Beruflich Dokumente
Kultur Dokumente
No. 08-3650
American International Group, Inc. a publicly held corporation that is not a party
to this appeal, as the parent corporation of the AIG Member Companies, has an
interest in the financial outcome of the proceeding.
Dated: November, 18, 2008
TABLE OF CONTENTS
Page
BANK_FIN:316991-2 021087-134919
Case: 08-3650 Document: 00312240403 Page: 4 Date Filed: 11/19/2008
I. TABLE OF AUTHORITIES
Statutes Page
11 U.S.C. § 105......................................................................................................7, 8
11 U.S.C. § 501........................................................................................................10
11 U.S.C. § 558........................................................................................................12
11 U.S.C. § 1129................................................................................................7, 8, 9
Cases
(i)
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Travelers Cas. & Sur. Co. of America v. Pac. Gas & Elec. Co.,
549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) ...................................11, 12
U.S. Lines, Inc. v. U.S. Lines Reorganization Trust (In re U.S. Lines, Inc.),
262 B.R. 223, (S.D.N.Y. 2001)................................................................................13
Secondary Materials
(ii)
Case: 08-3650 Document: 00312240403 Page: 6 Date Filed: 11/19/2008
The AIG Member Companies1 join in and adopt the Statement of Subject
The AIG Member Companies join in and adopt the Statement of Related
The AIG Member Companies join in and adopt the Statement of Standard of
1
Appellant is National Union Fire Insurance Company of Pittsburgh, PA,
Insurance Company of the State of Pennsylvania, Lexington Insurance Company,
American Home Insurance Company, and any other entities related to American
International Group, Inc. that engaged in business transactions with the
Reorganizing Debtors and referred to collectively as the “AIG Member
Companies”.
-1-
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The AIG Member Companies join in and adopt the Statement of Issues
Presented For Review of Appellants Hartford and Century Indemnity (Issues 1-3),
and further identify the following additional issue with respect to the AIG Member
Companies:
payment of invalid silica claims, and thus threatens to decrease the recovery of
The AIG Member Companies join in the Appellate Brief and associated
the Case and the Statement of the Facts articulated by Appellants Hartford and
on February 14, 2002 (the “Petition Date”). All potential silica related injury
claims that existed prior to the Petition Date are pre-petition claims, including
2
The other Appellants are Hartford Accident and Indemnity Company, First State
Insurance Company, and Twin City Fire Insurance Company (collectively,
“Hartford”); Century Indemnity Company, as successor to CIGNA Specialty
Company, formerly known as California Union Insurance Company, and
Westchester Fire Insurance Company, for itself and for International Insurance
Company (now known as TIG Insurance Company) (collectively, “Century”); and
the AIG Member Companies.
3
GIT’s affiliate, NARCO and its subsidiary debtors (“Narco”) filed their chapter
11 cases in January 2002. The various GIT-related companies' cases have been
jointly administered under Case No. 02-21626. The NARCO cases were jointly
administered under Case No. 02-20198. The Narco and GIT cases are related and
joint proceedings were held with respect to matters relating to plan confirmation
and the appeals have been consolidated before this Court. AIG Member
Companies' appeal concerns only issues arising in the GIT bankruptcy.
claims that accrued after January 1, 2000 through the Petition Date (the “Post-2000
Silica Claims”).
The GIT Third Amended Plan (“Plan” or “GIT Plan”) was filed on
December 28, 2005, and on June 21, 2006, the Debtors filed Technical
amendments to the Plan being filed on December 15, 2006 (Docket 6971) and
Technical Amendments were filed on October 25, 2007 (Docket 7819). See, JA
2877 et seq.
Pursuant to settlement agreements between the Debtor and the AIG Member
Companies, the AIG Member Companies are creditors of GIT and have allowed
recovery will be the same as any other Silica Trust Creditor, but thousands of tort
claimants also will be Silica Trust Creditors and will be paid from the Silica Trust,
the recovery by the AIG Member Companies and other bona fide Silica Trust
Creditors.
The Plan provides that all pre-petition silica claims, including the Post-2000
Silica Claims, will be administered through the Silica Trust, and such claims will
be allowed and paid based upon exposure and diagnosis alone. JA73 (¶193), JA
That payment scheme will prevail even though Debtor testified, and the
Bankruptcy Court opined, that the Post-2000 Silica Claimants should be “subject
2000, Debtor had implemented safety measures and warning procedures with
respect to their products. JA1042 (“we've put ourselves into the best position we
can as far as product warnings and things like that and sophisticated
intermediaries”). Thus, in the absence of the GIT Plan and the Silica Trust
Claimants’ claims would not otherwise be paid in the tort system or even be
Under the GIT Plan and Silica Trust Distribution Procedures, the Trustees
alone have the authority to "allow" a claim and no other parties can object -- not
insurers who will be asked to pay for the claim allowed by the Trust. JA 2968,
2972, et seq.
issues raised by Hartford and Century, the Bankruptcy Court erred in confirming
the GIT Plan and issuing the Silica Channeling injunction because the GIT Plan
would not be allowable under either bankruptcy or non-bankruptcy law, and the
GIT Plan and documentation contain no provision for the assertion of valid
defenses. This allowance of such claims comes at the expense of other claims to be
paid from the Trust, including those of the AIG Member Companies. The GIT Plan
On appeal, the District Court missed the point of AIG Member Companies’
arguments -namely that the AIG Member Companies are an actual creditor of the
APG Silica Trust and as a creditor AIG Member Companies object to the plan and
brief, in which objections and Brief the AIG Member Companies join.
The additional issue raised by AIG Member Companies in the Courts below,
and thus here, is whether it was proper for those Courts to confirm a plan which
structured a mechanism for the allowance and payment of invalid claims, contrary
to the Bankruptcy Code's principles and statutory provisions and to the detriment
and dilution of rights of creditors with valid and allowed claims. Specifically, the
bankruptcy law will nonetheless be allowed and paid, on a pro-rata basis, from a
limited pot of funds from which the AIG Member Companies’ claim is to be paid
pro-rata. The Debtors structured the Plan and Silica TDPs to eliminate the rights
of creditors (and insurers) to object to the payment of claims that would not
otherwise be allowed under bankruptcy law due to the claims being unenforceable
IX ARGUMENT
In confirming the Plan and approving the Silica Trust, the Bankruptcy Court
relied on Sections 105 and 1129 of the Bankruptcy Code. 11 U.S.C. §§ 105, 1129.
This Court has time and time again held that Section 105 does not provide
Bankruptcy Code. See, In re Continental Airlines, Inc., 203 F.3d 203, 211 (3d Cir.
Combustion Engineering, Inc., supra 391 F.3d at 235-6, citing, inter alia, Norwest
Bank Worthington v. Ahlers, 485 U.S. 197, 206, 99 L. Ed. 2d 169, 108 S. Ct. 963
(1988) ("Whatever equitable powers remain in the bankruptcy courts must and can
only be exercised within the confines of the Bankruptcy Code."). Section 1129 of
the Bankruptcy Code itself conditions confirmation of a plan on both the plan and
the plan proponent complying with applicable provisions of Title 11. 11 U.S.C. §
1129(a)(1), (2). It further requires the plan to be proposed in good faith and not by
means forbidden by law. 11 U.S.C. § 1129(a)(3). This Circuit has stated that "for
point of inquiry is the plan itself and whether such a plan will fairly achieve a
result consistent with the objectives and purposes of the Bankruptcy Code." In re
PWS Holding Corp., 228 F.3d 224, 242 (3d Cir. 2000), citing In re Abbotts Dairies
of Pa., Inc., 788 F.2d 143, 150 n.5 (3d Cir. 1986).
does the inclusion in the silica trust of persons with claims that would not be
allowed under the Bankruptcy Code, and the divestiture of the mechanism for
Further, the Bankruptcy Code set up a system with provisions that govern
how claims are handled in order to effectuate the Code's goal of ensuring a fair and
with the provisions of the Code as a device to get votes for a plan is simply not
claimant with an allowed claim has standing to appeal an order disposing of assets
(i.e., allowing a claim of another claimant) from which the claimants seeks to be
paid. See, e.g., In re International Environmental Dynamics, Inc., 718 F.2d 322,
Section 502(a) of the Bankruptcy Code provides that "a party in interest"
may object to claims. AIG Member Companies are parties with a direct interest in
the percentage payout of Silica Trust Claims. Yet, the Plan prohibits AIG Member
The District Court’s pronunciation that the fact that there are theories of
defense does not mean that claims do not exist demonstrates a fundamental
The mere ability to assert a claim does not rise to the level of having an allowed or
allowable claim under applicable bankruptcy law. To the contrary, a claim that is
subject to defense and which would be unenforceable against the debtor based
502(b)(1).
filed under Section 501 is deemed allowed unless a party in interest objects. 11
Section 502(b)(1) of the Bankruptcy Code provides that a claim will not be
allowable if it "is unenforceable against the debtor, and property of the debtor
In re Combustion Engineering, Inc., 391 F.3d 190, 245 (3d Cir. 2004)
State law ordinarily determines what claims of creditors are valid and
The “basic federal rule' in bankruptcy is that state law governs the substance
of claims, Congress having 'generally left the determination of property
rights in the assets of a bankrupt's estate to state law.'" (Citations Omitted)
Accordingly, when the Bankruptcy Code uses the word "claim"--which the
Code itself defines as a "right to payment," 11 U.S.C. § 101(5)(A) --it is
usually referring to a right to payment recognized under state law. As we
stated in Butner, "[p]roperty interests are created and defined by state law,"
and "[u]nless some federal interest requires a different result, there is no
reason why such interests should be analyzed differently simply because an
interested party is involved in a bankruptcy proceeding." 440 U.S., at 55, 99
S. Ct. 914, 59 L. Ed. 2d 136;…
Travelers Cas. & Sur. Co. of America v. Pac. Gas & Elec. Co., 549 U.S. 443, ,
127 S.Ct. 1199, 1205, 167 L.Ed.2d 178, 186-7 (2007).
From there, the bankruptcy court is to determine how and what claims are
advancing a fair and ratable distribution of assets among the creditors. Addison v.
Langston ( In re Brints Cotton Marketing, Inc.), 737 F.2d 1338, 1341 (5th Cir.
1984), citing Vanston Bondholders Protective Committee v. Green, 329 U.S. 156,
161, 162-63, 67 S. Ct. 237, 239, 240, 91 L. Ed. 162 (1946). See also, In re
American Reserve Corp., 840 F.2d 487, 489 (7th Cir. 1988) (the courts shall look
when the petition was filed). Ultimately, the effect of Section 502 is to provide a
bankruptcy trustee with the same rights and defenses to claims as held by the
debtor prior to bankruptcy. In re Combustion Eng'g, Inc., supra, 391 F.3d at 245
(3d Cir. Del. 2004). Moreover, Section 502 "is most naturally understood to
provide that, with limited exceptions, any defense to a claim that is available
& Sur. Co. of America v. Pac. Gas & Elec. Co., supra, 549 U.S. , 127 S.Ct. at
1204, 167 L.Ed.2d at 182 (2007). "When the Bankruptcy Code uses the word
referring to a right to payment under state law." Id. 594 U.S. , 127 S.Ct. at 1205,
167 L.Ed.2d at 182. Indeed, Section 558 of the Bankruptcy Code expressly
provides the bankruptcy estate with the benefit of any defense available to the
debtor as against any entity other than the estate. 11 U.S.C. § 558. Thus, a claim
be disputed that where a claim would be unenforceable against the debtor outside
of bankruptcy because the statute of limitation had run, the claim will not be
allowed in a bankruptcy case. See, In re Brill, 318 B.R. 49, 53 (Bankr. S.D.N.Y.
unenforceable against the debtor"), citing, inter alia, U.S. Lines, Inc. v. U.S. Lines
Reorganization Trust (In re U.S. Lines, Inc.), 262 B.R. 223, 234 (S.D.N.Y. 2001).
If the Post-2000 Silica Claims were submitted to the tort system, those
completely bar their claims. By shielding these claimants from valid liability
defenses, Post-2000 Silica Claims claimants will recover larger allowed amounts
by virtue of the GIT Plan than they would outside of bankruptcy in the tort system
(i.e., the otherwise applicable law to which Section 502 makes reference). This is
clearly contrary to the statutory scheme which provides for the allowance and
payment of a claim except to the extent that the claim is unenforceable against the
debtor under any agreement or applicable law. A plan that condones superior,
rather than equitable, treatment defies a principal purpose of the bankruptcy code
But for the GIT Plan and the Silica TDP, many, if not all, of the Post-2000
Silica Claimants’ claims would not otherwise be paid in the tort system or even be
allowed under the Bankruptcy Code. The Bankruptcy Court was mistaken when it
Amended Plan of Reorganization, page 46). To the contrary, the GIT Plan and
TDPs are structured so that Post-2000 Silica Claims will be allowed and, thus paid,
averred that the Plan and Silica TDPs “will be able to pay present claims and future
5
In his March 8, 2007 deposition, Mr. Pahigian acknowledged the potential
for greater recovery by silica claimants whose claims are administered by the trust.
(Bankruptcy Doc 7260, District Court Doc No. 13-2, Transcript, pp. 56-57):
Q: So when we talk about the claimants that are going to be treated --
channeled to the trust, this new group of claimants, and you said that you believe
that they would be treated more fairly than they would have in the tort system, do
you believe that they will also receive a greater recovery?
