�ects, or gives an option to e�ect, aforfeiture, modi�cation, or termination of the debtor's interest in such property.”11 U.S.C.A. § 363(l) (2012).




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because those clauses would interfere with the implementation ofthe plan of reorganization.79

In determining the preemption issues, the Kaiser court foundthat Combustion concerned the same issue—namely, whether areorganization plan could provide for the assignment of insur-ance proceeds to a section 524(g) trust—and that Combustionconcluded that sections 541(c)(1) and 1123(a)(5) of the Bank-ruptcy Code “expressly permits the assignment of a debtor's inter-est in insurance policies to a trust or other entity, even if thesubject insurance policies contain a prohibition on assignment.”80

The Kaiser court found Combustion to be applicable and expresslyrejected Paci�c, recognizing that it was not binding precedentand that it was decided after Combustion. The Kaiser courtsimilarly rejected the argument that the Third Circuit's decisionin Integrated Solutions81 would require the policies, as part ofestate property, to be subject to any limitations imposed by non-

79Kaiser, 343 B.R. at 92–93. Further, with regard to the applicability of

section 363(l), the debtors argued that the fact that section 365 operates topreempt the anti-assignment provisions of executory contracts does not, on itsown, preclude preemption of nonexecutory contracts by other provisions of theBankruptcy Code. Kaiser, 343 B.R. at 93.

80Kaiser, 343 B.R. at 95 (citing In re Combustion Engineering, Inc., 391

F.3d 190, 218–19, 43 Bankr. Ct. Dec. (CRR) 271, Bankr. L. Rep. (CCH) P 80206(3d Cir. 2004), as amended, (Feb. 23, 2005)).

81Integrated Solutions, Inc. v. Service Support Specialties, Inc., 124 F.3d

487, 31 Bankr. Ct. Dec. (CRR) 422, 38 Collier Bankr. Cas. 2d (MB) 805 (3d Cir.1997). In Integrated Solutions, the court considered issues regarding the assign-ment of a debtor's pre-judgment tort claims. See Integrated Solutions, 124 F.3dat 489–90. After concluding that state law prohibited the assignment of pre-judgment tort claims, the Court of Appeals for the Third Circuit held that suchtort claims nevertheless became part of the debtor's estate pursuant to section541. Integrated Solutions, 124 F.3d at 490–91. The issue then became one ofpreemption—whether the trustee could dispose of the subject tort claims incontravention of the state law prohibition on such assignment. Integrated Solu-tions, 124 F.3d at 491. The court determined that a bankruptcy trustee suc-ceeds only to the rights that a debtor possessed pre-petition and that suchrights are not augmented by bankruptcy absent explicit federal preemption. SeeIntegrated Solutions, 124 F.3d at 492–93. Although the purchaser argued thatsections 363(b)(1) and 704(1) evinced congressional intent to preempt state lawrestrictions on assigning tort claims, the court found that such sections did notexplicitly express congressional intent to supersede state law restrictions on thetransfer of estate property. Integrated Solutions, 124 F.3d at 493–94. The courtdid, however, cite section 1123(a) as an example of a Bankruptcy Code sectionthat demonstrates explicit congressional intent to displace state nonbankruptcylaw. Integrated Solutions, 124 F.3d at 493 (also citing to sections 541(c)(1),728(b) and 363(l)).



243

bankruptcy law.82 The Kaiser court explained that while Inte-grated Solutions found that neither sections 363 nor 704 of theBankruptcy Code would preempt state law, it speci�callydistinguished section 1123(a) as being a section of the Bank-ruptcy Code that expressly provides for preemption.83 The courtupheld the lower courts' conclusion that the anti-assignmentclauses in the debtors' insurance policies were preempted by theBankruptcy Code.84

F. OneBeacon Am. Ins. Co. v. A.P.I., Inc.85

Soon after the Kaiser court's decision, the district court of Min-nesota in OneBeacon considered, among other things, whetherthe debtor was authorized to assign its insurance policies to asection 524(g) trust notwithstanding the policies' anti-assignmentprovisions.86 The debtor argued that it could assign its asbestosinsurance policies without regard to the anti-assignment provi-sions because the events giving rise to the insurers' liability hadalready occurred.87 The insurer, on the other hand, argued thatthe bankruptcy court had erred in its determination that thepolicies could be assigned to the trust without its consent, andthat the operation of the trust would increase its risk by alteringits rights and duties under the policies.88 The OneBeacon courtfound this argument unavailing and held that the trust unitesthe debtor's insurance coverage with the insured loss.89 Conse-quently, the OneBeacon court reasoned, the insurer could notrely on the anti-assignment provision to prevent the trust fromsucceeding to the debtor's rights in the asbestos insurance

82See Kaiser, 343 B.R. at 95.



85OneBeacon America Ins. Co. v. A.P.I., Inc., 46 Bankr. Ct. Dec. (CRR) 168,

2006 WL 1473004 (D. Minn. 2006).86

OneBeacon America Ins. Co. v. A.P.I., Inc., 46 Bankr. Ct. Dec. (CRR) 168,2006 WL 1473004, *1 (D. Minn. 2006).


2006 WL 1473004, *3 (D. Minn. 2006).88

See OneBeacon America Ins. Co. v. A.P.I., Inc., 46 Bankr. Ct. Dec. (CRR)168, 2006 WL 1473004, *2–3 (D. Minn. 2006). In its con�rmation order, thebankruptcy court stated that “the vesting of [the debtor's] policies in the trustcould take place without regard to [the policies'] anti-assignment provisions.”OneBeacon America Ins. Co. v. A.P.I., Inc., 46 Bankr. Ct. Dec. (CRR) 168, 2006WL 1473004, *2 (D. Minn. 2006).


2006 WL 1473004, *3 (D. Minn. 2006).


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policies.90 The OneBeacon court thus held that the plan could vestthe debtor's insurance rights in the section 524(g) trust despitethe anti-assignment provision contained in the underlying insur-ance policies.91

G. In re Pittsburgh Corning Corp.92

The bankruptcy court in Pittsburgh Corning confronted thesame issue. Among various con�rmation objections, the Pitts-burgh Corning court addressed insurers' objections that chal-lenged the assignment of insurance policy proceeds to a section524(g) trust. Certain insurers contended that the rights to pursuecoverage under their insurance policies could not be assigned bythe plan without the their consent. The Pittsburgh Corning courtfound that the “assignments of certain rights to proceeds underpolicies and/or the proceeds themselves are permissible and validwith respect to claims for losses that have already occurred.”93

Further, the Pittsburgh Corning court explained that the ThirdCircuit had established that anti-assignment provisions in insur-ance policies do not prohibit the assignment of policy proceeds.94

Additionally, the Pittsburgh Corning court found that once theevent giving rise to the insurer's liability under the policy had oc-curred, such policy may be assigned.95 Accordingly, because thepolicies covered past periods, the court concluded that therewould be no additional risk to the insurance companies resulting


2006 WL 1473004, *3 (D. Minn. 2006).91

OneBeacon America Ins. Co. v. A.P.I., Inc., 46 Bankr. Ct. Dec. (CRR) 168,2006 WL 1473004, *3 (D. Minn. 2006) (citing 11 U.S.C.A. § 1123(a)(5)(B)(“authorizing a plan to ‘transfer . . . all or any part of the property of the estateto one or more entities, whether organized before or after the con�rmation ofsuch plan’ ”); Holywell Corp. v. Smith, 503 U.S. 47, 55, 112 S. Ct. 1021, 117 L.Ed. 2d 196, 22 Bankr. Ct. Dec. (CRR) 1028, 26 Collier Bankr. Cas. 2d (MB) 1,Bankr. L. Rep. (CCH) P 74435A, 92-1 U.S. Tax Cas. (CCH) P 50110, 69 A.F.T.R.2d 92-682 (1992) (‘‘ ‘[the] Bankruptcy Code expressly permits’ a plan to createa ‘separate and distinct trust holding the property of the estate.’ ”)).

