In a recent decision of the United States Bankruptcy Court for the District of Delaware, In re Federal Mogul Global, Inc., No. 01-10578 (JKF) (Bankr. D. Del., Mar. 19, 2008) (click here to read the decision), the court ruled that the assignment of rights in certain insurance policies to an asbestos trust was valid and enforceable under the Bankruptcy Code, and anti-assignment provisions in the policies and applicable state law were preempted.

The issue under consideration by the court was related to, but bifurcated from, the plan confirmation process. Certain insurers objected to confirmation of the Fourth Amended Joint Plan of Reorganization for the Debtors and Debtors-In-Possession (As Modified) (the “Plan”) on the ground that assignment of insurance rights to a § 524(g) trust, to which asbestos liabilities are channeled and which addresses and pays those liabilities, was not valid and enforceable. The Plan proponents and the objecting insurers stipulated that the court would address the assignment and preemption issue separately from the confirmation of the Plan, and the Plan had previously been confirmed on November 8, 2007.

The Court noted that it is established in the Third Circuit that assignment of policy proceeds to a § 524(g) trust is not prohibited by anti-assignment provisions in insurance policies. The court further noted that once an event occurs that gives rise to the insurer’s liability under a policy, the policy itself can be assigned. In this case, since events giving rise to liability have already occurred, the court reasoned that there is no additional risk to the insurance companies by virtue of the assignments. The court rejected the objecting insurers’ arguments that, even though the premiums have been paid, the debtors’ ongoing obligation of cooperation, retrospective premiums, deductibles and notice make the policies into executory contracts, which fall under the restriction on assignment contained in § 365 of the Bankruptcy Code. The Court found that “because the premiums are paid, the policy coverage periods have expired, and the remaining obligations of the insureds are ministerial, the asbestos insurance policies are not executory insurance contracts falling under §365 of the Bankruptcy Code.” Thus, the court overruled the objections of the objecting insurers and entered an Order that the assignment of rights in certain insurance policies to the asbestos trust is valid and enforceable, notwithstanding anti-assignment provisions in the policies.

Certain Underwriters at Lloyd’s London and Certain London Market Companies, as well as another group of insurers, appealed to the United States District Court for the District of Delaware from the Bankruptcy Court’s March 19, 2008 Order (Certain Underwriters at Lloyd’s London v. Federal Mogul Inc., Civil Action Nos. 08-0229 and 08-0230, Judge Joseph H. Rodriguez). The issue presented by the appellants is “[w]hether the bankruptcy code preempts otherwise enforceable provisions of insurance policies that prohibit an insured from assigning the policies (or rights thereunder) to a third party, absent the insurer’s consent.” Briefing on the appeals was completed on July 3, 2008, and the appellants have requested oral argument, which has not yet been ordered or scheduled.