A: Than?
Q: Than they would have had they not had their claims channeled to the
trust?
A: Yes. That’s my general belief. But as I said before, I can’t tell you what
the tort system is going to provide to these claimants on any given day in the
legitimate defenses that can limit or eliminate the claimant’s ability to recover.
See. Phillips v. A-Best Products Co., 542 Pa. 124, 665 A.2d 1176 (1995).6
The GIT Plan elevates the recovery by the Post-2000 Silica Claims
claimants and provides a windfall that would not otherwise exist, by requiring
without defense the allowance and payment of defensible claims. The GIT Plan
does so at the expense of the insurers generally and with respect to the AIG
Member Companies specifically as a Silica Trust Creditor whose claims are diluted
Bankruptcy Code. The GIT plan and the Trust eviscerate the mechanism that
future. You’re talking about individuals who are going to develop disease a decade
or many decades down the road. The tort system may change during that period,
likely will. So I can’t tell you how each – I can’t even begin to speculate how each
claimant is going to be treated. I think as a whole, the concept of setting a
significant amount of money aside and significant potential insurance recoveries
aside for the group as a whole and distributing that money after analyses are done
about the number of future claimants expected assures all of them relatively equal
treatment and I think a more fair and equitable distribution of proceeds than would
occur under the tort system
6
AIG Member Companies join in the Hartford and Century Appellant Brief which
includes a compelling showing that many silica claims, whether pre-2000 or post-
2000, are invalid and dilute the AIG Member Companies recovery as creditors of
the Silica Trust. AIG Member Companies argue further that the failure to retain
any requirement to show actual tort liability for Post-2000 Claims is a further
impermissible dilution. Indeed, the Phillips v. A-Best case explicitly held that
silica claims against these Debtors were subject to such defenses.
enables creditors with legitimate claims to object to claims that are not valid. A
plan that allows legally worthless claims to receive a recovery, with no provision
for disallowance in the face of a valid defense, at the expense of other claims, is
not equitable, is inconsistent with the principals and provisions of the Bankruptcy
Code and should not have been confirmed. The Bankruptcy Court erred in
X CONCLUSION
The Bankruptcy Court and District Courts erred in confirming the GIT
Plan. The Plan inappropriately provides for the payment of invalid claims from the
Silica Trust to the detriment of valid claims with no mechanism for disallowance.
For the foregoing reasons, and the reasons set forth in the Hartford Brief, the
Orders of the District Court and the Bankruptcy Court confirming the GIT Plan
and authorizing the APG Silica Trust and TDPs should be reversed.
B m Attorneys:
~ e v e w e i s Manne
s (Pa. 34545)
TUCKER ARENSBERG, P.C.
1500 One PPG Place
Pittsburgh, PA 15222
Phone: 4 12-566-1212
Telecopier: 4 12-594-5619
Email : bmanne@,tuckerlaw.com
COMBINED CERTIFICATIONS
1. Beverly Weiss Manne, Michael Davis and Joseph Boury are members in
good standing of the bar of the United States Court of Appeals for the Third
Circuit.
4. The text of the electronic version of this brief is identical to the text of the
paper copies of this brief being filed with the Court except that the
attachments contained in Volume I of the Appendix are not included in the
electronic version.
6. On this 19th day of November, 2008, a copy of the electronic version of the
brief was transmitted to the Office of the Clerk for the Third Circuit Court of
Appeals, ten hard copies of the brief were mailed to the Office of the Clerk
for the Third Circuit Court of Appeals.
Two copies of this Brief were served upon the following counsel of record
by first class/priority mail, postage prepaid, addressed as follows:
-18-
Case: 08-3650 Document: 00312240403 Page: 24 Date Filed: 11/19/2008
JOHN D. DEMMY
STEVENS & LEE, P.C.
1105 North Market Street, 7th Floor
Wilmington, DE 19801
(302) 425-3308
LEONARD P. GOLDBERGER
STEVENS & LEE, P.C.
1818 Market Street, 29th Floor
Philadelphia, PA 19103
(215) 751-2864
JOSEPH GIBBONS
AMY E. VULPIO
WHITE AND WILLIAMS LLP
1800 One Liberty Place
Philadelphia, PA 19103
(215) 864-7000
Pursuant to Fed. R. App. P. 26.1 and Third Circuit LAR 26.1, Appellants
Hartford Accident and Indemnity Company, First State Insurance Company, and
Twin City Fire Insurance Company hereby make the following disclosure:
The Hartford Financial Services Group, Inc., a publicly held corporation that
is not a party to this appeal, has a financial interest in the outcome of this appeal
because it is the ultimate parent of the Appellants listed above.
Pursuant to Fed. R. App. P. 26.1 and Third Circuit LAR 26.1, Appellants (i) Century
Indemnity Company, as successor to CIGNA Specialty Company, formerly known as California
Union Insurance Con~pany,and (ii) Westchester Fire Insurance Company, for itself and for
International Insurance Company (now known as TIG Insurance Company) (by operation of
novation all rights and obligations under the policies have been transferred from International
Insurance Company to Westchester Fire lnsurance Company), hereby make the following
disclosures:
TABLE OF CONTENTS
ARGUMENT ...........................................................................................................19
CONCLUSION........................................................................................................59
ii
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TABLE OF AUTHORITIES
CASES
Brockett v. Winkle Terra Cotta Co., 81 F.2d 949 (8th Cir. 1936) ...........................37
Danvers Motor Co. v. Ford Motor Co., 432 F.3d 286 (3d Cir. 2005).....................16
Colacicco v. Apotex Inc., 521 F.3d 253 (3d Cir. 2008) ...........................................15
In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989) ..............................................23
In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000) .................15, 16, 23, 24, 27
In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) ........................................23
iii
Case: 08-3650 Document: 00312869189 Page: 8 Date Filed: 12/04/2008
In re Porto Rican America Tobacco Co., 112 F.2d 655 (2d Cir. 1940) ..................37
In re Pressed Steel Car Co., 16 F. Supp. 329 (W.D. Pa. 1936) ..............................38
In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999) ...........................................27
In re UNR Industries, Inc., 725 F.2d 1111 (7th Cir. 1984) ...............................21, 24
New York State Conference of Blue Cross & Blue Shield Plans v. Travelers
Insurance Co., 514 U.S. 645 (1995)..............................................................30
iv
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Pacific Gas & Electric Co. v. California ex rel. Cal. Dep’t of Toxic
Substances Control, 350 F.3d 932 (9th Cir. 2003)......................44, 48, 53, 54
Schweitzer v. Consolidated Rail Corp., 758 F.2d 936 (3d Cir. 1985).....................20
Weinberger v. Hynson, Westcott & Dunning, Inc., 412 U.S. 609 (1973)................42
STATUTORY PROVISIONS
11 U.S.C.
§105 ...................................................................................................... passim
§365(b)...........................................................................................................46
§365(e) ...........................................................................................................43
§524(g)................................................................................................... passim
§525 ...............................................................................................................43
§541 .........................................................................................................50, 51
§541(a) ...........................................................................................................52
§541(c) ...........................................................................................................51
§1123(a) ................................................................................................. passim
§1141(d).........................................................................................................19
§1142(a) .......................................................................................42, 43, 44, 45
28 U.S.C.
§157(a) .............................................................................................................3
§157(b).............................................................................................................3
§157(c) .............................................................................................................3
§158(a) .............................................................................................................4
§158(d).............................................................................................................4
§1291 ...............................................................................................................4
§1334(a) ...........................................................................................................3
§1334(b)...........................................................................................................3
v
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LEGISLATIVE MATERIALS
OTHER AUTHORITIES
Hanna, John & McLaughlin, James Angell, The Bankruptcy Act of 1898 as
Amended Including the Chandler Act of 1938 (1939)...................................38
Phillips, Walter Ray & Nadler, Charles Elihu, The Law of Debtor Relief:
Bankruptcy and Non-Bankruptcy Devices (1972).........................................37
vi
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PRELIMINARY STATEMENT
In recent years, plaintiffs’ lawyers have flooded the courts with dubious or
over the silica multidistrict litigation described such claims: “[T]hese diagnoses
were driven by neither health nor justice: they were manufactured for money.” In
re Silica Prods. Liab. Litig., 398 F. Supp. 2d 563, 635 (S.D. Tex. 2005) (Jack, J.).
This case centers on a scheme to use the bankruptcy process to generate similarly
dubious or fraudulent silica-related claims, to hand Debtors’ insurers the bill for
those claims, and to deprive insurers of defenses to coverage arising from that very
scheme.
Prior to bankruptcy, Debtors had never paid a penny on account of silica claims
(and their primary insurer had paid a mere $312,000 to resolve such claims).
Debtors did, however, have liability insurance policies that excluded asbestos
claims but (they believed) covered silica claims. And Debtors desperately needed
to reach agreement with the plaintiffs’ bar to obtain the necessary votes to approve
the plan of reorganization that would resolve their asbestos liability. Debtors
therefore agreed not only to set up a trust for asbestos claims, but also to give the
plaintiffs’ lawyers something extra: a trust for silica claims, funded entirely by
insurance proceeds.
Case: 08-3650 Document: 00312869189 Page: 12 Date Filed: 12/04/2008
After that—even though Debtors had faced fewer than 200 silica claims in
More than half were supported by doctors whose diagnoses Judge Jack had
rejected as fraudulent. And more than half were filed by persons previously
diagnosed with an asbestos-related disease, who almost certainly could not also
have had any silica-related disease. As Judge Jack explained, “a golfer is more
single case of both silicosis and asbestosis,” Silica Prods., 398 F. Supp. 2d at
Despite these obvious indicia of fraud, and despite their own projection that
contended that they could not reorganize without an injunction under §105 of the
Bankruptcy Code channeling the silica claims to a trust. Their plan provided for
the creation of such a silica trust, to be funded solely by the proceeds of insurance
plan also purported to bar insurers from invoking any defense to insurance
policies’ assignment.
Over the insurers’ objection, the bankruptcy court upheld both features of
the plan. It erred on both counts. As to the §105 injunction, the bankruptcy court
2
Case: 08-3650 Document: 00312869189 Page: 13 Date Filed: 12/04/2008
failed to apply the legal standard articulated by this Court for granting such
extraordinary relief, failing to require Debtors to show that the injunction was truly
wrongly held that the Bankruptcy Code preempts those defenses, reasoning that
contract governing the transactions through which it chooses to implement its plan.
That surpassingly broad reading of §1123(a) cannot be squared with its text or with
JURISDICTIONAL STATEMENT
The district court had original jurisdiction over Debtors’ Chapter 11 cases
under 28 U.S.C. §1334(a); the cases were referred to the bankruptcy court under 28
U.S.C. §157(a). The bankruptcy court had jurisdiction over plan confirmation
of the plan. JA2538-2550. Treating that order as a final order confirming the plan,
Appellants filed a timely notice of appeal to the district court. JA2667-2674.1 The
1
As to “core matters” such as plan confirmation, see 28 U.S.C.
§157(b)(2)(L), there is no statutory authority for the bankruptcy court to issue
“recommended” findings and conclusions subject to de novo review in the district
court. Cf. id. §157(c)(1) (establishing such a procedure for non-core matters).
3
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parties subsequently filed a timely joint motion to alter or amend the judgment.
JA2675-2681. On November 14, 2007, the bankruptcy court issued a revised order
filed a timely amended notice of appeal. JA3045-3054. The district court had
On December 18, 2007, the district court issued an order, in Misc. No. 07-
motion for reconsideration on the ground that they had not yet had an opportunity
to brief their appeal. After briefing, on July 26, 2008, the district court entered a
final order in No. 07-1749 vacating its earlier order and again affirming the
of appeal to this Court on August 25, 2008. JA1-10. This Court has jurisdiction
under 11 U.S.C. §105 channeling present and future silica-related claims against
2
Raised: Bankr. Docket Nos. 5993, 5994, 5996. Ruled on: JA47-63
(bankruptcy court); JA19-21 (district court).
4
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Debtors’ plan of reorganization and to appeal the order confirming the plan?4
This case arises out of the Chapter 11 petition filed in 2002 by Global
Industrial Technologies, Inc. (“GIT”) and its subsidiaries, including A.P. Green
Industries, Inc. Appellants are insurers who issued liability insurance policies to
§105 of the Bankruptcy Code, enjoining present and future silica-related claims
3
Raised: Bankr. Docket Nos. 6375, 6476, 6477. Ruled on: JA201-208
(bankruptcy court); JA22-24 (district court).
4
Raised: Bankr. Docket No. 6477. Ruled on: JA201-208 (bankruptcy
court); JA16-19 (district court).
5
Appellants are three groups of insurers: Hartford Accident and Indemnity
Company, First State Insurance Company, and Twin City Fire Insurance Company
(collectively, “Hartford”); Century Indemnity Company, as successor to CIGNA
Specialty Company, formerly known as California Union Insurance Company, and
Westchester Fire Insurance Company, for itself and for International Insurance
Company (now known as TIG Insurance Company) (collectively, “Century”); and
National Union Fire Insurance Company of Pittsburgh, PA, Insurance Company of
the State of Pennsylvania, Lexington Insurance Company, American Home
Insurance Company, and any other entities related to American International
Group, Inc. that engaged in business transactions with the Reorganizing Debtors
(collectively, “the AIG Member Companies”). This brief is filed on behalf of
Hartford and Century. While the AIG Member Companies have filed a separate
brief to address an additional issue, they join fully in this brief. See Brief for
Appellants AIG Member Companies (“AIG Br.”) at 2.