92In re Pittsburgh Corning Corp., 417 B.R. 289 (Bankr. W.D. Pa. 2006).

93Pittsburgh Corning, 417 B.R at 292. Additionally, the court found that

the proposed plan did “not impermissibly assign the contested insuranceproceeds or rights and that the plan is ‘insurance neutral.’ That is, defenses tocoverage are preserved and insurer rights and risks are una�ected.” PittsburghCorning, 417 B.R at 292.

94Pittsburgh Corning, 417 B.R at 313 (citing In re Combustion Engineering,

Inc., 391 F.3d 190, 218, 43 Bankr. Ct. Dec. (CRR) 271, Bankr. L. Rep. (CCH) P80206 (3d Cir. 2004), as amended, (Feb. 23, 2005), and emphasizing that thedebtor in this case was only assigning proceeds).

95Pittsburgh Corning, 417 B.R at 313.



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from the assignments.96 The Pittsburgh Corning court found fur-ther support in In re Western Asbestos Co.,97 which permitted thetransfer of insurance policies to an asbestos personal injury trust,and held that insurance proceeds could be vested in the trustunder section 1123(a)(5)(B), notwithstanding contrary state lawor contractual provisions.98

H. In re Congoleum Corp.99

Nearly two years after the Pittsburgh Corning decision, thebankruptcy court in Congoleum issued a memorandum opinionaddressing, among other things, whether anti-assignment provi-sions in the debtors' insurance policies were preempted by federalbankruptcy law.100 Under the proposed joint plan, all asbestos in-surance policies would be transferred to a plan section 524(g)trust. The insurers, whose policies contained anti-assignmentclauses, objected to that treatment.101 In �nding that the anti-assignment provisions in the debtors' insurance policies werepreempted, the Congoleum court, like the court in Kaiser,established that Combustion was controlling on the issue of

96See Pittsburgh Corning, 417 B.R at 313 (citing, inter alia, OneBeacon,

2006 WL 1473004 at *2–*3 for the proposition that assignment of loss does notincrease the insurer's risk, but instead allows the policy's coverage to “recon-nect” with the insured loss).

97In re Western Asbestos Co., 313 B.R. 832, 858 (Bankr. N.D. Cal. 2003)

(holding that under section 1123(a)(5), insurance policies or rights under suchpolicies may be transferred to a section 524(g) trust, whether state law wouldpermit assignment).

98See Pittsburgh Corning, 417 B.R. at 314.

99In re Congoleum Corp., 2008 WL 4186899 (Bankr. D. N.J. 2008).

100In re Congoleum Corp., 2008 WL 4186899, *1 (Bankr. D. N.J. 2008). The

bankruptcy court also held that the insurers' various rights (including, rights (i)to cooperation from the debtors, (ii) to control defense of claims, (iii) to object toasbestos claims and (iv) of non-settling insurers to assert contribution claims)were not impermissibly altered. See In re Congoleum Corp., 2008 WL 4186899(Bankr. D. N.J. 2008). Although the insurers argued that the joint plan violatedtheir rights by giving the plan trustee the sole authority to litigate and settleclaims against the plan trust, the bankruptcy court found that the plan trustwould be bound by the cooperation clauses and consent-to-settle provisions ofthe insurance contracts to the same extent as the debtors, and that it was theprovince of the state court in any coverage action to determine if the plan trustfailed to ful�ll those obligations and thus provided the insurers with a defenseto coverage. In re Congoleum Corp., 2008 WL 4186899 (Bankr. D. N.J. 2008).

101In re Congoleum Corp., 2008 WL 4186899, *1 (Bankr. D. N.J. 2008).


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preemption.102 The Congoleum court found that the discussion inthe Combustion opinion relating to the Bankruptcy Code'spreemption of the anti-assignment clauses in the policies waspredicated on section 1123, as well as on section 541(c)(1),because the “[t]ransfer of the policies to the asbestos trust couldbe accomplished only through § 1123(a)(5) and not merely§ 541.”103 The Congoleum court agreed with other courts in theThird Circuit in concluding that a reorganization plan “may as-sign insurance policies to a personal injury trust despite the exis-tence of anti-assignment clauses in those policies.”104

The Congoleum court held that even if Combustion were notcontrolling, it would still �nd the transfer of the insurance poli-cies to the trust to be permissible based on preemption doctrine.105

The Congoleum court found that the language of section 1123(a)provided for express preemption given that the term “notwith-standing” had been found to indicate clear congressional intent tosupersede all other laws.106 Accordingly, the Congoleum courtnoted that such intent would overcome the presumption againstpreemption, thus making the assignment of the insurance poli-

102See In re Congoleum Corp., 2008 WL 4186899, *2 (Bankr. D. N.J. 2008).

The court noted that Combustion resolved the same issue since insurers therealso objected to con�rmation of the plan that provided for a transfer of policiesto an asbestos trust. See In re Congoleum Corp., 2008 WL 4186899, *2 (Bankr.D. N.J. 2008).


court explained that despite not explicitly discussing the interplay of sections541 and 1123, the resolution of the insurers' objections in Combustion requireda two-stage analysis. The �rst stage required the Combustion court to determinewhether the insurance policies could be property of the estate, notwithstandingan anti-assignment provision. This determination, the court explained, isgoverned by section 541 of the Bankruptcy Code which expressly provides thatan interest of the debtor in property becomes property of the estate “notwith-standing any provision in an agreement, transfer instrument, or applicable non-bankruptcy law” that would restrict or condition the transfer of such interest bythe debtor In re Congoleum Corp., 2008 WL 4186899, *2 (Bankr. D. N.J. 2008)(citing 11 U.S.C.A. § 541). The second stage of the analysis required a determi-nation of what could be done with the insurance policies once they become prop-erty of the estate. In re Congoleum Corp., 2008 WL 4186899, *2 (Bankr. D. N.J.2008). This, the Congoleum court noted, was governed by section 1123.Therefore, once it was determined that the insurance policies were “property ofthe estate” as the term is used in section 1123, then the transfer of those poli-cies to a trust is “expressly provided for by § 1123(a)(5).” In re Congoleum Corp.,2008 WL 4186899, *2 (Bankr. D. N.J. 2008).






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cies to a trust permissible under the doctrine of expresspreemption.107 The Congoleum court also found that con�ictpreemption was applicable.108 The Congoleum court made clearthat this analysis would require examining the objectives ofCongress in enacting section 524(g), and determined that thepurpose was to help companies deal with the “�ood of asbestoslawsuits.”109 Therefore, the Congoleum court opined that prevent-ing debtors from contributing “insurance assets,” which are oftentheir most signi�cant assets, to the 524(g) trust would be “atodds” with congressional intent to create a trust that can relievedebtors from perpetual asbestos liability and provide a reliablesource of payment for present and future asbestos claimants.110

Accordingly, the court found that the anti-assignment provisionsin the policies, which are enforceable under state law, must yieldto section 1123 of the Bankruptcy Code.111

In addressing proposed limitations on preemption, the Congo-leum court dismissed the insurers' argument that section 1123would not preempt contracts between private parties for lack ofexpress language to encompass agreements.112 The Congoleumcourt, however, found that this argument was undercut by thevarious examples of other Bankruptcy Code sections in which



bankruptcy court explained that, of the two forms of con�ict preemption, it hadto determine whether denying the transfer of assets to the trust would createan obstacle to the accomplishment of congressional goals. See In re CongoleumCorp., 2008 WL 4186899, *4 (Bankr. D. N.J. 2008).


