Saturday, May 5, 2012

Assigning the Unassignable: Creating an Asbestos
Liability Trust by Rewriting Contracts

Normally bankruptcy does not expand pre-petition contracts or impose different risks on contracting parties, but it appears that when the courts are firmly convinced of the public good of creating an asbestos trust, insurance contracts at least can be re-written.


11 U.S.C §524(g) was added to the Bankruptcy Code after the historic Johns Manville asbestos bankruptcy case to codify the use of a trust and channeling injunction to allow asbestos defendants to channel all their asbestos liabilities into a trust, fund the trust with assets and stock, provide for present and future claimants of these long latency diseases, and take their productive assets and continue their businesses without being responsible for those liabilities beyond the trust assets. As the practice has evolved in many cases, the trusts are controlled by plaintiffs’ lawyers and payment decisions are not based on state law liability factors such as injury, damage or causation, but rather based on Trust Distribution Protocols which can provide compensation to persons who would not recover in the tort system.

In Federal Mogul Global Inc., et al., (No. 09-2230, Third Cir. May 1, 2012) the Third Circuit Court of Appeals approved the assignment of certain insurance policy assets to Federal Mogul’s asbestos trust notwithstanding the fact that those policies prohibited assignment. If the policies had still been executory, i.e., still in their coverage period, 11 U.S.C. §365 would have prohibited both their assumption and assignment. However these were historic policies from years ago, covering long latency asbestos diseases under the continuous coverage trigger.

The court’s opinion started off by covering at great length the extent of the asbestos problem generally plus the half million claims pending against the debtor, a manufacturer of automotive parts, before turning to its legal analysis.

The lynchpin of this decision was the Court’s conclusion that 11 U.S.C. §1123(a) preempts contract law through its prefatory language “notwithstanding any other applicable nonbankruptcy law.” That permitted the debtor to support its plan by arguing 1123(a)(5) allows it to ignore contractual restrictions since a plan “shall…provide adequate means for its implementation.” The insurers argued that applicable nonbankruptcy law should not include contract provisions, a position rejected by the Court as it is state law that makes a contract enforceable. They also argued the clause should be limited to applicable nonbankruptcy law relating to financial condition to make it consistent with the implementation of a plan language found in 11 U.S.C. §1142, which the court rejected based on plain language, weak legislative history, and its view that there was no support for the proposition that Congress had not intended in 1978 to change prior law which would have deferred to state law, focusing instead on the text itself. The court also found that this interpretation would further Congress’ purpose in 11 U.S.C. 541(c) bringing property into the estate notwithstanding restrictions on transfer (although noting that provision was inapplicable to the transfer to the trust) and also to further the purpose behind 524(g) as the Court felt that honoring the insurers’ contractual rights would create a plan veto for the insurers.

The Court decided that the provision authorizing the insurers to retain their other defenses meant the plan did not materially alter their risks as the causative events for claims had already occurred. It rejected objections related to plaintiff attorney control of the trust as bare assertions and said it would not second-guess Congress or the Bankruptcy Court in providing for Trust Distribution Protocols. It rejected the argument that the trust structure misaligned the interests of insured and insurer in jointly minimizing claims in the absence of evidence of collusion. Finally, it rejected the insurers’ argument that this reading of 11 U.S.C. § 1123(a) permits debtors to ignore any state law, rule or regulation that hampers its ability to confirm a plan (such as child labor laws, environmental or zoning laws, or anything else). The Court did so by extending to 1123(a) the presumption against preemption of state police power – that the preemption of state laws does not apply to laws relating to public health, safety, and welfare.

 The key to this decision is the almost 20 page discussion of the asbestos problem and the lack of any other viable solution. Ultimately this case perhaps supports the proposition that bad facts make bad law or the well-known truism that nine times out of ten insurance companies lose.

Karen Lee ("Kitt") Turner
KTurner@eckertseamans.com
Eckert Seamans Cherin & Mellott, LLC

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