5
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against Debtors and channeling the claims to a trust. Debtors’ plan assigns
Debtors’ rights in certain insurance policies to the trust. The plan also purports to
Century’s objections, arguing that they lacked standing (while conceding that the
AIG Member Companies, who were creditors as well as insurers of Debtors, had
June and October 2006. On September 21, 2007, the bankruptcy court issued an
order holding that (1) Hartford and Century lacked standing to object to Debtors’
plan; and (2) the Bankruptcy Code preempted any anti-assignment provisions in
the insurers’ policies. JA201-208. On September 24, 2007, the court issued an
order confirming Debtors’ plan and concluding that Debtors had demonstrated that
2681, and on November 14, 2007, the bankruptcy court issued a final revised order
6
Case: 08-3650 Document: 00312869189 Page: 17 Date Filed: 12/04/2008
related entity. The bankruptcy court entered a final order confirming the NARCO
plan on November 14, 2007. Hartford appealed, and the district court affirmed on
July 26, 2008. That order is the subject of a separate appeal to this Court, No. 08-
3651. This appeal has been consolidated with the NARCO appeal for the purpose
of disposition.
STATEMENT OF FACTS
Debtor here. JA816. In 1999, GIT itself was acquired by RHI AG as part of
sold by A.P. Green allegedly contained asbestos. Certain plaintiffs sued A.P.
6
RHI AG is also the ultimate parent of NARCO, the debtor in No. 08-3651,
which it acquired at around the same time.
7
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bankruptcy filing in 2002, A.P. Green had paid approximately $448 million to
A.P. Green’s experience with silica was another story entirely. As of the
bankruptcy filing, there was exactly one lawsuit pending against A.P. Green, in
Texas state court, consisting of claims by 169 individuals for bodily injury caused
Debtors identified fewer than 200 claims asserted against A.P. Green for silica-
related injury in the 25 years before the bankruptcy. JA106. In those 25 years,
A.P. Green never paid any of its own money on account of silica claims, and its
primary insurer had paid only $312,000 to resolve such claims. JA106-107.
conditions” and “to deal with the overwhelming number of asbestos liability
lawsuits and claims pending against them.” JA117; see also JA780 (Debtors filed
8
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asbestos claimants, and thus needed to reach a deal with plaintiffs’ lawyers. See In
re Congoleum Corp., 426 F.3d 675, 680 (3d Cir. 2005) (noting that “[t]he realities
of securing favorable votes from thousands of claimants to meet the 75% approval
requirement forces debtors to work closely” with plaintiffs’ lawyers). In the course
of negotiating that deal, Debtors determined that they had nearly $500 million in
potential insurance coverage that did not cover asbestos claims (generally because
policies in the 1980s) but that, in their view, was available to cover silica claims.
JA823. Accordingly, Debtors and asbestos plaintiffs’ counsel (many of whom also
represented persons asserting silica claims against other companies) agreed upon a
plan that included not just an asbestos trust and channeling injunction, but a silica
trust and channeling injunction as well. JA2891, JA2893.7 Debtors and plaintiffs’
counsel also negotiated the Trust Distribution Procedures—the terms under which
the silica trust would evaluate and pay claims. JA2968-3031. In addition, Debtors
agreed with plaintiffs’ counsel that the Trust Advisory Committee and the Future
7
Under the plan, silica claims against A.P. Green based on exposure prior to
the petition date will be channeled to the silica trust. JA119, JA892. Claims based
on post-petition exposure will ride through the bankruptcy and become the
responsibility of the reorganized Debtors. JA65, JA119, JA137.
9
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Debtors are making no contribution of their own funds to the silica trust,
Green will assign to the trust its rights under its insurance policies with asbestos
JA3037.
After agreeing with plaintiffs’ counsel to structure the plan to include the
silica trust, Debtors actively sought out claimants to support the plan. Having
virtually no silica claimants of their own, Debtors obtained a list of silica claimants
from another company’s bankruptcy and solicited votes for their plan from counsel
for those claimants (many of whom were the same firms representing asbestos
behalf of persons with alleged silica claims against Debtors. JA1412. The bulk of
these votes were submitted by a handful of law firms via master ballots. JA1417.
10
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Indeed, one law firm, the Provost Umphrey Law Firm, accounted for over half the
votes. JA1334.8
Initially, the ballots were the only evidence of the alleged silica liability
asserted in the bankruptcy case. The bankruptcy court ultimately required voting
Green silica-containing products, and any prior diagnoses of, or claims for,
counsel, many were incomplete, and some contained no information at all other
serious doubt on the legitimacy of such claims. First, in 2005, the district judge
presiding over the silica multidistrict litigation, Judge Janis Jack, made disturbing
8
Nearly 10% of the voted silica claims were ultimately withdrawn after
counsel was forced to concede they were meritless. After Hartford served a
subpoena on the Law Firm of Robert Taylor requesting information about the
claims the firm had voted, the firm withdrew 489 out of the 525 silica votes it had
cast. JA1563-1565. Although Taylor had previously certified that he had
authorization to vote the claims, that the disease categories were correct, and that
the claimants had been exposed to A.P. Green silica products, he explained in his
motion to withdraw the votes that he no longer represented these claimants “due to
the dismissal of these claimants’ litigation claims.” JA1564.
11
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findings regarding the mass screening resulting in over 10,000 silica claims. See In
re Silica Prods. Liab. Litig., 398 F. Supp. 2d 563 (S.D. Tex. 2005). Judge Jack
information, all were diagnosed with silicosis by the same 12 doctors “affiliated
with a handful of law firms and mobile x-ray screening companies,” who
580, 622. Moreover, of the 6,757 silicosis claims submitted by one law firm, over
4,000 were from persons who had previously made claims against the Manville
Trust for asbestosis—which meant the odds were overwhelming that one, or both,
diagnoses were fraudulent. See id. at 603. As Judge Jack put it after a careful
review of the medical evidence, “a golfer is more likely to hit a hole-in-one than an
asbestosis,” yet the plaintiffs’ law firm in question “parked a van in some parking
lots and found over 4,000 such cases.” Id.9 The court found the doctors’ diagnoses
inadmissible and imposed sanctions on the lawyers over whom it determined it had
jurisdiction for bringing such claims. See id. at 637-640, 676. As Judge Jack
9
See also id. at 608 (noting that when one of the diagnosing doctors “first
examined 1,807 Plaintiffs’ x-rays for asbestos litigation …, he found them all to be
consistent with asbestosis and not with silicosis. But upon re-examining these
1,807 MDL Plaintiffs’ x-rays for silica litigation, [he] found evidence of silicosis
in every case”).
12
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summed it up: “[T]hese diagnoses were driven by neither health nor justice: they
claims was state tort reform. Texas, for example, required asbestos and silica
disease, including a detailed diagnosis by a physician. See Tex. Civ. Prac. & Rem.
Other states have also enacted legislation requiring evidence of impairment for
submissions in this case, leave little doubt that most of the claims asserted by the
5,125 silica claimants who voted on the plan are invalid. Over half the claimants
were rejected as fraudulent by Judge Jack. JA2074. In addition, over half the
603; see also JA1431 (Decl. of David Weill) (noting the near impossibility of a
13
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working lifetime). Fully 82% of the claims bore at least one of these markers of
fraud. JA2159.
June 2006, the bankruptcy court held a hearing on plan confirmation. In support of
the proposed silica injunction, Debtors relied primarily on the 5,125 votes cast by
alleged silica claimants. The bankruptcy court concluded that this evidence was
allow submission of additional evidence regarding the silica claims and Debtors’
ability to pay them. As discussed above, approximately 4,600 silica claimants filed
bankruptcy court confirmed the plan, concluding that the silica injunction was
to the merits of the silica claims, but concluded that “[w]hether or not [the] claims
prove to be compensable, Debtor[s] must address them, either in the tort system
with its inherent risks and the possibility that any one judgment could be materially
14
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adverse and constitute a default under its financing covenants, or through a trust.”
JA55.
standing to object to the GIT plan and the plan’s assignment of A.P. Green’s
insurance rights to the trust. JA201-209. The court concluded that the Bankruptcy
Code preempted the insurers’ ability to assert the anti-assignment clauses in their
policies as a defense to coverage. JA207. In addition, the court held that Hartford
and Century lacked standing to object to confirmation of the plan (indeed, the court
found that they lacked standing to be heard even as to the assignment of rights
were creditors, as well as insurers, their standing was not contested. JA34.
The district court affirmed both rulings. JA11-27. This appeal followed.
STANDARD OF REVIEW
injunction against silica claims, this Court accepts the bankruptcy court’s findings
of fact unless clearly erroneous, but reviews de novo whether those facts meet the
F.3d 203, 208 (3d Cir. 2000). This Court reviews the bankruptcy court’s
preemption and standing rulings, which present pure questions of law, de novo.
Colacicco v. Apotex Inc., 521 F.3d 253, 261 (3d Cir. 2008) (preemption); Danvers
15
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Motor Co. v. Ford Motor Co., 432 F.3d 286, 291 (3d Cir. 2005) (standing). In
doing so, it affords no deference to the district court, but reviews the bankruptcy
court’s judgment using the standard the district court should have employed.
SUMMARY OF ARGUMENT
Such an injunction is permissible only when the bankruptcy court makes specific
factual findings demonstrating that the debtor could not reorganize without the
injunction. In granting Debtors a §105 injunction against future silica claims, the
bankruptcy court failed to apply that standard. On the undisputed facts here, there
can be no doubt that Debtors did not meet their burden of showing that they could
not reorganize without a silica injunction. Debtors had only minimal silica liability
before the bankruptcy was filed; over four-fifths of the claims asserted in response
to Debtors’ active solicitation during the bankruptcy bore obvious indicia of fraud;
and the reorganized Debtors’ financial health and profitability were never in
question.
16
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elements. By its terms, that provision preempts only non-bankruptcy law that
would bar a debtor from complying with (or authorize a debtor not to comply with)
transfer its property to a third party, and the provision simply does not affect state-
nature and the rights of the property interest that the debtor possessed pre-petition.”
Integrated Solutions, Inc. v. Service Support Specialties, Inc., 124 F.3d 487, 495
(3d Cir. 1997). The Bankruptcy Code does not erase the anti-assignment
text, with its history, or with the overall structure and purpose of the Bankruptcy
Code. And that reading produces the illogical and unacceptable result that a debtor
would be entitled to override all state or federal law regulating any transaction
17
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III. Finally, while this Court need not reach the question in light of the
AIG Member Companies’ conceded standing, the lower courts erred in holding
that Hartford and Century lacked standing to contest these features of Debtors’
specifically designated for silica claims, and their active solicitation, thousands of
new silica claims were asserted against Debtors in a matter of months—claims that
otherwise might never have been asserted at all and that bore multiple indicia of
fraud. The silica trust is funded solely by insurance settlement proceeds and rights
under insurance policies. Yet the insurers had no role in the creation of the trust
distribution procedures that will govern payment of claims and will have no ability
to defend or associate in the defense of the claims, as their policies give them the
right to do. The obvious harm to insurers from such a scheme gives them a
bankruptcy court, and increases their burdens and impairs their rights in a manner
18
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ARGUMENT
the plaintiffs’ lawyers, they used the bankruptcy process to manufacture silica
claims that previously did not exist—and that, as shown above, bear patent signs of
fraud. Debtors now point to their own handiwork to argue that they must have an
injunction against silica claims or (despite the substantial profits they project) they
will be unable to reorganize at all. But the extraordinary relief of a §105 injunction
requires a showing of real necessity: it has never been available as a bandage for
have met their burden of demonstrating the need for a §105 injunction.
and may be asserted against the reorganized debtor, consistent with the basic due
process principle that claimants’ rights may not ordinarily be abrogated without
only of the present silica claims against them, but also of future silica claims that
19
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do not yet exist, but may arise after Debtors exit bankruptcy.10 In doing so, the
court invoked §105(a), which provides that bankruptcy courts may “issue any
Bankruptcy Code. Section 105 does not, however, grant the bankruptcy court the
authority to enter an injunction against future silica claims in a case such as this.
future mass-tort claims, to the extent they are permissible at all, must be reserved
for the rare cases in which such an injunction is essential to the success of the
claimants with nothing. Thus, in Johns-Manville, the bankruptcy court issued such
an injunction only after finding that Manville faced billions of dollars of asbestos-
related liability, and that “in the absence of the [i]njunction, one of the central
20
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626 (Bankr. S.D.N.Y. 1986); see also In re Johns-Manville Corp., 36 B.R. 743,
746 (Bankr. S.D.N.Y. 1984) (in the absence of a plan addressing future demands,
Industries: “If future claims cannot be discharged before they ripen, UNR may not
existence as a going concern. In that event, both UNR … and future plaintiffs
would be made worse off.” In re UNR Indus., Inc., 725 F.2d 1111, 1119-1120 (7th
Cir. 1984).
whether the injunction can withstand all challenges,” which in turn “depressed the
value of [Manville] stock.” H.R. Rep. No. 103-835, at 40 (1994). That uncertainty
led Congress to enact §524(g) of the Bankruptcy Code, which ratified the
codified it for use in future similar asbestos bankruptcies. Id. at 41. Section
524(g) permits debtors to obtain channeling injunctions against present and future
claims in asbestos cases, but only if the debtor satisfies stringent requirements
mirroring those in Johns-Manville. The debtor must demonstrate that it “is likely
21
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claims, and that “pursuit of such demands,” absent the injunction, “is likely to
threaten the plan’s purpose to deal equitably with claims and future demands.” 11
U.S.C. §524(g)(2)(B)(ii). In other words, the debtor must prove that it faces future
reorganized debtor would be unable to pay the claims against it and would be
likely to face liquidation. See H.R. Rep. No. 103-835, at 41 (§524(g) was designed
debtor seeking such relief to meet those basic threshold requirements of §524(g)—
that is, to meet the same requirements that Johns-Manville imposed in granting
such relief under §105. JA2213-2214. Thus, the silica channeling injunction
11
As the party requesting the injunction under §105, Debtors bear the
burden of demonstrating that the injunction is in fact necessary to their
reorganization. See In re S.I. Acquisition, Inc., 817 F.2d 1142, 1146 n.3 (5th Cir.