Indeed, the court noted that “from the very inception of § 524(g) it wasunderstood that insurance assets are often an important component of the as-sets a debtor has available to contribute to a § 524(g) trust” and that a debtorhas an obligation to place its assets and income into the trust to facilitate thepayment of claims. In re Congoleum Corp., 2008 WL 4186899, *5 (Bankr. D.N.J. 2008).


111In re Congoleum Corp., 2008 WL 4186899, *5 (Bankr. D. N.J. 2008). In

addition, the bankruptcy court noted that there was an “actual con�ict” in thiscase, given that the insurers argued that state law also prohibited the transferof the insurance policies. In re Congoleum Corp., 2008 WL 4186899, *5 (Bankr.D. N.J. 2008). This, the court found, presented an actual con�ict between thestate law and federal bankruptcy law. In re Congoleum Corp., 2008 WL 4186899,*5 (Bankr. D. N.J. 2008).


The insurers pointed to other sections of the Bankruptcy Code that speci�callyreference private agreements in support of their argument. In re CongoleumCorp., 2008 WL 4186899, *5 (Bankr. D. N.J. 2008).


248

private contracts were not speci�cally mentioned, but wereunequivocally intended to be covered by the phrase “applicablenonbankruptcy law.”113 The Congoleum court declared that adopt-ing such a restrictive reading of section 1123 would render sev-eral of its subsections null.114 Lastly, the Congoleum court foundthat many courts, including the Third Circuit, disagreed with arestrictive reading of section 1123, concluding that contracts andprivate agreements are not exempt from the preemptive scope ofsection 1123(a) of the Bankruptcy Code.115

The Congoleum court likewise declined to accept the insurers'contention that, as in Paci�c, section 1123 only preempts non-bankruptcy law relating to “�nancial condition,” explaining thatthe court's rationale in Paci�c was based on a fear of what mightresult from “unfettered preemption” in section 1123.116 The Congo-leum court deemed such a fear to be unfounded because, in itsopinion, the Paci�c court failed to consider that the plan couldnot be con�rmed unless it met the requirements of section 1129of the Bankruptcy Code.117 Accordingly, what was described asthe “parade of horribles” that might result from an expansivereading of section 1123(a) was not found to be a su�cient reasonto impose the requirements of section 1142(a) onto section 1123(a)when the plain language of section 1123 does not support such aresult.118

I. Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In reThorpe Insulation Co.)119

When the Ninth Circuit in Thorpe was recently faced with the

113In re Congoleum Corp., 2008 WL 4186899, *5 (Bankr. D. N.J. 2008) (cit-

ing sections 365(c) and 1322(c)(1) of the Bankruptcy Code).114

In re Congoleum Corp., 2008 WL 4186899, *5 (Bankr. D. N.J. 2008) (cit-ing sections 1123(a)(5)(F), 1123(a)(5)(H), and 1123(a)(5)(I) of the BankruptcyCode and explaining that those subsections are directed at clearly contractualissues, and an interpretation of section 1123 that would not apply to contractswould render these sections meaningless).

115In re Congoleum Corp., 2008 WL 4186899, *6 (Bankr. D. N.J. 2008)

(“[T]he plan may propose such actions notwithstanding nonbankruptcy law oragreements.”) (quoting In re FCX, Inc., 853 F.2d 1149, 1155, 18 Bankr. Ct. Dec.(CRR) 342, Bankr. L. Rep. (CCH) P 72396 (4th Cir. 1988).


117In re Congoleum Corp., 2008 WL 4186899, *6 (Bankr. D. N.J. 2008) (stat-

ing that no court would con�rm a plan that would “indiscriminately �aunt otherlaws if it served no legitimate bankruptcy purpose”).


119In re Thorpe Insulation Co., 677 F.3d 869, 67 Collier Bankr. Cas. 2d (MB)

437 (9th Cir. 2012).



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preemption question, it was bound by its prior decision in Paci�c.Notably, despite Paci�c, the Ninth Circuit deemed in Thorpe thatthe anti-assignment provisions in the insurance policies at issuewere unenforceable, deriving the authority for preemption solelyfrom sections 541(c) and 524(g).

The debtors in Thorpe proposed a plan that would establish asection 524(g) trust to which they would channel existing andfuture asbestos personal injury claims, and assign their insur-ance rights.120 Both the bankruptcy and district courts determinedthat bankruptcy law preempted the anti-assignment provisionsin the policies.121 On appeal to the Circuit Court, however, theinsurers relied on In re Farmers Markets, Inc.122 to argue thatsection 541 did not preempt state law that limited transfers tothird parties.123 The Ninth Circuit considered Farmers Markets tobe inapposite because the assignee-trust was not a third party,but an “estate representative,” which it deemed to be part of theestate.124 Thus, the court concluded that Farmers Markets did notpreclude a �nding that the policies' anti-assignment clauses werepreempted. The Ninth Circuit then determined that its holdingin Paci�c was not applicable because Paci�c did not establishwhether the anti-assignment provisions in the policies would bepreempted by section 541(c).125

In addition to �nding express preemption pursuant to section541(c) of the Bankruptcy Code, the court also found con�ictpreemption because enforcement of the anti-assignment clauseswould stand as an obstacle to the completion of a successful sec-

120Thorpe, 677 F.3d at 878. The insurance rights included both the proceeds

from settlements with various insurers, and policies with insurers that had notreached settlement agreements with the debtors. Thorpe, 677 F.3d at 878.

121Thorpe, 677 F.3d at 889.

122In re Farmers Markets, Inc., 792 F.2d 1400, 14 Bankr. Ct. Dec. (CRR)

1185, 15 Collier Bankr. Cas. 2d (MB) 93, Bankr. L. Rep. (CCH) P 71209 (9thCir. 1986) (involving the transfer of a liquor license to a third party and holdingthat section 541 does not invalidate restrictions on transfers to a third party).

123Thorpe, 677 F.3d at 889–90 (“[T]he court held that § 541(c) does not

invalidate all transfer restrictions on property in which the debtor holds aninterest, but ‘avoids only those restrictions which prevent transfer of the deb-tor's property to the estate.’ ”) (quoting Farmers Mkts., 792 F.2d at 1402).

124Thorpe, 677 F.3d at 890 (“Instead of attempting to sell or assign anything

to third parties, the debtor was attempting to transfer its rights and property tothe trust, part of the estate.”).

125Thorpe, 677 F.3d at 890 (explaining that Paci�c only concerned issues of

preemption with respect to sections 1123(a) and 1142(a) and did not interpretsection 541(c)).


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tion 524(g) plan.126 The Ninth Circuit explained that the trustmust be su�ciently funded, and the source of such funding isusually the product of settlements with insurers that are thentransferred to the trust. Hence, it concluded, that enforcing theanti-assignment provisions would eliminate an insurer's incen-tive to settle and essentially subject all section 524(g) reorganiza-tions to an “insurer veto.”127 In essence, the conclusions reachedin the Thorpe decision were consistent with those reached byother courts—�nding that the anti-assignment provisions in in-surance policies would not be enforced. Interestingly, however,the Thorpe court was the only court to make such a �ndingwithout relying on section 1123(a)(5). Consequently, Paci�c,grounded on section 1142(a) of the Bankruptcy Code, remainsbinding precedent in the Ninth Circuit.

