Jennifer Black Strutt on In re: Federal-Mogul Global Inc.: Third Circuit Holds Bankruptcy Code Preempts Anti-Assignment Provisions, Allowing Transfer of Policy Rights to Asbestos Trust

McCarter & English, LLP

Federal-Mogul Global, Inc., one of the world’s largest manufacturers of automobile parts, and over 150 affiliates (collectively “Federal-Mogul”), filed for Chapter 11 bankruptcy as a result of asbestos-related liabilities. At the time Federal-Mogul petitioned for bankruptcy, it was alleged that Federal-Mogul expended over $350 million in the preceding year in defense and indemnity costs and 500,000 asbestos claims were still pending.211 U.S.C. § 524 Federal-Mogul’s proposed plan for reorganization sought to channel present and future asbestos-related claims to a trust pursuant to (g). Additionally, the plan assigned assets to the trust, including Federal-Mogul’s rights to recover under liability insurance. The plan included provisions granting insurers the right to assert any defenses to coverage already available under the policies, except for the defense that the transfer of the policies to the trust violated any anti-assignment provisions – i.e., standard clauses that bar the insured from transferring the policies without the insurers’ consent.

The insurers objected to the plan on the basis that a transfer to the trust would violate the insurance policies’ anti-assignment provisions. 611 U.S.C. § 1123 Federal-Mogul countered that the anti-assignment provisions were preempted under the Bankruptcy Code, (a)(5)(B). The bankruptcy court agreed with Federal-Mogul and confirmed the plan. The district court affirmed and this appeal to the Third Circuit ensued.

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