1987).
22
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That standard is consistent with the standard this Court has applied to
party. See In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000). While
Continental held that the §105 injunction issued in that case was unlawful, and did
not decide whether such relief was ever proper, it held that at a minimum, a
that the injunction was both fair and “necess[ar]y to the reorganization.” Id. at
214. Application of that standard is also appropriate here, since both non-debtor
discharge of claims that otherwise could not be discharged under the Bankruptcy
Code.12
12
Consistent with Continental, other courts that have permitted §105
injunctions in favor of non-debtor third parties have done so only in extraordinary
circumstances, where the debtor was overwhelmed with liability, the third party’s
liability was derivative of the debtor’s, and the injunction in favor of a third party
was necessary to the success of the reorganization. See, e.g., In re Dow Corning
Corp., 280 F.3d 648, 658 (6th Cir. 2002) (in case involving over $2.3 billion in
mass-tort liabilities, holding that third-party injunction was permissible only in
“unusual circumstances” and that the bankruptcy court must make “specific factual
findings” supporting the conclusion that “the injunction [was] essential to
reorganization”); In re A.H. Robins Co., 880 F.2d 694, 702 (4th Cir. 1989)
(upholding third-party injunction under §105 where debtor faced liability of nearly
$2.5 billion and injunction was “essential to the reorganization”).
23
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the bankruptcy court rendered the necessity standard meaningless. The court did
not require Debtors to show that without a silica injunction they could “be forced
prospects for continued existence as a going concern,” UNR, 725 F.2d at 1119-
1120. Rather, the bankruptcy court relied solely on its conclusion that the
reorganized debtor would face some business risk associated with the silica
and UNR, but the ordinary business risk borne by nearly every operating company
that might face lawsuits against it. On the bankruptcy court’s logic, virtually any
debtor could be eligible for a §105 injunction against future claims. As this Court
On the undisputed facts, it is plain that Debtors have not met their burden of
contested that Debtors’ bankruptcy filing was unrelated to silica claims. JA117.
Indeed, at the time of the bankruptcy filing, A.P. Green had only one silica-related
lawsuit pending against it and had never paid anything from its own pocket on
before the bankruptcy, A.P. Green’s insurer paid a mere $312,000 to settle and
24
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defend a handful of silica lawsuits against it, JA106-107, in contrast to the $448
of new silica claims following the bankruptcy. As discussed above, however, over
half the claims were based on evaluations by doctors whose diagnoses Judge Jack
found to be fraudulent (and who were later banned by the Manville Trust).
JA2159, JA2074. And over half were submitted by individuals who had
JA2074. Over four-fifths of the claims bore at least one of these markers of fraud.
JA2159. And state tort reform has made such dubious claims even easier to defend
in the tort system than they were before Debtors entered bankruptcy. JA2169-
2170. The bankruptcy court’s conclusion that Debtors had shown a necessity for
reorganized Debtors would have been fully capable of defending against the
Nor is there any dispute that the reorganized Debtors would have ample
competing on a global stage, with annual sales approaching half a billion dollars.
25
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and $40 million a year—after its emergence from bankruptcy. JA957. And its
The bankruptcy court brushed aside the undisputed facts regarding the silica
address them, either in the tort system with its inherent risks and the possibility that
any one judgment could be materially adverse and constitute a default under its
financing covenants, or through a trust.” JA55. But the need to defend invalid
claims (claims that Debtors themselves solicited) and the theoretical possibility of
26
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such relief would be available in the most ordinary cases. Virtually any debtor
could face an extraordinary and unexpected judgment. Nor would the §105
injunction Debtors seek eliminate that possibility: because, under the plan, the
exposure, they could still face an unexpected judgment arising out of a silica claim,
warrant granting a debtor even the ordinary protections of Chapter 11, let alone the
Corp., 200 F.3d 154, 163 (3d Cir. 1999) (holding that debtor’s desire to avoid the
In sum, the bankruptcy court’s use of the §105 power here is no different
than its use by the bankruptcy court in Continental Airlines. In that case, this
Court rejected the use of §105 to enjoin claims against third-party non-debtors on
the ground that the lower courts—despite paying lip service to the “necessity”
Precisely the same is true here. Here, as there, the silica lawsuits played no role in
“propel[ling] the … Debtors into bankruptcy; far from being the tail wagging the
27
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dog,” the silica lawsuits were never “anything more than a flea.” Id. at 215. Here,
as there, the mere possibility that Debtors might have to face a judgment sometime
in the future does not make the injunction necessary to Debtors’ reorganization.
See id. at 216. Ultimately, here, as there, the bankruptcy court applied the wrong
may not be assigned to a third party without the insurer’s consent. These
provisions are critical protections for the insurer because an assignment to a third
party could impose a radically different risk than the one the insurer believed it
was taking on when it issued the policy. Accordingly, under certain circumstances,
may provide a defense to coverage under state law. Debtors’ plan nevertheless
assigns all of their rights under certain liability insurance policies to the silica trust.
insurers from asserting “defenses … that are based on or arise out of any ‘anti-
Below, Appellants objected that the plan could not lawfully override their
court rejected that argument, holding that §1123(a)(5) of the Bankruptcy Code
28
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nonbankruptcy law, a plan shall … provide adequate means for the plan’s
taken to implement a plan, including “transfer of all or any part of the property of
the estate to one or more entities.” Debtors argued below, and the bankruptcy
court agreed, that §1123(a)(5) expressly preempts any federal or state law or
contractual provision that could interfere with any means that a plan might specify
for its implementation, including any transfer of estate property that would
otherwise be unlawful. JA206. The district court affirmed on the same basis.
JA11-27.
The courts below erred. Nothing in either the Bankruptcy Code or this
their insurance policies. While Debtors may decide to assign rights under their
policies to the trust without seeking the insurers’ consent, plan confirmation should
not preclude insurers from arguing in coverage litigation—just as they could where
29
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defense to claims asserted by an assignee. As both the Supreme Court and this
Court have made clear, bankruptcy generally preserves, rather than overrides,
reason of the happenstance of bankruptcy.” Butner v. United States, 440 U.S. 48,
55 (1979); Integrated Solutions, 124 F.3d at 492. Nothing in the Bankruptcy Code
by a conflict between federal and state law.” New York State Conf. of Blue Cross
& Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 654 (1995). Whatever the
type of preemption at issue, however, the Supreme Court has held that courts may
not “assume[] lightly that Congress has derogated state regulation, but instead
[must] address[] claims of pre-emption with the starting presumption that Congress
does not intend to supplant state law.” Id. That presumption applies equally when,
as here, a statute contains an express preemption clause and the question is “the
30
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Support Specialties, Inc., 124 F.3d 487, 493 (3d Cir. 1997). As the Supreme Court
has put it, “[i]f Congress wishes to grant … an extraordinary exemption from
administering the estate of the bankrupt.’” Midlantic Nat’l Bank v. New Jersey
Dep’t of Envtl. Prot., 474 U.S. 494, 501 (1986) (citation omitted). Accordingly,
absent a “clear and manifest” purpose to the contrary, “the Bankruptcy Code will
by §1123(a)’s text and structure; it fails to account for the provision’s legislative
history, along with a long history of pre-Code practice establishing that it does not
the principle that the statute must be construed as a harmonious whole. Last, but
not least, Debtors’ surpassingly broad reading of §1123(a) leads to absurd results.
31
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environmental or safety regulations. Indeed, on this view of §1123(a), the very act
of writing a transaction into a plan would exempt the transaction from any non-
include in its plan. That is a result Congress could never have intended.
a plan must (1) designate classes of claims; (2) specify classes that are unimpaired;
(3) specify the treatment of impaired classes; (4) generally provide the same
treatment for claims within a class; (5) “provide adequate means for the plan’s
implementation”; (6) provide for the inclusion in the charter of a corporate debtor
of certain provisions governing the voting of equity securities; (7) provide for
interests of stakeholders; and (8) for individual debtors, provide for the payment of
15
The entire text of §1123, along with relevant excerpts from its predecessor
provisions under the 1898 Bankruptcy Act, appears in the separate Statutory
Addendum to this brief.
32
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Paragraph (5), which directs that a plan “shall … provide adequate means
actions that might be taken to implement a plan, “such as” “retention by the debtor
of all or any part of the property of the estate” (subparagraph (A)), “transfer of all
or any part of the property of the estate to one or more entities” (subparagraph
(B)), and “merger or consolidation of the debtor with one or more persons”
in a plan, nor are they the only possible means by which a plan can be
implemented (as the use of the words “such as” to introduce the examples makes
clear).
modifies the statute’s directive that a plan “shall” contain the eight specified
elements. It thus means simply, and exactly, what it says: that a plan “shall”
nonbankruptcy law” that would bar a debtor from including (or authorize a debtor
not to include) them in its plan. For instance, §1123(a)(6) requires that a corporate
debtor’s plan “provide for the inclusion in the charter of the debtor … of a
33
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bankruptcy law that would authorize a debtor to propose a plan that did not
§1123(a) preempts only laws that would bar a debtor from complying with, or
authorize a debtor not to comply with, its requirements. Section 1123(a)(5) thus
Under the construction of the statute urged by Debtors and adopted by the
law or agreement that would prevent a debtor from including in its plan, and later
executing, whatever “means for the plan’s implementation” the debtor chooses.
But that is not what the provision actually says. As a matter of grammar and logic,
modifies only the statute’s command that a plan “shall” contain the eight specified
requirements, not the permissive examples of transactions a given plan might (or
might not) employ to meet the “adequate means” requirement. Nothing in the
statutory text suggests that the preemptive effect of §1123(a)—which, after all, is
34
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part of the section prescribing the “[c]ontents of [the] plan”16—extends any further
than that.
provision’s history. Since the 1930s, bankruptcy law has contained provisions
governing the contents of a plan, specifically requiring that a plan contain adequate
governing such transactions. The Supreme Court has consistently held that the
la Cruz, 523 U.S. 213, 221 (1998) (citation omitted).17 And there is no indication
16
See, e.g., Almendarez-Torres v. United States, 523 U.S. 224, 234 (1998)
(relying on a section heading to discern the scope of a statutory provision and
explaining that such headings are proper “tools available for the resolution of a
doubt” about a statute’s interpretation).
17
See also Dewsnup v. Timm, 502 U.S. 410, 419-420 (1992); United Sav.
Ass’n v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 379-380 (1988); Kelly v.
Robinson, 479 U.S. 36, 47 (1986); Midlantic, 474 U.S. at 501.
35
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plan of reorganization ... shall provide adequate means for the execution of the
plan, which may include” various transactions, including “the transfer of all or any
Pub. L. No. 73-296, 48 Stat. 911, 913-914 (1934). Section 77B(b) contained no
means for the execution of the plan, which may include,” among other
transactions, “the sale or transfer of all or any part of [the debtor’s] property to one
Pub. L. No. 75-696, 52 Stat. 840, 895-896 (1938). Section 216, like §77B(b), did
provisions, it was well-established that the transactions provided for under a plan
were not exempt from otherwise applicable non-bankruptcy law. As the 1977
36
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directive to provide “adequate means for the execution of the plan”: “Whatever
the means chosen, it must be remembered that conformity with other applicable
state or federal laws may be necessary, and the plan should be drawn with that in
mind.” 6A Collier on Bankruptcy ¶10.19, at 89 & n.8 (14th ed. 1977). Other
corporation from state law” governing the transactions through which a plan is
States §4601, at 402 (1961); see also Phillips & Nadler, The Law of Debtor Relief:
of such transactions set out in the statute) from applicable non-bankruptcy law.
For example, in Brockett v. Winkle Terra Cotta Co., 81 F.2d 949, 955-959 (8th Cir.