Part III: In re Federal-MogulThe question of the enforceability of anti-assignment provi-

sions reached the Third Circuit in Federal-Mogul III,128 and thatcourt became the �rst federal Court of Appeals to directly ad-dress whether contractual anti-assignment provisions in insur-ance policies are preempted by section 1123 of the BankruptcyCode.

A. BackgroundFederal-Mogul Global, Inc. was one of the world's largest

manufacturers of automobile parts. On October 1, 2001, Federal-Mogul Global, Inc., and over 150 a�liates (together with Federal-Mogul Global, Inc., the “Debtors”) �led chapter 11 bankruptcypetitions as a way to resolve their substantial asbestos-relatedliabilities.129 With over 500,000 personal injury claims pending onthe petition date, and many more anticipated, the Debtorsproposed a plan of reorganization (the “Plan”) that contemplated

126Thorpe, 677 F.3d at 890. In reaching this conclusion, the court observed

that section 524(g) was speci�cally designed to permit companies with signi�-cant asbestos-related liabilities to transfer such liabilities, in addition to its as-sets, to a trust that would be responsible for paying future claimants. Thorpe,677 F.3d at 891. The court also noted that “[p]art of the ‘cornerstone’ of the re-organization is contribution by the insurers to the trust.” Thorpe, 677 F.3d at891 (citing Travelers Indem. Co. v. Bailey, 557 U.S. 137, 129 S. Ct. 2195, 174 L.Ed. 2d 99, 51 Bankr. Ct. Dec. (CRR) 210, 61 Collier Bankr. Cas. 2d (MB) 1441,Bankr. L. Rep. (CCH) P 81505 (2009)).

127Thorpe, 677 F.3d at 891.

128In re Federal-Mogul Global Inc., 684 F.3d 355, 56 Bankr. Ct. Dec. (CRR)

112 (3d Cir. 2012).129

See Federal-Mogul III, 684 F.3d at 363.



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the use of a section 524(g) injunction to channel present andfuture asbestos-related claims to a post-con�rmation trust. Aspart of the reorganization, the Plan proposed the assignment ofvarious assets to the trust, including the Debtors' right torecovery under liability insurance.130

Various insurers (the “Objecting Insurers”) that had issued li-ability policies to the Debtors prior to the bankruptcy objected tothe Plan. They alleged, among other things, that the Plan violatedthe anti-assignment provisions in the insurance policies, whichbarred the Debtors from transferring the policies or insurancerights without the Objecting Insurers' consent.131 Certain Object-ing Insurers later stipulated to narrow the scope of their objec-tions to focus on “[w]hether, under the Bankruptcy Code as amatter of law, the [a]ssignment is valid and enforceable againstthe [i]nsurers notwithstanding anti-assignment provisions . . . inthe [p]olicies and applicable state law” (the “Assignment andPreemption Issue”).132 On July 10, 2007, Certain Underwriters atLloyd's, London and Certain London Market Companies (collec-tively, “LMI”) entered into a stipulation with the proponents ofthe Plan (the “Plan Proponents”),133 in which the parties agreedthat LMI's only objection to con�rmation was limited to whetherthe assignment of their policies was valid, notwithstanding theanti-assignment provisions in such policies and applicable statelaw.134

Hearings relating to con�rmation of the Plan were held onJune 18-21, July 9-10 and October 1-2 in 2007.135 On October 17,2007, the Plan Proponents and certain Objecting Insurers �led ajoint motion seeking a determination of the Assignment and

130Federal-Mogul III, 684 F.3d at 363.


132In re Federal-Mogul Global Inc., 385 B.R. 560, 562 n.2, 49 Bankr. Ct.

Dec. (CRR) 201 (Bankr. D. Del. 2008), a�'d, 402 B.R. 625 (D. Del. 2009),judgment a�'d, 684 F.3d 355, 56 Bankr. Ct. Dec. (CRR) 112 (3d Cir. 2012). Thisstipulation also preserved the right of the parties to appeal the decision relatingto the validity of the assignments.

133The bankruptcy court identi�ed the Plan Proponents as: (i) the Debtors,

(ii) the o�cial committee of unsecured creditors, (iii) the o�cial committee ofasbestos claimants, (iv) the legal representatives for future asbestos claims, (v)the o�cial committee of equity security holders, and (vi) JPMorgan ChaseBank, N.A., as administrative agent under a credit agreement. See Federal-Mogul I, 385 B.R. at 563 n.3.

134Federal-Mogul I, 385 B.R. at 563 n.2.

135Federal-Mogul I, 385 B.R. at 562. Arguments on the issue of assignment

were part of the con�rmation hearing.


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Preemption Issues.136 On November 8, 2007, the bankruptcy courtentered an order con�rming the plan and issued �ndings of factand conclusions of law as required by section 524(g). However,consistent with the terms of the various stipulations, thecon�rmation order did not constitute a ruling on the objectionsrelating to the Assignment and Preemption Issue.137 Both thecon�rmation order and the �ndings of fact and conclusions of lawwere a�rmed by the United States District Court for the Districtof Delaware on November 13, 2007 and the Plan became e�ectiveon December 27, 2007.138 On March 19, 2008, the bankruptcycourt issued its memorandum opinion regarding the Assignmentand Preemption Issue.

B. Federal-Mogul I: The Bankruptcy Court DecisionThe bankruptcy court considered whether, under the Bank-

ruptcy Code as a matter of law, the assignment of the asbestosinsurance policies to a 524(g) trust would be enforceable,notwithstanding anti-assignment provisions in the asbestos in-surance policies. It concluded that the assignment of rights incertain insurance policies, as provided for in the Plan, was validand enforceable pursuant to sections 524(g), 541(c)(1),1123(a)(5)(B) and 1129(a)(1) of the Bankruptcy Code.139

As a preliminary matter, the bankruptcy court a�rmed thatinsurance policies are property of the estate, given section 541'sbroad de�nition of “property.”140 More speci�cally, the bankruptcycourt noted that the Third Circuit expressly concluded that an in-surance policy is property of the estate, pursuant to section 541,even if the policy has not yet matured, has no cash value, or isotherwise contingent.141 Additionally, the bankruptcy courtexplained that other courts found section 1123 to expressly

136Federal-Mogul I, 385 B.R. at 563. Additionally, LMI entered into a sepa-

rate stipulation with the Plan Proponents, which was later added to this jointmotion. Federal-Mogul I, 385 B.R. at 564.

137Federal-Mogul I, 385 B.R. at 564.

138Federal-Mogul I, 385 B.R. at 565 & n.15.


140Federal-Mogul I, 385 B.R. at 566 (stating that section 541 provides that

“property” includes ‘‘ ‘all legal or equitable interests of the debtor in property asof the commencement of the case,’ ‘proceeds . . . from property of the estate,’and ‘any interest in property that the estate acquires after the commencementof the case’ ”) (quoting 11 U.S.C.A. § 541(a)(1), (6), and (7)).

141Federal-Mogul I, 385 B.R. at 566 (citing Estate of Lellock v. Prudential

Ins. Co. of America, 811 F.2d 186, 189, Bankr. L. Rep. (CCH) P 71619 (3d Cir.1987)).



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preempt nonbankruptcy rights that might otherwise interferewith implementation of a plan of reorganization.142 The courtrelied upon the Third Circuit precedent establishing that assign-ment of policy proceeds to a 524(g) trust would not be prohibitedby anti-assignment provisions in insurance policies.143

Relying on state insurance law, the bankruptcy court also heldthat insurance policies may be assigned once the event givingrise to the insurer's liability had occurred.144 The court found thatto the extent that events giving rise to liability had already oc-curred, the assignments would not result in any additional riskto the insurer. Moreover, the bankruptcy court noted that anycoverage issues would be preserved, thus not a�ecting theinsurer's rights to raise such issues at a later time.