1936), the Eighth Circuit rejected a plan because it called for a corporation to
violate Missouri law by issuing stock without an adequate basis. See also, e.g., In
re Porto Rican Am. Tobacco Co., 112 F.2d 655 (2d Cir. 1940) (upholding
confirmation of a plan only after finding that “[t]here is nothing to indicate that
[the debtor] cannot lawfully carry out the proposed transfer of its assets” under
37
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Co., 79 F.2d 804, 817 (8th Cir. 1935) (upholding confirmation of a plan only after
determining that the securities it called for were consistent with Missouri law); In
re Pressed Steel Car Co., 16 F. Supp. 329, 338-339 (W.D. Pa. 1936) (confirming a
plan only after concluding that its proposed acquisition of stock was “not forbidden
of the 1898 Act became §1123 of the Bankruptcy Code. Section 1123 was
shall … (5) provide adequate means for the plan’s execution, such as— … (B)
transfer of all or any part of the property of the estate to one or more entities,
18
Brockett, Warner Bros., and Pressed Steel were decided under the version
of the statute in force between 1934 and 1938. Section 77B(f)(7) of that statute
made confirmation of a plan contingent on the court’s determination that “the
debtor … is authorized by its charter or by applicable State or Federal laws … to
take all action necessary to carry out the plan.” Pub. L. No. 73-296, 48 Stat 911,
919 (1934). This provision was deleted in 1938. It is clear, however, that the
deletion did not permit a debtor to implement its plan through transactions that
violated “applicable State or Federal laws.” Quite the opposite: the provision was
omitted from the amended law because the need to comply with state and federal
law was so obvious that it “goes without saying,” Hanna & McLaughlin, The
Bankruptcy Act of 1898 as Amended Including the Chandler Act of 1938, at 151
(1939), and was “necessarily implicit,” Weinstein, The Bankruptcy Law of 1938, at
238 (1938). Accord Analysis of H.R. 12889, 74th Cong., 2d Sess. 78 & n.3
(1936). Indeed, in 1938 Congress also deleted a separate provision of the prior
statute that had granted the debtor “full power and authority … to carry out the
plan,” precisely because it wanted to “eliminate the possible construction that such
power is conferred regardless of state corporation law.” Hanna & McLaughlin at
155; see also Weinstein at 238-240 (1938); Analysis of H.R. 12889 at 80.
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whether organized before or after the confirmation of such plan.” Consistent with
legislative history that the 1978 Act was intended to alter the accepted
Accordingly, for the first fifty years of its existence—from its creation in
federal bankruptcy law mandating that a plan contain adequate means for its
implementation did not authorize a debtor to include in its plan transactions that
established prior practice, §1123(a)(5) can be given the broad preemptive effect
Debtors advocate only if there is some “clear indication that Congress intended”
radically to depart from existing practice when it amended the statute in 1984.
Cohen, 523 U.S. at 221-222. There is no such indication here. To the contrary,
every indication is that Congress did not intend to depart from existing practice
nonbankruptcy law” to §1123(a) was first proposed in a 1980 bill. The House
Judiciary Committee report accompanying that bill contained no hint that the
amendment was meant to have broad preemptive effect: the report’s only
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clear that the rules governing what is to be contained in the reorganization plan are
those specified in this section.” H.R. Rep. No. 96-1195, at 22 (1980). That is, the
and its predecessors: that §1123(a) sets out the required elements of a plan and
that those requirements may not be varied by non-bankruptcy law. By making that
basic point “clear,” however, the amendment to §1123(a) did nothing to alter fifty
years of prior practice and decisional law establishing that §1123(a)(5)’s list of
examples of transactions that could (but need not) be used to implement a plan did
While the 1980 bill was not enacted, the same proposed amendment was
included in a 1983 bill; the Senate Report regarding that bill described the
And the same proposed amendment was included in the bill that ultimately became
L. No. 98-353, §507, 98 Stat. 333, 385 (1984).19 The conference report on the
and explained that it made certain “technical reforms” to the 1978 Act. H.R. Conf.
19
In addition to adding the “notwithstanding” phrase, the 1984 amendments
changed the word “execution” in §1123(a)(5) to “implementation.” Id.
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Rep. No. 98-882 (1984), reprinted in 1984 U.S.C.C.A.N. 576, 581 (statement of
substantive change to prior law at all—let alone the broad preemption of state and
federal law that Debtors now claim it represented. Under these circumstances, the
presumption that Congress did not intend the Bankruptcy Code to alter pre-Code
practice has particular force. The Supreme Court has consistently rejected
“arguments that would interpret the Code … to effect a major change in pre-Code
practice that is not the subject of at least some discussion in the legislative history.”
Dewsnup v. Timm, 502 U.S. 410, 419 (1992). Moreover, in considering the 1984
amendments to the Code at issue here, the Court has expressly refused to conclude
that an amendment, like this one, characterized by the 1983 Senate Report “only as
alter pre-Code practice. Cohen, 523 U.S. at 221. In short, if Congress intended “a
sweeping pre-emption” of the sort Debtors advocate here, “its failure even to hint
at it” in the legislative record “is spectacularly odd.” Medtronic, Inc. v. Lohr, 518
41
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by the language and history of §1123(a) itself, but also renders other provisions of
the Bankruptcy Code incomprehensible. It thus violates the principle that “in
interpreting separate provisions of a single Act,” courts should “give the Act the
policy and purpose.” Weinberger v. Hynson, Westcott & Dunning, Inc., 412 U.S.
609, 631-632 (1973) (citation omitted). This is particularly true in interpreting the
design that must inform the construction of any particular provision. United Sav.
Ass’n v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 371 (1988) (explaining
substantive effect” that was not “compatible with the rest of the law”).
organized for the purpose of carrying out the plan shall carry out the plan and shall
comply with any orders of the court.” Accordingly, while §1123(a)(5) provides
42
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that a plan “shall … provide adequate means for the plan’s implementation,” and
§1142(a)’s more limited express preemption of law that would otherwise apply to a
interpretation. See Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998) (courts should be
20
Section 1142(a)’s preemption of laws “relating to financial condition” is
echoed in several other provisions of the Bankruptcy Code, all of which are
intended to ensure that a debtor is not debarred—simply by virtue of being a debtor
or being in financial distress—from engaging in transactions that would otherwise
be lawful and that are critical to the debtor’s ability to obtain a fresh start. See,
e.g., 11 U.S.C. §365(e)(1) (rendering unenforceable provisions in executory
contracts or applicable law terminating or modifying rights under such contracts
because of the debtor’s insolvency, financial condition, or debtor status); id. §525
(prohibiting discrimination against a debtor on account of its insolvency or debtor
status).
43
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superfluous another portion of that same law”); Hibbs v. Winn, 542 U.S. 88, 101
(2004).
Indeed, in the most comprehensive treatment of the issue to date, the Ninth
Circuit relied on precisely this conflict with §1142(a) (along with §1123(a)’s
legislative history and pre-Code practice) to conclude that §1123(a) could not bear
the preemptive weight Debtors would assign to it. See Pacific Gas & Elec. Co. v.
California ex rel. Cal. Dep’t of Toxic Substances Control, 350 F.3d 932 (9th Cir.
2003). As the PG&E court explained, the only sensible way to harmonize
to financial condition.” Id. at 948.21 The contrary view renders §1142(a)’s specific
21
PG&E went on to conclude that “the scope of … express preemption
[under §1123(a)] is the same as under the ‘notwithstanding’ clause of §1142(a),”
and that both provisions’ express preemptive effect is limited to “[o]therwise
applicable nonbankruptcy laws ‘relating to financial condition.’” 350 F.3d at 948.
Appellants’ argument here is slightly different. While PG&E correctly identified
the inconsistency between the broad preemptive reading of §1123(a) and the
narrower express preemption clause in §1142(a), Appellants do not contend that
the preemption clause of §1123(a) is limited to laws “relating to financial
condition.” Rather, as discussed above, Appellants contend that §1123(a), by its
terms, preempts only laws (whether or not they relate to financial condition) that
directly conflict with its eight requirements regarding what a plan must contain,
and does nothing to supersede non-bankruptcy law governing the transactions that
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grant a debtor the unfettered power to modify the terms of any lien on its property.
The Bankruptcy Code sets out, in considerable detail, the limited circumstances
under which a plan may modify the rights of a secured creditor. Specifically,
objection only if the creditor retains its lien and its secured claim is paid in cash, or
circumstances under which a debtor must cure a default and the manner in which it
45
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certain limited exceptions) cure any default, compensate the counterparty for any
pecuniary loss resulting from the default, and provide adequate assurance of future
waive any default, the detailed scheme set out in §365(b) would make no sense.
the non-bankruptcy law rights of parties to contracts with the debtor; where it
overrides those rights, it does so specifically and expressly and only where
necessary to accomplish the aims of the Code. See, e.g., Integrated Solutions, 124
this overarching principle and the specific provisions of the Code in which it is
Whitman v. American Trucking Ass’ns, 531 U.S. 457, 468 (2001). The
46
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unacceptable and absurd consequences that Congress could not have intended. On
their view, the preemption clause overrides all federal or state law or provisions of
private contracts that might govern the ten specific transactions listed in
exemplary and not exhaustive, Debtors’ theory necessarily means that §1123(a)
must preempt any federal or state law or contractual provision that would prevent a
debtor from executing any transaction that can be characterized as a “means for the
plan’s implementation.”
see §1123(a)(5)(B). This result is not only absurd on its face, but would permit
Court in Midlantic. Midlantic held that §554 of the Bankruptcy Code, which
expressly authorizes a trustee to abandon property of the estate, does not permit
abandonment that would violate state health or safety laws. 474 U.S. at 506-507.
47
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§1123(a)(5)(B).
That example is not at all far-fetched; the debtor in PG&E sought preemption of
just such regulations. See 350 F.3d at 935-937. Or, to take an example closer to
the facts of this case, §1123(a)(5)(B) would authorize a small family business in
General Motors—thus vastly increasing the risk the insurer agreed to underwrite.
Indeed, there is nothing in the text of §1123(a) that puts any limit at all on
the scope of the preemption Debtors assert it effects: any law or agreement that
would restrict any transaction at all that a debtor might choose as a means for
48
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history of the statute, or with this Court’s strong presumption against bankruptcy
preemption. Instead, they concluded, with little analysis, that this Court’s decision
in In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004), had already
provision’s preemptive scope. And both this Court’s precedents and the only
which the issue was genuinely contested support the narrower construction of that
provision.
passage in this Court’s lengthy and complex opinion—a passage that must be
trust certain insurance policies issued by the London Market Insurers to two non-
debtor affiliates, Basic and Lummus. London objected that policies belonging to
non-debtors could not lawfully be assigned to the trust. This Court addressed that
49
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The London Market Insurers also contend the Plan impairs their rights
under the anti-assignment provisions of the relevant insurance
policies. With respect to the anti-assignment provisions, we agree
with the District Court that even if the subject insurance policies
purported to prohibit assignment of Combustion Engineering’s
insurance proceeds, these provisions would not prevent the
assignment of proceeds to the bankruptcy estate.27
27
Section 541 effectively preempts any contractual provision
that purports to limit or restrict the rights of a debtor to transfer or
assign[] its interests in bankruptcy. 11 U.S.C. §541(c)(1) (“[A]n
interest of the debtor in property becomes property of the estate …
notwithstanding any provision in an agreement, transfer
instrument, or applicable nonbankruptcy law—(A) that restricts or
conditions transfer of such interest by the debtor.”). The
Bankruptcy Code expressly contemplates the inclusion of debtor
insurance policies in the bankruptcy estate. Section 1123(a)(5)
provides:
Notwithstanding any otherwise applicable nonbankruptcy
law, a plan shall—…(5) provide adequate means for the plan’s
implementation, such as … (B) transfer of all or any part of
[the] property of the estate to one or more entities, whether
organized before or after the confirmation of such plan.
11 U.S.C. §1123(a)(5).
391 F.3d at 218-219 & n.27 (emphases added). The Court went on to explain that
“[t]his is not the case, however, with respect to anti-assignment provisions in the
Basic and Lummus primary and excess insurance policies.… Put simply, §541
prohibits restrictions on the interests of the debtor…. It does not, however, place
similar restrictions on the interests of non-debtors.” Id. at 219. Because the Basic
and Lummus policies were not issued to the debtor, they never became estate
property. Id. This Court accordingly concluded that London was not precluded by
the Bankruptcy Code from challenging the attempted transfer of the Basic and
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that issue because it held the Combustion Engineering plan unlawful on other
grounds. Id.
transfer of a debtor’s insurance policies from the debtor’s estate to a third party.
the point that the Code “contemplates the inclusion of debtor insurance policies in
the bankruptcy estate.” 391 F.3d at 218-219 n.27 (emphasis added). This Court
ventured no comment on the preemptive scope of §1123(a), and did not address
any of the arguments that have been made, or decisions that have been rendered,
regarding that question. Rather, it addressed only the question under what
first place. It is for that reason that the Court’s discussion focused not on
restrictions on transfer of that property once it has become part of the estate.
extent … an interest [in property] is limited in the hands of the debtor, it is equally
limited in the hands of the estate.” 391 F.3d at 219 (quoting Legislative Statement
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case this Court addressed “a basic preemption issue” very similar to that presented
claims belonging to the estate in violation of state laws that forbid the assignment
of such claims.” 124 F.3d at 491. Integrated Solutions explained that this Court
preempt state law in the bankruptcy context,” doing so only where Congress has
Against that backdrop, this Court concluded that Congress did not intend to
override state law regarding assignment of tort claims, rejecting the contention that
§363 and §704 of the Bankruptcy Code—which permit a trustee to use, sell, or
third party. “[B]y refusing to find preemption of state law restrictions on the
transferability of estate property,” this Court explained, “we are giving effect to
52
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fundamental principle that the estate succeeds only to the nature and the rights of
the property interest that the debtor possessed pre-petition.” Id. at 495.22
Under the lower courts’ theory, however, the very transaction Integrated
preemption question in a context in which it was genuinely contested, and the only
previous decision carefully to consider the text, context, and legislative history of
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The only reported court of appeals decision other than PG&E to address the
853 F.2d 1149 (4th Cir. 1988). In that case, a secured lender contested the
treatment of its claim under the debtor’s plan, which would have satisfied the
lender’s claim by returning its collateral. While the court stated that
contrary law, it also noted that that issue was uncontested, 853 F.2d at 1155 n.10,
and that “the real dispute” was over the valuation of the collateral, id. at 1157.
Perhaps because the issue was not truly disputed, the court’s analysis of the
§1123(a)(5) issue was conclusory and incorrect. FCX did not consider any
did it consider the pre-Code practice and legislative history supporting the
and the remainder of the Bankruptcy Code, or the absurd results that would follow
23
The bankruptcy court and district court cases that have reached the same
conclusion are no more persuasive: in general, they either rely on FCX or on the
incorrect reading of Combustion Engineering discussed above. See, e.g., In re
Kaiser Aluminum Corp., 343 B.R. 88 (D. Del. 2006); In re Congoleum Corp., No.
03-51524, 2008 WL 4186899 (Bankr. D.N.J. Sept. 2, 2008).
54
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In sum, the lower courts’ conclusion that §1123(a) preempts the anti-
structure, or history of the statute, or in the relevant caselaw. As this Court has
explained, the Code “was written with the expectation that it would be applied in
the context of state law and that federal courts are not licensed to disregard
interests created by state law when that course is not clearly required to effectuate
their agreements with insurers and thereby tilt future coverage litigation in their
favor, and the Bankruptcy Code does not grant Debtors that power.
Companies, which are creditors as well as insurers of the Debtors, have standing to
object to Debtors’ plan and to appeal the order confirming the plan. JA15-16. The
AIG Member Companies have joined fully in Hartford and Century’s brief. AIG
Br. at 2. There is accordingly no need for this Court to address the question
whether Hartford and Century also have standing. See, e.g., McConnell v. FEC,
540 U.S. 93, 233 (2003); Clinton v. City of New York, 524 U.S. 417, 431 n.19
(1998).
55
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Should the Court address that issue, however, it should hold that all the
insurer-appellants have the right to be heard regarding the legality of Debtors’ plan
and its proposed silica injunction, both in the bankruptcy court and on appeal. As
plan channeling mass tort claims to a trust has an immediate and direct practical
effect on the debtor’s liability insurers, who therefore have standing to object to
such a plan and to appeal its confirmation. See Brief for Appellants 29-51, In re
In holding that Hartford and Century lacked standing, the lower courts relied
in part on so-called “neutrality” language in the plan, which stated that nothing in
the plan would preclude insurers from raising any defense to coverage (other than
defenses arising out of the anti-assignment provisions).24 But the inclusion of that
the NARCO brief, see NARCO Br. 42-46, the availability of defenses to coverage
24
The lower courts held that Hartford and Century lacked standing to
challenge either the silica injunction or the provisions in the plan purporting to
strip them of the right to assert the anti-assignment provisions of the policies as a
defense in subsequent coverage litigation. Even Debtors, however, have never
contended that the insurers lack standing to challenge a plan provision that
purports to deprive them of a defense to monetary liability that they would
otherwise possess. Nor could they plausibly do so.
56
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channeling the liability of its insured, or that the insurer lacks standing to challenge
such a plan.
insurance policies that did not respond to the asbestos claims that precipitated their
bankruptcy filing, but that they (and plaintiffs’ lawyers) believed could potentially
respond to silica claims. Prior to the bankruptcy, Debtors had a mere handful of
silica lawsuits against them, and had never paid a penny out of their own funds on
account of a silica claim. But, by soliciting the plaintiffs’ lawyers who represented
the asbestos claimants, Debtors attracted several thousand new silica claims of
insurance settlements and rights to claim against the insurance policies. In short,
this case is a perfect example of a phenomenon that one commentator has noted in
the plaintiffs lawyers in their quest to empty out that great Platonic ATM machine,
the insurance industry.” Parloff, Welcome to the New Asbestos Scandal, Fortune,
Yet the insurers—who will be called upon to pay the silica claims against
Debtors—were not permitted to participate in the process of devising the trust and
TDPs, and will not be permitted to participate in the evaluation of claims against
57
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the silica trust or to exercise their right to defend or associate in the defense of
those claims. Rather, they will be handed, as a fait accompli, a bill reflecting what
purports to be the already determined liability of their insured. Moreover, they will
be required to address claims that likely never would have arisen at all outside
bankruptcy, and would have been highly defensible if they had. This interference
with the insurers’ contractual rights and the practical harm inflicted on insurers
who are being asked to pay the silica claims more than suffices to meet the liberal
standards for participation in bankruptcy court, under which a party need only
That harm also satisfies the standard for appellate standing, under which a
party must show that the order being appealed “diminishes [its] property, increases
[its] burdens, or impairs [its] rights.” Combustion Eng’g, 391 F.3d at 214.
Moreover, given that insurers alone are expected to foot the bill for the silica
claims, it is unsurprising that insurers alone have objected to the plan. As this
“highly unlikely that any of the parties other than the insurers” would raise an
appealing “every bankruptcy court order” should not bar insurers from being heard
on appeal. In re Congoleum Corp., 426 F.3d 675, 685, 687 (3d Cir. 2005).
58
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Case No. 08-3650
In re: Global Industrial Technologies, Inc., et al.
Hartford Accident and Indemnity Company, et al. v. Global Industrial Technologies Company, et al.
CONCLUSION
This Court should reverse the district court’s order affirming the bankruptcy
court’s order confirming Debtors’ Chapter 11 plan and remand this case to the
59
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Case No. 08-3650
In re: Global Industrial Technologies, Inc., et al.
Hartford Accident and Indemnity Company, et al. v. Global Industrial Technologies Company, et al.
LEONARD P. GOLDBERGER
STEVENS & LEE, P.C.
1818 Market Street, 29th Floor
Philadelphia, PA 19103
(215) 751-2864
JOSEPH GIBBONS
AMY E. VULPIO
WHITE AND WILLIAMS LLP
1800 One Liberty Place
Philadelphia, PA 19103
(215) 864-7000
60
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CERTIFICATE OF COMPLIANCE
In addition, pursuant to LAR 31.1(c), I certify that the text of the brief filed
with the Court by electronic mail is identical, except for the signatures, to the text
of the paper copies. I further certify that a virus detection program has been run on
the electronic file and that no virus was detected. I rely on the virus detection
program Trend Micro Office Scan, program version 8.0 Service Pack 1, scan
engine version 8.910.1002, virus definition file version 5.661.00, in making this
representation.
EDWIN J. HARRON
SHARON M. ZIEG
YOUNG CONAWAY STARGATT & TAYLOR LLP
The Brandywine Building, 17th Floor
1000 West Street
Wilmington, DE 19801
(302) 571-6600
eharron@ycst.com
szieg@ycst.com
Counsel for Appellee Lawrence Fitzpatrick, Legal Representative to the Future
Claimants
GARY PHILIP NELSON
SHERRARD, GERMAN & KELLY P.C.
2800 Two PNC Plaza
620 Liberty Avenue
Pittsburgh, PA 15222
(412) 258-6720
gpn@sgkpc.com
Counsel for Appellee Philip Pahigian, Legal Representative to the Future Silica
Personal Injury Claimants
MICHAEL S. DAVIS
ZEICHNER ELLMAN & KRAUSE LLP
575 Lexington Avenue
New York, NY 10022
(212) 223-0400
mdavis@zeklaw.com
BEVERLY WEISS MANNE
TUCKER ARENSBERG, PC
1500 One PPG Place
Pittsburgh PA 15222
(412) 594-5525
bmanne@tuckerlaw.com
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JOSEPH BOURY
BIVONA & COHEN
88 Pine Street
New York, NY 10005
(212) 363-3100
joseph.boury@bivonacohen.com
Counsel for Appellants AIG Member Companies, including National Union Fire
Insurance Company of Pittsburgh, PA, Insurance Company of the State of
Pennsylvania, Lexington Insurance Company and American Home Assurance
Company
I further certify that, on this 19th day of November, 2008, I caused ten
bound copies of the foregoing BRIEF OF APPELLANTS HARTFORD AND
CENTURY and four bound copies of the JOINT APPENDIX to be filed with the
Court via overnight courier (Federal Express) to the following address:
Office of the Clerk
United States Court of Appeals for the Third Circuit
U.S. Courthouse
601 Market Street, Room 21400
Philadelphia, PA 19106-1790
(215) 597-2995
I also certify that an electronic copy, in .pdf format, of the foregoing BRIEF
OF APPELLANTS HARTFORD AND CENTURY was filed with the Office of
the Clerk by electronic mail at the address indicated:
electronic_briefs@ca3.uscourts.gov.
STATUTORY ADDENDUM
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TABLE OF CONTENTS
11 U.S.C. § 1123............................................................................................................................1a
Amendments to Bankruptcy Act of 1898, Pub. L. No. 75-696, 52 Stat. 840 (1938)
(excerpts)............................................................................................................................3a
Amendments to Bankruptcy Act of 1898, Pub. L. No. 73-296, 48 Stat. 911 (1934)
(excerpts)............................................................................................................................6a
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1a
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(7) contain only provisions that are consistent with the interests of creditors and equity
security holders and with public policy with respect to the manner of selection of any
officer, director, or trustee under the plan and any successor to such officer, director, or
trustee; and
(8) in a case in which the debtor is an individual, provide for the payment to creditors under
the plan of all or such portion of earnings from personal services performed by the debtor
after the commencement of the case or other future income of the debtor as is necessary for
the execution of the plan.
(b) Subject to subsection (a) of this section, a plan may—
(1) impair or leave unimpaired any class of claims, secured or unsecured, or of interests;
(2) subject to section 365 of this title, provide for the assumption, rejection, or
assignment of any executory contract or unexpired lease of the debtor not previously
rejected under such section;
(3) provide for—
(A) the settlement or adjustment of any claim or interest belonging to the debtor
or to the estate; or
(4) provide for the sale of all or substantially all of the property of the estate, and the
distribution of the proceeds of such sale among holders of claims or interests;
(5) modify the rights of holders of secured claims, other than a claim secured only by a
security interest in real property that is the debtor’s principal residence, or of holders of
unsecured claims, or leave unaffected the rights of holders of any class of claims; and
(6) include any other appropriate provision not inconsistent with the applicable
provisions of this title.
(c) In a case concerning an individual, a plan proposed by an entity other than the debtor may not
provide for the use, sale, or lease of property exempted under section 522 of this title, unless the
debtor consents to such use, sale, or lease.
(d) Notwithstanding subsection (a) of this section and sections 506(b), 1129(a)(7), and 1129(b)
of this title, if it is proposed in a plan to cure a default the amount necessary to cure the default
shall be determined in accordance with the underlying agreement and applicable nonbankruptcy
law.
2a
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Amendments to Bankruptcy Act of 1898,Pub. L. No. 75-696, 52 Stat. 840 (1938) (excerpts)
(1) shall include in respect to creditors generally or some class of them, secured or
unsecured, and may include in respect to stockholders generally or some class of them,
provisions altering or modifying their rights, either through the issuance of new securities
of any character or otherwise;
(2) may deal with all or any part of the property of the debtor;
(3) shall provide for the payment of all costs and expenses of administration and other
allowances which may be approved or made by the judge;
(4) may provide for the rejection of any executory contract except contracts in the public
authority;
(5) shall specify what claims, if any, are to be paid in cash in full;
(6) shall specify the creditors or stockholders or any class of them not to be affected by
the plan and the provisions, if any, with respect to them;
(7) shall provide for any class of creditors which is affected by and does not accept the
plan by the two-thirds majority in amount required under this chapter, adequate
protection for the realization by them of the value of their claims against the property
dealt with by the plan and affected by such claims, either as provided in the plan or in the
order confirming the plan, (a) by the transfer or sale, or by the retention by the debtor, of
such property subject to such claims; or (b) by a sale of such property free of such claims,
at not less than a fair upset price, and the transfer of such claims to the proceeds of such
sale; or (c) by appraisal and payment in cash of the value of such claims; or (d) by such
method as will, under and consistent with the circumstances of the particular case,
equitably and fairly provide such protection;
(8) shall provide for any class of stockholders which is affected by the plan and does not
accept the plan by the majority of the stock required under this chapter, adequate
protection for the realization by them of the value of their equity, if any, in the property
of the debtor dealt with by the plan, either as provided in the plan or in the order
confirming the plan, (a) by the sale of such property at not less than a fair upset price; or
(b) by appraisal and payment in cash of the value of their stock; or (c) by such method as
will, under and consistent with the circumstances of the particular case, equitably and
fairly provide such protection: Provided, however, That such protection shall not be
required if the judge shall determine that the debtor is insolvent;
(9) may include, where any indebtedness is created or extended under the plan for a
period of more than five years, provisions for the retirement of such indebtedness by
stated or determinable payments out of a sinking fund or otherwise, (a) if secured, within
the expected useful life of the security therefor, or (b) if unsecured, or if the expected
3a
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useful life of the security is not fairly ascertainable, then within a specified reasonable
time, not to exceed forty years;
(10) shall provide adequate means for the execution of the plan, which may include: the
retention by the debtor of all or any part of its property; the sale or transfer of all or any
part of its property to one or more other corporations theretofore organized or thereafter
to be organized; the merger or consolidation of the debtor with one or more other
corporations; the sale of all or any part of its property, either subject to or free from any
lien, at not less than a fair upset price and the distribution of all or any assets, or the
proceeds derived from the sale thereof, among those having an interest therein; the
satisfaction or modification of liens; the cancellation or modification of indentures or of
other similar instruments; the curing or waiver of defaults; the extension of maturity dates
and changes in interest rates and other terms of outstanding securities; the amendment of
the charter of the debtor; the issuance of securities of the debtor or such other
corporations for cash, for property, in exchange for existing securities, in satisfaction of
claims or stock or for other appropriate purposes;
(11) shall include provisions which are equitable, compatible with the interests of
creditors and stockholders, and consistent with public policy, with respect to the manner
of selection of the persons who are to be directors, officers, or voting trustees, if any,
upon the consummation of the plan, and their respective successors;
(12) shall provide for the inclusion in the charter of the debtor, or any corporation
organized or to be organized for the purpose of carrying out the plan, of—
(a) provisions prohibiting the debtor or such corporation from issuing non-voting
stock, and providing, as to the several classes of securities of the debtor or of such
corporation possessing voting power, for the fair and equitable distribution of
such power among such classes, including, in the case of any class of stock
having a preference over other stock with respect to dividends, adequate
provisions for the election of directors representing such preferred class in the
event of default in the payment of such dividends; and
(b)(1) provisions which are fair and equitable and in accordance with sound
business and accounting practice, with respect to the terms, position, rights, and
privileges of the several classes of securities of the debtor or of such corporation,
including, without limiting the generality of the foregoing, provisions with respect
to the issuance, acquisition, purchase, retirement or redemption of any such
securities, and the declaration and payment of dividends thereon; and (2) in the
case of a debtor whose indebtedness, liquidated as to amount and not contingent
as to liability, is $250,000 or over, provisions with respect to the making, not less
than once annually, of periodic reports to security holders which shall include
profit and loss statements and balance sheets prepared in accordance with sound
business and accounting practice;
(13) may include provisions for the settlement or adjustment of claims belonging to the
debtor or to the estate; and shall provide, as to such claims not settled or adjusted in the
4a
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plan, for their retention and enforcement by the trustee or, if the debtor has been
continued in possession, by an examiner appointed for that purpose; and
(14) may include any other appropriate provisions not inconsistent with the provisions of
this chapter.