The bankruptcy court rejected the Objecting Insurers' argu-ments asserting the “presumption against preemption,” and argu-ments contending that section 1123 could not be interpreted toextend beyond “the limited preemption a�orded by § 363(l) and§ 1142(a).”145 Like most courts deciding the issue before it, thebankruptcy court conceded that although there is a strong

142Federal-Mogul I, 385 B.R. at 566 (“Courts that have delved into the reach

of § 1123 have found that it expressly preempts nonbankruptcy rights thatmight otherwise interfere with the implementation of a Chapter 11 plan.”) (cit-ing In re FCX, Inc., 853 F.2d 1149, 1155, 18 Bankr. Ct. Dec. (CRR) 342, Bankr.L. Rep. (CCH) P 72396 (4th Cir. 1988); In re Stone & Webster, Inc., 286 B.R.532, 543, 40 Bankr. Ct. Dec. (CRR) 137 (Bankr. D. Del. 2002)).

143Federal-Mogul I, 385 B.R. at 567 (‘‘ ‘[P]ut simply, § 541 prohibits restric-

tions on the interests of the debtor, which includes the insurance policies heldby the debtor’ . . . and, with respect to property of the estate, § 1123(a)(5)(B)expressly contemplates that the debtor's interest in the policies may be as-signed to a trust or other entity.”) (quoting In re Combustion Engineering, Inc.,391 F.3d 190, 219, 43 Bankr. Ct. Dec. (CRR) 271, Bankr. L. Rep. (CCH) P 80206(3d Cir. 2004), as amended, (Feb. 23, 2005), in which the Third Circuit did notrule on the section 1123(a) issue; see text at note 73, supra). The bankruptcycourt also brie�y discussed various decisions in which courts permitted thedebtor to assign insurance proceeds to a personal injury trust. Federal-Mogul I,385 B.R. at 570–71 (discussing In re Western Asbestos Co., 313 B.R. 832, 858(Bankr. N.D. Cal. 2003); In re Western Asbestos Co., 313 B.R. 456, 459 (Bankr.N.D. Cal. 2004), order a�'d, 2004 WL 1944792 (N.D. Cal. 2004); In re KaiserAluminum Corp., 343 B.R. 88 (D. Del. 2006); and In re Global IndustrialTechnologies, Inc., 375 B.R. 155, 48 Bankr. Ct. Dec. (CRR) 235 (Bankr. W.D. Pa.2007)).

144Federal-Mogul I, 385 B.R. at 567. The court explained that the anti-

assignment clauses are intended to protect the insurer from increased risk,therefore the assignment of the loss would not increase such risk since it merelyallows the coverage to “reconnect” to the loss. Federal-Mogul I, 385 B.R. at568–70 (citing, inter alia, 3 Couch on Insurance § 35.7 (3d ed. 1995)).



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presumption against preemption, such presumption can beovercome if congressional intent to preempt is clear.146 The courtexpressly declined to look beyond section 1123, to sections 1142and 363(l) of the Bankruptcy Code, to restrict the scope ofpreemption of section 1123. With respect to the contention thatsection 1123 should be limited to laws relating to �nancial condi-tion, the court found the Paci�c case to be directly in con�ict withthe Third Circuit's decision in Combustion on the same issue,and concluded that it was bound by Combustion.147 Moreover, thebankruptcy court determined that the limitation based on section363(l) was equally unavailing, because its application in thisinstance did not present the “appropriate statutory framework,”but instead took the Bankruptcy Code out of its logicalsequence.148 The court relied upon Combustion, Kaiser and In reWestern Asbestos Co., as precedents that had laid the appropriatestatutory framework applicable to the assignment of insuranceproceeds to a trust pursuant to a plan.149

The Objecting Insurers also sought to limit section 1123(a) onthe basis that a broad reading would give a debtor with no li-ability the right to transfer a policy to any third party, includingone that may have liabilities but no insurance.150 The courtdismissed this argument, �nding that it ignored the context ofthe assignment at issue. It explained that the section 524(g) trustis created and governed by the Bankruptcy Code and is a succes-

146See Federal-Mogul I, 385 B.R. at 571 (“The court in Egelho� v. Egelho�

ex rel. Breiner, explained that the presumption against preemption ‘can beovercome where Congress has made clear its desire for pre-emption.’ In Cisnerosv. Alpine Ridge Group, the Supreme Court noted that it is well-recognized thatthe term ‘notwithstanding’ as found in § 1123(a) expresses a clear statement ofintent ‘to supercede [sic] all other laws.’ ”) (internal citations omitted).

147Federal-Mogul I, 385 B.R. at 571 (noting that Combustion interpreted

section 1123(a)(5) without limiting “applicable nonbankruptcy laws” to laws re-lating to �nancial condition) (citing Combustion, 391 F.3d 219 n.27).

148Federal-Mogul I, 385 B.R. at 572–73 (identifying the sequence of sections

541, 1123, and 1129, and noting that “[s]ection 363 is an administrative provi-sion which gives the trustee authority to deal with property of the estatenotwithstanding certain ex post facto clauses based upon the insolvency or�nancial condition of the debtor” and indicating that “[n]ot all anti-assignmentprovisions are based upon a debtor's insolvency or �nancial condition”).

149Federal-Mogul I, 385 B.R. at 573 (�nding that the precedent suggested

that sections 524(g), 541, 1123 and 1129 provide the appropriate statutoryframework).




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sor to the debtor's asbestos liabilities channeled into it.151 Ad-ditionally, the court found, the insurance policies coveringasbestos liabilities are assets of the debtor. Therefore, just as theasbestos liabilities may be transferred to the trust, “so may thecorresponding assets, the insurance policies, proceeds, or policyrights” that are intended to cover such liabilities.152 The courtheld that, in this context, it is irrefutable that section1123(a)(5)(B) of the Bankruptcy Code permits the transfer ofproperty of the estate from the debtor to the successor vehicle ofsuch debtor.153

Objecting Insurers also contended that section 1123 did notpreempt contract rights because the language of the section didnot explicitly refer to contracts. Other provisions of the Bank-ruptcy Code, they argued, do speci�cally refer to contracts, andthus Congress would have expressly included a reference tocontracts in the text of section 1123 if it was intended to preemptcontract rights.154 In response to this argument, the bankruptcycourt looked to the express language of section 541 and held that“both the express language of § 541(c)(1) and courts construingthat text have held that § 541(c)(1) prohibits a contractual re-striction on the rights of a debtor to transfer or assign itsinterests in bankruptcy and § 1123(a)(5) permits the transfer ofproperty to § 524(g) trust.”155

Finally, the bankruptcy court rejected the Objecting Insurers'contention that because the insurance contracts are executory,section 365 would apply. The court explained that other courtshave held that insurance policies in which the policy coverage pe-riod had expired prior to the insured's bankruptcy were not exec-utory, despite ongoing obligations of the debtor.156 Moreover, itstated that while “the terms and conditions of the policies maystill be in e�ect for the periods covered by the policies, the execu-





155Federal-Mogul I, 385 B.R. at 574 (citing In re Combustion Engineering,

Inc., 391 F.3d 190, 219 n.27, 43 Bankr. Ct. Dec. (CRR) 271, Bankr. L. Rep.(CCH) P 80206 (3d Cir. 2004), as amended, (Feb. 23, 2005); In re KaiserAluminum Corp., 343 B.R. 88, 95 (D. Del. 2006); In re FCX, Inc., 853 F.2d 1149,1154–55, 18 Bankr. Ct. Dec. (CRR) 342, Bankr. L. Rep. (CCH) P 72396 (4th Cir.1988)).