5a
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Amendments to Bankruptcy Act of 1898,Pub. L. No. 73-296, 48 Stat. 911 (1934) (excerpts)
* * *
(b) A plan of reorganization within the meaning of this section . . . (9) shall provide
adequate means for the execution of the plan, which may include the transfer of all or any
part of the property of the debtor to another corporation or to other corporations, or the
consolidation of the properties of the debtor with those of another corporation, or the
merger or consolidation of the debtor into or with another corporation or corporations, or
the retention of the property by the debtor, the distribution of assets among creditors of
any class thereof, the satisfaction or modification of liens, indentures, or other similar
instruments, the curing or waiver of defaults, extension of maturity dates of outstanding
securities, the change in interest rates and the other terms of such securities, the
amendment of the charter of the debtor, and the issuance of securities of either the debtor
or any such corporation or corporations, for cash, or in exchange for existing securities,
or in satisfaction of claims or rights, or for other appropriate purposes[.]
6a
Received and Filed
Case: 08-3650 Document: 00314856981 Page: 1 Date Filed: 12/01/2008
08-3650
12/01/08
Marcia M. Waldron,
Clerk
No. 08-3650
Appellants
ANNE MILGRAM
ATTORNEY GENERAL OF NEW JERSEY
R.J. Hughes Justice Complex
25 Market Street
P.O. Box 112
Trenton, New Jersey 08625
973 648 4730
Of Counsel and On the Brief:
Andrea M. Silkowitz
Assistant Attorney General
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ROBERT M. MCKENNA
Attorney General
State of Washington
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TABLE OF CONTENTS
SUMMARY OF CASE..............................................................................................4
ARGUMENT .............................................................................................................6
B. Section 1123 Does Not Impose a Broad Preemption of State Law ....12
CONCLUSION........................................................................................................26
CERTIFICATE OF COMPLIANCE……………………………………………..28
APPENDIX
Debtor’s First Amended Disclosure Statement………………………..Appendix 1
Notice of Emergency Motion………………………………………… Appendix 2
i
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TABLE OF AUTHORITIES
Cases
ii
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Statutes
11 U.S.C.
§ 362(b)(1) ........................................................................................................2, 25
§ 362(b)(4) ........................................................................................................2, 25
§ 541 ............................................................................................................. passim
§ 541(a)(1)...............................................................................................................9
§ 541(c)(1) ....................................................................................................1, 9, 10
§ 554......................................................................................................................14
§ 1123 ........................................................................................................... passim
§ 1123(a) ....................................................................................................... passim
§ 1123(a)(5) ....................................................................................... 5, 6, 8, 16, 23
§ 1123(a)(5)(B).............................................................................................. 10, 23
§ 1123(a)(6) ..................................................................................................... 7, 16
§ 1129 ............................................................................................................ 16, 23
§ 1129(a)(3) ............................................................................................... 7, 23, 24
§ 1129(a)(11).........................................................................................................16
29 U.S.C.
§ 959(b)...........................................................................................................3, 25
§ 1452(a) .........................................................................................................3, 25
LEGISLATIVE MATERIALS
OTHER AUTHORITIES
iii
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as Amici States), appear here in their role as chief law enforcement officials for
their respective citizens. They are vitally interested in the outcome of this case, not
with a view to ensuring that the final result will benefit the appellants in this
matter, but rather to ensure that the decision regarding their interests is not made
of the Bankruptcy Code. 1 The reading endorsed by the courts below would
devastate the Amici States’ ability to enforce their laws against any entity that
confirms a plan under Chapter 11 of the Bankruptcy Code. The lower courts
indicated that they believed that this Court had already resolved the issue of the
(3d Cir. 2004). The Amici States believe, to the contrary, that this Court had no
occasion to address that issue and did not do so. While this Court did discuss
1
11 U.S.C. § 1123(a). All “Section” references herein are to sections of title
11, the Bankruptcy Code, unless otherwise specified.
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did – resolve the separate issue of the interpretation of Section 1123(a), much less
hold that that section creates a broad, and indeed unlimited, preemption of all laws
The conclusion of the bankruptcy and the district courts herein – that the
nonbankruptcy law to the contrary,” does impose such a broad preemptive effect –
is deeply flawed in that it reads that language without any historical context, and
without any attempt to harmonize that language with the rest of the Bankruptcy
Code. And, by reaching that conclusion, the lower courts have created a situation
by which an entity can use bankruptcy to escape from all regulatory authority if it
can convince a bankruptcy court that doing so would allow it to implement its plan.
Such a result would fly in the face of the oft-repeated axiom that bankruptcy
at 362-23 (4th ed. 1980); 2 Collier on Bankruptcy P 362.04 at 362-36 (15th ed.
Texas, 645 F.2d 429, 439 fn. 16 (5th Cir. 1981) and numerous other circuit courts
thereafter. It is certainly the case that many valid laws create operating difficulties
for those who do not wish to follow their strictures. The Code, though, does not
allow a debtor to flout those requirements during the case. Sections 362(b)(1) and
(4), for example, except governmental criminal and civil regulatory actions from
2
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the automatic stay; 28 U.S.C. 959(b) requires debtors to obey the laws of the states
with respect to the property of the estate during the case; and 28 U.S.C. 1452(a)
bars debtors from removing regulatory actions to bankruptcy court from the state
courts in which they are pending.2 Yet, under the interpretation espoused below,
those constraints disappear as soon as the debtor proposes a plan under which it
Such a reading of this language would destroy the Amici States’ ability to
preserve their regulatory authority in the face of a bankruptcy filing. It could allow
a debtor to propose and confirm a plan with terms that provide for anything from
consumer protection agencies the ability to bar the debtor from continuing methods
of operations that are unfair and deceptive and violate state law. The Amici States
do not believe that any such result could possibly have been contemplated by
2
The courts have upheld the application of those sections even if they may
make it difficult or impossible for the debtor to operate. See, e.g., Gillis v.
California, 55 S.Ct. 4, 5 (1934) (federal receiver cannot demand right to operate in
violation of tax laws even if it does not have resources to comply); City of New
York v. Quanta Resources Corp. (In re Quanta Resources Corp.), 739 F.2d 912,
919 (3d Cir. 1984) (under § 959(b) and Gillis, "the goals of the federal bankruptcy
laws, including rehabilitation of the debtor, do not authorize transgression of state
laws setting requirements for the operation of the business even if the continued
operation of the business would be thwarted by applying state laws").
3
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amendment” (see discussion below, pp. 15-17). They file this brief to urge this
court to reverse the decisions below and find that the appropriate scope of
preemption under Section 1123 is far narrower than that stated in the decisions at
issue and, properly read, does not bar appellants from raising their substantive
arguments. The Amici States are not concerned with the final outcome of that
substantive litigation, and take no position on the merits of the insurers’ anti-
consequences of the means by which the lower courts arrived at the conclusion that
SUMMARY OF CASE
The Debtors, like many other companies facing mass tort liability for their
asbestos-related activities, filed bankruptcy to deal with that issue. During their
below, the bankruptcy court approved – and the district court affirmed – a plan of
3
They note that some decisions have held that state law does not bar such
assignments (see In re Federal-Mogul Global Inc., 385 B.R. 560, 568-89 (Bankr.
D. Del. 2008) (no bar on assigning policies after loss is incurred)) and other
decisions have suggested that, at least for asbestos trusts, other provisions are
relevant to the preemption issue (see In re Congoleum Corp. 2008 WL 4186899,
*4-5 (Bankr. D.N.J. 9/2/08) (Section 524(g) is premised on transferring insurance
policies to creditors’ trust so that enforcing anti-assignment provision would
conflict with that goal). The possibility, though, is not a reason to impose
preemption so as to preclude the issues from being heard.
4
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reorganization that channeled all of those silica-related claims against the Debtors
to a trust, and assigned the rights under certain insurance policies to that trust.
Although the appellants seek to call into question both the merits of the
silicosis claims and the propriety of the trust procedures, the Amici States again
take no position on those issues or any of the other issues raised by appellants in
their appeal. Rather, we write only to urge this Court to reverse the decision of the
lower courts that found that any arguments against the assignment of the proceeds
to the trust were barred ab initio because of the language in Section 1123(a)((5),
plan shall . . . provide adequate means for the plan’s implementation, such as (B)
transfer of all or any part of property of the estate to one or more entities, . . . .”
The lower courts held that that language was sufficient to preempt any claim
that the policy proceeds could not be assigned to the silica claims trust. In doing
so, the lower courts held that this Court’s decision in Combustion Engineering had
resolved the issue, that this Court had relied upon Section 1123 to preempt any
such arguments, and that, in reaching that conclusion, the Court had implicitly
rejected the analysis of the Ninth Circuit in Pacific Gas & Elec. Co. v. California,
350 F.3d 932 (9th Cir. 2003). They reached that conclusion, despite the facts that
Combustion Engineering did not mention PG & E; the analysis in PG&E was not
5
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discussed by this Court in any way, and the only reference to “preemption” in
Combustion Engineering was with reference to Section 541, not Section 1123.
As the Amici States show below, the ruling in Combustion Engineering did
not resolve the issue of the proper interpretation of Section 1123. This Court
should thus reject the view of the lower courts herein and adopt either the Ninth
Circuit’s view of the narrow scope of preemption in Section 1123 or, preferably,
ARGUMENT
insurance policies and/or such provisions in state law, and, generally, that the
section creates a broad preemption of laws that interfere with the implementation
any otherwise applicable nonbankruptcy law, a plan shall” contain eight required
elements. By its terms, that language only requires that a debtor comply with those
requirements. It does not permit a debtor to ignore all laws that might in some way
impact on the debtor’s structuring of its plan to meet those requirements. That is
particularly true with respect to Section 1123(a)(5), which states that a debtor must
6
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provide “adequate means for the plan’s implementation” and suggests a wide
would explicitly interfere with a truly mandatory aspect of that section – such as
from that effect to a general conclusion that a debtor may propose any plan term it
wishes (no matter how illegal) and then demand that any law to the contrary must
yield to that plan term would transform this apparently routine section into a grant
assume that such a change could have been put into place without an outcry from
governmental authorities at all levels, when confronted with the possibility that a
debtor’s plan could release it from all of the regulatory constraints that governed its
operations during the case. Finally, such a reading would put Section 1123 into a
clear – and unnecessary – conflict with Section 1129(a)(3), which provides that a
plan may not be confirmed unless it is “proposed in good faith and not by any
7
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The Debtors argued below, and the lower courts agreed, that Section 1123
has a broad preemptive effect and that, specifically, Section 1123(a)(5) allows the
debtor to preempt any federal or state law or contractual provision that could
interfere with any means that a plan might specify for its implementation,
including any transfer of estate property that might otherwise be unlawful. The
courts further concluded that, in Combustion Engineering, this Court had already
resolved that issue and that it had done so in favor of a reading that afforded broad
preemptive to Section 1123. Thus, they asserted, they were merely applying well-
established law when they barred the appellants from being able to litigate the
merits of their contractual issues. The Amici States believe both prongs of that
the Amici States note that the only policies at issue there were those of the London
Insurers, i.e., the insurers that had issued policies to non-debtors. And the question
before the Court was whether policies issued to non-debtors could be transferred to
the bankruptcy estate. This Court held that they could not. It noted that it agreed
with the District Court that anti-assignment provisions would not bar assignment of
debtors’ rights in insurance policies to the bankruptcy estate, because “Section 541
effectively preempts any contractual provision that purports to limit or restrict the
8
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Engineering, 391 F.3d at 219, fn. 27. That is, this Court correctly recognized that
Section 541 removes restriction on the transfer of property of the debtor to the
While the quoted sentence might, initially, suggest that, in using the term
“debtor,” this Court was referring to the debtor-in-possession during the case and
transfers that it might make (i.e., transfers from the estate to a third party), that
“As section 541(a)(1) clearly states, the estate is comprised of all legal or equitable
such an interest is limited in the hands of the debtor, it is equally limited in the
hands of the estate.”. Id.. Thus, while the debtor’s property (its insurance polices)
does become property of the estate without regard to technicalities about whether
property, while in the estate, remains encumbered with the same limitations placed
thereon while in the debtor’s hands prior to the bankruptcy filing. Thus, Section
541 cannot be read as removing all restrictions relating to the transfer of estate
property while held by the debtor. The same point is made by this Court’s decision
in Integrated Solutions, Inc. v. Service Support Specialties, Inc., 124 F.3d 487 (3rd
9
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Cir. 1997), where this Court stated that “it is a fundamental principle that the estate
succeeds only to the nature and the rights of the property interest that the debtor
In any event, whatever the state of the law was with respect to transfers of
the debtor’s property, it did not form the basis for the decision of this Court in
Combustion Engineering. The plan in that case purported to deal with the interests
apply. The property never entered the estate absent those conditions and,
accordingly, could not be transferred thereafter without compliance with them. Id.