156Federal-Mogul I, 385 B.R. at 574 (quoting Beloit Liquidating Trust v.

United Ins. Co., 287 B.R. 904, 906 (N.D. Ill. 2002)).


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tory period for the contract ends when the last e�ective date ofthe policy has passed.”157 Thus, because the policy periods hadexpired, all premiums relating to such policies had been paidprior to the petition date, and the only outstanding obligationswere purely ministerial, the policies were not executory contractsand were not governed by section 365 of the Bankruptcy Code.158

C. Federal-Mogul II: The District Court Decision159

The Objecting Insurers appealed, putting forth several argu-ments in support of their contention that section 1123(a)(5)(B)did not preempt anti-assignment provisions in private contractualagreements or state law. The district court a�rmed the bank-ruptcy court. First, it found that the “notwithstanding” languageof section 1123 had been interpreted to signal express preemp-tion,160 and recognized that the sole question for it to resolve waswhether the anti-assignment provisions in the policies werewithin the scope of section 1123's preemptive power.161 In ad-dressing this question, the district court identi�ed applicable pre-cedent and noted the dispute regarding whether Combustion wascontrolling on the Assignment and Preemption Issue. The districtcourt determined that Combustion was controlling, because it ad-dressed the same issue in language that was “straightforwardand unambiguous.”162 Additionally, the district court rejected theLMI's attempt to distinguish Combustion on the basis that itinvolved the transfer of proceeds, and pointed to the benchopinion and appellate brie�ng to conclude that the “insurance

157Federal-Mogul I, 385 B.R. at 574 (citing Matter of Federal Press Co., Inc.,

104 B.R. 56, 66 (Bankr. N.D. Ind. 1989)).158

Federal-Mogul I, 385 B.R. at 576.159

In re Federal-Mogul Global, 402 B.R. 625 (D. Del. 2009), judgment a�'d,684 F.3d 355, 56 Bankr. Ct. Dec. (CRR) 112 (3d Cir. 2012).

160See Federal-Mogul II, 402 B.R. at 631–32 (“With respect to the Bank-

ruptcy Code, numerous sections are now prefaced with a notwithstanding clause,and in each instance, the congressional intent has been interpreted as expresspreemption.” (citing Paci�c Gas and Elec. Co. v. California ex rel. CaliforniaDept of Toxic Substances Control, 350 F.3d 932, 946, 42 Bankr. Ct. Dec. (CRR)46, 51 Collier Bankr. Cas. 2d (MB) 445, Bankr. L. Rep. (CCH) P 80007 (9th Cir.2003), as amended, (Dec. 9, 2003))).

161Federal-Mogul II, 402 B.R. at 632.

162See Federal-Mogul II, 402 B.R. at 636–37 (explaining that the issues pre-

sented to the Combustion court mirrored those before it and �nding that “the is-sue before [the Combustion] [c]ourt, and the opinion it subsequently rendered,was straightforward and unambiguous”).



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rights were, in fact, a focal point of the case.”163 Therefore, thecourt concluded that section 1123(a)(5)(B) of the BankruptcyCode preempted the anti-assignment provisions in the policies,and permitted the transfer of the insurance rights to the section524(g) trust.164

As they did below, the Objecting Insurers' asserted that thepreemptive scope of section 1123 excluded contracts or agree-ments because the reference to such terms is notably absent inthis section, although such references are explicitly included inother sections of the Bankruptcy Code.165 The district courtrejected this argument, reasoning that such a limited view of theprovision would render several subsections of section 1123super�uous and essentially meaningless.166 Additionally, thedistrict court held that the “notwithstanding” language of section1123 was broad enough to encompass contractual obligations,including the anti-assignment provisions at issue.167

The district court likewise rejected LMI's argument that sec-tions 363 and 365 would apply. It noted that section 363(l) dealswith the limited situation in which the “contractual provision is‘conditioned on the insolvency or �nancial condition of the debtor. . . and that e�ects, or gives a forfeiture, modi�cation, ortermination of the debtor's interest in such property.’ ”168 In ac-cord with the bankruptcy court's �nding, the district court foundthat although the anti-assignment provisions were contractual innature, they were not provisions based on the debtor's insolvencyor �nancial condition and hence, section 363(l) was inapplicable.169

According to the district court, LMI's reliance on section 365 wassimilarly inappropriate, because section 365 of the BankruptcyCode is only concerned with executory contracts and, by LMI's

163Federal-Mogul II, 402 B.R. at 636–37. Additionally, the district court

noted that the Combustion court speci�cally referred to the transfer of“interests” in footnote 27, and found that the Combustion court's description ofsection 1123 in the same footnote provided the mechanism to include thoseinterests in a plan. Federal-Mogul II, 402 B.R. at 637.


165Federal-Mogul II, 402 B.R. at 638–39. Objecting Insurers cited to sections

363(l) and 365(e) to demonstrate provisions that expressly contain such refer-ence. Federal-Mogul II, 402 B.R. at 638–39.

166See Federal-Mogul II, 402 B.R. at 639.


168Federal-Mogul II, 402 B.R. at 640 (alteration in original) (quoting 11

U.S.C.A. § 363(l)).169

Federal-Mogul II, 402 B.R. at 640.


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own admission, the policies were not executory.170 The districtcourt also rejected the argument that section 1123 should be readto mean that it only preempts applicable nonbankruptcy law re-lating to �nancial condition. The court explained that Paci�creached this conclusion despite the existence of any language insection 1123 that would require such a limitation. It furtherfound that the legislative history was insu�cient to support sucha conclusion.171

Lastly, the court found that public policy requires a �ndingthat such assignments are valid, despite the contractual anti-assignment provisions. The district court opined that (i) therewas no additional risk to insurers, (ii) the trust is a successor ininterest to Debtor, and (iii) the Plan permits Objecting Insurersto assert any coverage defenses.172 In so �nding, the district courtconcluded that denying the assignment would preclude debtorsfrom availing themselves of the use of the section 524(g) trustand impermissibly relieve insurers of their responsibilities, by ef-fectively letting the asbestos liabilities transfer to the trustwithout the “concomitant rights or coverage to pay for them.”173

D. Federal-Mogul III: Third Circuit Decision174

On appeal to the Third Circuit, Objecting Insurers contended


171Federal-Mogul II, 402 B.R. at 640–41 (“Setting aside the inherent in�r-

mity of relying on the �oor remarks of a single senate subcommittee chairmanas controlling authority, this statement is not as outcome-determinative as theNinth Circuit suggests.”) (citation omitted). Additionally, the court noted thatCongress had the opportunity to include language relating to “�nancial condi-tion” when it amended section 1123, but did not do so. See Federal-Mogul II,402 B.R. at 641. The district court also mentioned that even if sections 1123and 1142(a) were construed together, based on the principles of statutoryconstruction, the limitation with respect to �nancial condition would only oper-ate to modify the term “regulations” and not the entire phrase “any otherwisenonbankruptcy law.” Federal-Mogul II, 402 B.R. at 641. (“[Section] 1123(a)would read in relevant part, ‘notwithstanding any otherwise applicable non-bankruptcy law, rule, or regulation relating to �nancial condition.’ In short, thequalifying phrase—relating to �nancial condition—would only modify the lastword—regulation.”).

172See Federal-Mogul II, 402 B.R. at 644–645.

173Federal-Mogul II, 402 B.R. at 645. The district court also held that a

denial of such a transfer would also have the e�ect of giving insurers a vetopower over debtors and prohibit the formation of a trust, particularly where theinsurance policy is the only signi�cant asset for the company in bankruptcy.Federal-Mogul II, 402 B.R. at 645.

174In re Federal-Mogul Global Inc., 684 F.3d 355, 56 Bankr. Ct. Dec. (CRR)

112 (3d Cir. 2012).



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that the Combustion decision did not adequately address thepreemptive scope of section 1123(a)(5), and therefore, the issuebefore the court was one of �rst impression. The Plan Proponentsargued that the Third Circuit's opinion in Combustion had previ-ously settled that section 1123(a)(5) of the Bankruptcy Codepreempts anti-assignment provisions that would otherwise pro-hibit the transfer of insurance rights to a section 524(g) trust.175

The court agreed with the Plan Proponents, and a�rmed theholding of both the bankruptcy and district courts below. TheThird Circuit held that “[f]ootnote 27 [of Combustion] sets forthour conclusion that any objection to the reorganization plan basedon the anti-assignment provisions could be overcome through acombination of § 541 and § 1123.”176 The court explained that al-though preemption of anti-assignment provisions was not one ofthe primary issues on appeal in Combustion, the question wasraised in prior proceedings and briefed by the parties. The courtcited its Combustion opinion, in which it held that “with respectto the anti-assignment provisions, . . . even if the subject insur-ance policies purported to prohibit assignment of [the debtor's]insurance proceeds, these provisions would not prevent the as-signment of proceeds to the bankruptcy estate.”177 This holding, itfound, was dispositive of the Assignment and Preemption Issue.

Objecting Insurers sought to distinguish the case from Combus-tion, suggesting that the term “proceeds” in the Combustionopinion referred only to liquidated insurance coverage, and not tothe insurance rights at issue in the Federal-Mogul cases.178 Thecourt rejected this contention, relying upon the Combustionopinion's reference to “rights to proceeds,” and also that the actualvalue of many of Combustion Engineering's insurance policieshad not yet been determined.

Although the court acknowledged that the scope of section 1123


176Federal-Mogul III, 684 F.3d at 366–67 (citing In re Combustion Engineer-

ing, Inc., 391 F.3d 190, 218, 43 Bankr. Ct. Dec. (CRR) 271, Bankr. L. Rep.(CCH) P 80206 (3d Cir. 2004), as amended, (Feb. 23, 2005)). The court alsofound that “in a recent en banc holding, we held that ‘the discussion of anti-assignment provisions in Combustion . . . should su�ce’ to resolve whether in-surance policies could be transferred to a personal-injury trust.” Federal-MogulIII, 684 F.3d at 366–67 (quoting In re Global Indus. Technologies, Inc., 645 F.3d201, 212 n.27, 54 Bankr. Ct. Dec. (CRR) 178, Bankr. L. Rep. (CCH) P 81998 (3dCir. 2011), cert. denied, 132 S. Ct. 551, 181 L. Ed. 2d 397 (2011)).

177Federal-Mogul III, 684 F.3d at 365 (quoting Combustion, 391 F.3d at

218).178

Federal-Mogul III, 684 F.3d at 367 n.18.


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was not the primary focus of the numerous disputes in Combus-tion, it took the opportunity to discuss the proper scope of section1123(a) by engaging in a thorough preemption analysis thatscrutinized “the statutory language, structure, and legislativehistory of § 1123.”179 In examining the text of section 1123(a)(5)(B),the Third Circuit noted that the “critical words here are‘Notwithstanding any otherwise applicable nonbankruptcy law. . .’ ”180 The court relied upon a myriad of authority to supportthe proposition that a “notwithstanding” clause demonstrates adrafter's clear intent for such provision to override otherwisecon�icting law or provisions.181 Turning speci�cally to section1123(a), the court noted that it had previously “cited § 1123(a) asan instance where Congress used ‘explicit language’ to demon-strate its intent ‘to displace state nonbankruptcy law,’ ”182 andother courts of appeals had also concluded that the “notwithstand-ing” clause in section 1123(a) “expressly preempts state law.”183

The court next sought to “identify the domain expressly pre-empted” by the statutory language.184 The Debtors argued thatthe scope of section 1123(a), as the plain text provides, encom-passed the transfer of insurance rights at issue. Objecting Insur-ers, however, proposed a narrower reading of section 1123, argu-ing that the non-exhaustive list of “means” set forth in sections1123(a)(5)(A)–(J) were not subject to the “notwithstanding”clause. They contended that sections 1123(a)(5)(A)–(J) were mere“illustrative examples of non-required transactions enumeratedas adequate means” that should be read as distinct from theremainder of section 1123(a).185 The court was not persuaded,�nding that “[i]t is hardly natural to read the ‘notwithstanding’

179See Federal-Mogul III, 684 F.3d at 367.


181See Federal-Mogul III, 684 F.3d at 369.

182Federal-Mogul III, 684 F.3d at 369 (quoting Integrated Solutions, Inc. v.

Service Support Specialties, Inc., 124 F.3d 487, 493, 31 Bankr. Ct. Dec. (CRR)422, 38 Collier Bankr. Cas. 2d (MB) 805 (3d Cir. 1997)).

183Federal-Mogul III, 684 F.3d at 369 (citing Paci�c Gas and Elec. Co. v.

California ex rel. California Dept of Toxic Substances Control, 350 F.3d 932,946, 42 Bankr. Ct. Dec. (CRR) 46, 51 Collier Bankr. Cas. 2d (MB) 445, Bankr.L. Rep. (CCH) P 80007 (9th Cir. 2003), as amended, (Dec. 9, 2003)); In re FCX,Inc., 853 F.2d 1149, 1154–55, 18 Bankr. Ct. Dec. (CRR) 342, Bankr. L. Rep.(CCH) P 72396 (4th Cir. 1988)).

184Federal-Mogul III, 684 F.3d at 369 (quoting Medtronic, Inc. v. Lohr, 518

U.S. 470, 484, 116 S. Ct. 2240, 135 L. Ed. 2d 700, Prod. Liab. Rep. (CCH) P14634, 29 U.C.C. Rep. Serv. 2d 1077 (1996)).

185Federal-Mogul III, 684 F.3d at 369 (internal quotation marks omitted).



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clause in § 1123(a) as applying only to some, but not all, of subsec-tion (a).”186 The court ultimately concluded that the preemptivescope of section 1123(a) reaches all the provisions in thesubsection.187

LMI, once again asserted that the phrase “otherwise applicablenonbankruptcy law” in section 1123(a) did not encompass privatecontracts, such as the contracts between it and the Debtor. LMIpointed to other sections of the Bankruptcy Code in whichCongress used language to explicitly preempt private contracts.They reasoned that, because no such language was used in sec-tion 1123(a), private contracts were not intended to be includedin the scope of the section's reference to “nonbankruptcy law.”188

The court here agreed with the district court's rejection of LMI'sproposed interpretation, concluding that “[m]any of the transac-tions listed under § 1123(a)(5) implicate contractual rights, andso demonstrate clear congressional intent that the phrase ‘non-bankruptcy law’ encompass private contracts.”189 The courttherefore concluded that the phrase “otherwise applicable non-bankruptcy law” did, in fact, encompass private contracts, includ-ing the insurance policies at issue here.190

Objecting Insurers next asserted that the “context andstructure of the Bankruptcy Code support a narrow reading ofpreemption,” pointing to other Bankruptcy Code provisions theyclaim would be “rendered super�uous” if the court were to upholda broad interpretation of section 1123(a)'s scope.191 In response,the court found that “§ 1123(a) by its express terms does notdisplace other portions of the Bankruptcy Code.”192 According tothe court, Congress could have limited the preemptive scope ofsection 1123(a) if it had intended to do so, but “rather than ad-



188See Federal-Mogul III, 684 F.3d at 370; see also Br. of Appellants Certain

Underwriters at Lloyd's, London, Certain London Market Cos., 2009 WL6522159 at *45 (“Congress, by omitting language from section 1123(a)(5) thatspeci�cally preempts private contract rights, but including such languageelsewhere in the Bankruptcy Code, expressed its intent that section 1123(a)(5)not preempt private contract rights.”).

189Federal-Mogul III, 684 F.3d at 370. The court also noted that “the Fourth

Circuit endorsed this view in FCX when it held that § 1123(a) preempts thecontractual provisions of patronage certi�cates.” Federal-Mogul III, 684 F.3d at370 (citing FCX, 853 F.2d at 1154–55).





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dressing the relationship between § 1123(a) and the rest of the[Bankruptcy] Code clause-by-clause, Congress unambiguouslylimited the scope of the ‘notwithstanding’ clause in § 1123(a) to‘nonbankruptcy law,’ leaving other [Bankruptcy] Code provisionsintact.”193

The Objecting Insurers relied upon section 1142(a) to reinforcetheir assertion that a broad reading of the preemptive scope ofsection 1123(a) is inconsistent with other areas of the Bank-ruptcy Code. Section 1142(a) governs the implementation of thereorganization plan, and the Objecting Insurers argued that “itwould be illogical for the scope of preemption in § 1123, whichprovides what the plan should contain, to exceed that providedfor in § 1142 . . .”194 The Objecting Insurers supported this asser-tion by citing Paci�c, in which the court limited the expresspreemptive scope of section 1123(a)(5) to match that of section1142(a), thus contracting the preemptive scope of section1123(a)(5) to nonbankruptcy laws relating to “�nancial condition.”The Third Circuit disagreed with the Paci�c court's �nding thatsections 1123 and 1142 must be read together.195 The ThirdCircuit explained that section 1142 implicated a di�erent stagein the bankruptcy proceeding than did section 1123 of the Bank-ruptcy Code. The court also explained that section 1142 encom-passed “orders of the court,” which would suggest that thesection's limited preemptive language “[may] serve primarily as acheck on the court's authority to trump non-bankruptcy law insupplemental orders enacting the plan.”196 The court ultimatelydeclined “to limit the preemptive scope of section 1123(a) to thosestate laws relating to �nancial condition.”197

The Federal-Mogul III court found that there was no textualsupport for a limitation on the scope of the term“notwithstanding.” The Third Circuit explained that the plainlanguage of section 1123(a) “evinces clear congressional intent fora preemptive scope that includes the transactions listed under§ 1123(a)(5) as ‘adequate means’ for the plan's implementation”and that “[t]he plain language also reaches private contracts

193Federal-Mogul III, 684 F.3d at 371–72.



196Federal-Mogul III, 684 F.3d at 373 (“Case law supports this interpreta-

tion, since nearly all of the cases construing § 1142 have involved the properscope of the bankruptcy court's post-con�rmation jurisdiction and authority.”).




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enforced by state common law, and overcomes the presumptionagainst preemption.”198

The court also addressed the Objecting Insurer's argumentthat section 1123(a) should be read narrowly on the basis of priorpractice and legislative history. The Objecting Insurers suggestedthat broad preemption deviates substantially from pre-Bankruptcy Code bankruptcy practice, and that legislative his-tory established that Congress intended for the 1984 revisions tosection 1123 to be minor. The court, however, found the legisla-tive history of section 1123(a)'s “notwithstanding clause” to be“thin and inconclusive,”199 ultimately declining to rely on pre-Bankruptcy Code practice or an insu�ciently developed legisla-tive history that “says nearly nothing about the intended preemp-tive scope of § 1123(a), to overcome the plain and unambiguousmeaning of the words Congress chose.”200

The court concluded its opinion by noting that preemption, inthis case, advanced the purposes of the Bankruptcy Code, whilethe transfer or assignment of the Debtor's insurance policies didnot materially increase the Objection Insurers' risk or exposureto asbestos liability.201 The court reasoned that the “trust mecha-nism furthered ‘the fundamental rationale of chapter 11, that areorganized debtor emerges from bankruptcy free and clear otherthan the liability set by the plan.’ ”202 With regard to the Object-ing Insurers' risk, the court explained that the plan, here, “shifteddebtor's asbestos-related liabilities—based on events which hadalready occurred and for which the insurers were alreadypotentially responsible—to the post-con�rmation trust.”203 Thecourt added that preemption under section 1123(a) is notunlimited, and cautioned that reorganization plans must stillcomply with other aspects of the Bankruptcy Code and ultimatelybe approved by the bankruptcy court.204 These safeguards, theThird Circuit reasoned, should ensure that a plan achieves a




201See Federal-Mogul III, 684 F.3d at 378–80.

202Federal-Mogul III, 684 F.3d at 378 (quoting 140 Cong. Rec. 28,358 (1994)).


204Federal-Mogul III, 684 F.3d at 381 (“Any reorganization plan must still

comply with all aspects of the Bankruptcy Code and be approved by the bank-ruptcy court. In particular, it must satisfy 11 U.S.C.A. § 1129(a)(3), whichprovides that a court shall con�rm a reorganization plan only if it ‘has beenproposed in good faith and not by any means forbidden by law.’ ”).


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result that is consistent with the objectives and purposes of theBankruptcy Code.205

ConclusionSince the Federal-Mogul III decision, courts have relied on its

holding for the proposition that section 1123 preempts anti-assignment provisions in contracts.206 Courts seem to be in agree-ment that the Bankruptcy Code preempts nonbankruptcy lawand contractual provisions that seek to impose limitations on theassignment to litigation trusts, whether courts justify such as-signment pursuant to sections 524(g), 541, 1123, or somecombination of the three. It remains to be seen whether Federal-Mogul and the related cases will be relied upon by litigants toovercome contractual anti-assignment provisions in cases outsideof the section 524(g) context, or when plan proponents purport toassign other contracts or rights to a third party.


206See In re W.R. Grace & Co., 475 B.R. 34 (D. Del. 2012), stay pending

appeal denied, (3rd Circ. 12-2966) (June 27, 2012) and appeal dismissed, (3rdCirc. 12-2966) (Sept. 24, 2012) and appeal dismissed, (3rd Circ. 12-2917) (Oct. 4,2012) and appeal dismissed, (3rd Circ. 12-2967) (Oct. 9, 2012) (citing In reFederal-Mogul Global Inc., 684 F.3d 355, 56 Bankr. Ct. Dec. (CRR) 112 (3d Cir.2012) and In re Combustion Engineering, Inc., 391 F.3d 190, 43 Bankr. Ct. Dec.(CRR) 271, Bankr. L. Rep. (CCH) P 80206 (3d Cir. 2004), as amended, (Feb. 23,2005) for the proposition that section 1123 preempts contractual anti-assignment provisions); see also In re MF Global Inc., 478 B.R. 611, 57 Bankr.Ct. Dec. (CRR) 12, 68 Collier Bankr. Cas. 2d (MB) 898 (Bankr. S.D. N.Y. 2012),stay pending appeal denied, 2012 WL 5386101 (Bankr. S.D. N.Y. 2012) (includ-ing a discussion on the preemptive reach of various sections of the BankruptcyCode, but ultimately �nding that the anti-assignment provisions in the subjectengagement letter did not operate to prohibit assignment of tort claims becausesuch claims had not arisen under the engagement letter).



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Documents

THE PREEMPTION OF CONTRACTUAL ANTI- … · SURVEY OF CASES FROM FCX TO ... 2 Issues surrounding the enforceability of anti ... By virtue of the Supremacy Clause of the United States