While in reaching that conclusion, this Court did twice refer to preemption, it did
so only in reference to Section 541, and that Section’s language that brought the
debtor’s property into the estate despite restrictions on assignment. The only
reference to Section 1123 was in footnote 27, which described Section 541 as the
Nothing in that brief reference contains any reference to preemption, much less any
4
A contrary reading, in view of the inclusion of “applicable nonbankruptcy
law” in Section 541(c)(1), would mean that transfer of property to the estate would
override all state law restrictions during the case – a result directly contrary to the
holding in Integrated Solutions, which held that the sale provisions in Section 363
did not preempt state law limitations on sale of claims. 124 F.3d at 491-92.
10
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holding that preemption under Section 1123 was the basis for its holding in the
case. Nor, of course, could any such statement (even if one were included) have
been anything but dicta in light of the fact that the issue before the Court was what
to do with non-debtor policies to which the initial preemption from Section 541 did
not apply. Most significantly, nothing in that discussion suggested that this Court
had made a considered decision that Section 1123 allowed a debtor to override not
only all contractual, but also all state-law, restrictions on the debtor’s or trustee’s
ability to transfer property of the estate to a third party or otherwise regulate its
use.
Thus, the Amici States agree with the appellants that the Court did not
comment on the preemptive scope of Section 1123(a), nor did it address, much less
resolve, any of the arguments that have been raised in that regard. In light of the
extensive treatment of the preemption issues by the Ninth Circuit in PG & E only
the year before, it is highly unlikely that if this Court did intend to address that
adopted such a far-reaching view of the preemptive scope of Section 1123 without
ever directly mentioning the issue. Rather, the most logical reading of this Court’s
opinion is that it merely noted that a debtor’s insurance policies become part of the
estate, like any other property, but did not decide whether the Bankruptcy Code
preempts state-law limits on assigning that property from the estate to a third party.
11
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The Amici States agree with the appellants that the courts below erred in
reading Section 1123(a) to have such a sweeping scope; it would be even greater
error to allow the lower courts to find that this Court has already considered and
decided those issues, by way of nothing more than a citation of Section 1123 for
the proposition that insurance policies are included in the debtor’s estate. Thus,
now that this Court is called on to resolve the issue directly, the States believe that
it is critical that it consider the full ramifications of adopting the broad view
espoused below. They urge the Court to find that the proper reading of that section
is far narrower than the view adopted by the courts below, and one that would
leave open to the appellants the ability to raise their anti-assignment arguments.
(As noted above, the Amici States take no view on the merits of those arguments
As the appellants correctly argue (Brief for Appellants Hartford and Century
30-31, hereafter “Brief”), while the Supremacy Clause does allow federal law to
override state law, the Supreme Court has long counseled that such preemption
should not be lightly inferred. Similarly, while one federal law may control over
another law if they conflict, the courts are counseled to avoid such conflicts where
possible and not to assume that Congress, in fact, intended to create such disputes.
12
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Pittsburgh & Lake Erie R.R. Co. v. Railway Labor Executives' Ass'n, 491 U.S. 490,
510 (1989).
Supreme Court have both counseled for even greater circumspection, particularly
where the interference would be with aspects of state law that are of great import to
their citizens. See, Integrated Solutions, 124 F.3d at 493 (“strong presumption
Nat’l Bank v. New Jersey Dep’t of Envt’l. Prot., 474 U.S. 494, 501 (1986) (“[i]f
‘the intention would be clearly expressed, not left to be collected or inferred from
bankrupt.’”) Similarly, absent a “clear and manifest” purpose to the contrary, “the
state law.” BFP v. Resolution Trust Corp., 511 U.S. 531, 544-545 (1994).
13
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Where the issue of state law is of sufficient import, the Supreme Court has
read the Bankruptcy Code not to displace state law unless Congress has made its
U.S. 36 (1986), the Court noted the courts’ long reluctance to allow bankruptcy to
be used as a means of escaping criminal sanctions (in the face of language in the
bankruptcy laws that facially would appear to discharge such debts) and concluded
that in view of that history, it would apply the principle that Congress would not be
held to have changed that interpretation absent clear proof of its intent. Id. at 479
U.S. at 46-47. The Court further noted that the States’ interest in their criminal
judgment systems were among the most powerful factors for federal courts to use
federalism also must influence our interpretation of the Bankruptcy Code.” Id. at
49. Indeed, the Court found that the states’ interests were so strong that the
restitution awarded to a private victim, even though such restitution was not
literally a “fine, penalty, or forfeiture,” was not payable to the government, and
was arguably for the victim’s direct pecuniary loss – all of which are contrary to
14
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property, it concluded that the prior history of the provision, the need to respect the
ability of States to enforce their regulatory processes, and the contextual evidence
of the Code’s respect for that authority (as seen in the police and regulatory
exceptions to the automatic stay), meant that property could not be abandoned in
violation of state laws that were “reasonably designed to protect the public health
or safety from identified hazards.” Midlantic, 474 U.S. at 507. Thus, it is clear
that the courts are to consider both comity and history in construing language that
could dramatically affect the States’ regulatory interests, even where those limits
authority, the Debtors’ argument for a sweeping view of the scope of the
agree with the arguments in that regard made by appellants (Brief pp. 30-46) and
do not repeat them in depth here. They do write to emphasize certain aspects of
those arguments and to add references to other provisions and decisions that
15
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Initially, they note that the section is, on its face, an innocuous recital of the
sorts of provisions that plans are to contain – most of which arise inherently from
the requirements for confirmation set out in Section 1129. Section 1123(a)(5), for
instance, directs that in proposing its plan the debtor must provide adequate means
for its implementation, which is essentially just another means of saying the plan
provisions set out in Section 1123(a)(5) are plainly not exclusive, giving the debtor
the full range of discretion to propose anything that might make the plan feasible
(and, thus, limiting the scope of preemption only by the extent of a debtor’s
imagination). Moreover, nothing in Section 1123(a) even suggests what the plan’s
substantive terms should be; it merely states that, whatever they may be, the debtor
state or federal – may not bar the debtor from including a mandatory provision in a
plan. Section 1123(a)(6) is an obvious example where there could be a state law
that might directly contradict a substantive directive for the terms of a plan. On the
5
As the appellants note, this phrase first appeared in a proposed 1980 bill,
whose legislative history stated that the language was intended to “make[] it clear
that the rules governing what is to be contained in the reorganization plan are those
16
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nonbankruptcy laws merely because they would bar the debtor from confirming a
plan that would violate the laws applicable to every other entity.
preempts any law, civil or criminal, that could limit what a debtor can include in its
plan and the means for execution of those plan terms – is stunningly broad when
taken to its logical conclusions. A debtor, for instance, might wish to eliminate its
after the bankruptcy, because the cost of doing so would be a drain on its future
profits. Or it might seek to be allowed, in violation of state law, to force its driver
to reduce its ongoing expenses going forward. Or a gun manufacturer might seek
to confirm a plan whereby it would decide what steps it would take to modify its
and include an injunction barring those entities from requiring it to take more or
different steps, because the costs of compliance therewith and/or ongoing litigation
would be too onerous for it to operate profitably. Or, finally, a debtor may wish to
specified in this section.” H.R. Rep. No. 96-1195, at 22 (1980). That is consistent
with a reading that would preclude other laws from adding requirements to those in
Section 1123 for terms of a plan, but that would not preempt nonbankruptcy laws
from applying to the debtor post-confirmation.
17
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merge with another business to create a new and stronger entity going forward that
create an entity that would be an illegal monopoly under federal antitrust laws.
Heartland Partners, 966 F.3d 1143 (7th Cir. 1991), In re Baker & Drake, 35 F.3d
1348 (9th Cir. 1994), In re Davis Industries, Inc., Case No. RS99-19302-MJ
(Bankr. C.D. Cal. 2000) (see attached excerpts from debtor’s first amended plan
and disclosure statement, Docket Nos. 471 and 472, April 21, 2000, Appendix 1),
and Lockyer v. Mirant Corp., 398 F.3d 1098 (5th Cir. 2005), respectively.6 In each
case, the courts rejected the argument that the debtors should be allowed to escape
their normal obligations under state and federal law. As the Ninth Circuit stated,
in rejecting the injunction against enforcement of state law that was contained in
the debtor’s plan, “Congress's purpose in enacting the Bankruptcy Code was not to
mandate that every company be reorganized at all costs, but rather to establish a
preference for reorganizations, where they are legally feasible and economically
practical.” Baker & Drake, 35 F.3d at 1354. In CMC Heartland, the Seventh
Circuit concluded that federal law imposes obligations on the owner of land
regardless of whether it was liable for the initial contamination and, hence, the
6
Similarly, in PG&E, the debtor sought to disaggregate its operations into
four corporations in violation of state as a way of escaping state regulatory
authority post-confirmation.
18
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discharge it received in its plan. In Davis Industries, the bankruptcy court rejected
the debtor’s plea that its ban on post-confirmation government regulation was
necessary because it could not effectively reorganize without the ban. (See
Amended Disclosure Statement, Docket No. 501, June 2, 2000, Appendix 2). The
case was eventually dismissed when it became clear that, absent that ban, the
Nov. 11, 2000). In Mirant, the Ninth Circuit held that the Attorney General had to
be allowed to pursue his Clayton Act claims during the case, despite the automatic
stay, because it was unclear whether the plan would provide for divestiture on that
basis. The Court had no doubt that, if the plan did not include the divestiture, the
Attorney General could have brought its action post-confirmation so there was no
reason to delay the suit. 398 F.3d at 1104-05. None of those cases turned on
Section 1123; rather, the courts considered it self-evident that a plan could not be
Only in PG & E was the court confronted with a direct appeal to Section
1123 to validate the debtor’s ability to make a transfer that would have allegedly
violated state law. In resolving that question, the Ninth Circuit carefully examined
the legislative history of Section 1123, and its relationship with the remainder of
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the Code and concluded that, at most, the section only preempts measures dealing
with financial conditions. A contrary ruling would have allowed not only the plan
in PG&E to have been confirmed, but, under the same logic, plans could have been
proposed – and confirmed – in each of the other cases discussed above to eliminate
result would be to allow debtors to write themselves not just the “fresh start” that
bankruptcy intends, but a “head start” over all others who remain subject to those
laws.
this language suggests that Congress intended such a perverse result, especially
As noted above, when the new language was included in a proposed 1980 bill, the
legislative history stated that it would “make . . . clear that the rules governing
section.” H.R. Rep. No. 96-1195, at 22 (1980). That language, which suggests
that the phrase was only intended to ensure that nonbankruptcy law did not impose
added criteria for a plan beyond those “specified in [Section 1123],” would
comport well with the fact that this change was referred to as a “technical stylistic
change[]” in the 1983 version of the legislation. Similarly, the change was
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knowingly concealed a change of this dramatic import under the guise of enacting
a minor clarification. As noted by the appellants’ brief (p. 41), the Supreme Court
has not treated similar technical or “stylistic” amendments as having such effects.
(and only in Chapter 11)7 may override nonbankruptcy law to an extent that is
limited only by whether the plan can garner sufficient votes to be presented for
discretion, in turn, could be exercised without criteria or limits, other than that the
of the plan. There need not even be a showing that the language was necessary for
equal terms with plans of reorganization.8 And, under the doctrine of “equitable
mootness,” as a practical matter, the confirmation order will often be the binding
7
No similar language appears with respect to plans in Chapters 12 or 13.
8
As the appellants note, all that the debtor in Midlantic needed to have
done was to file its case as a Chapter 11 liquidation, rather than in Chapter 7, and,
under this reading, it could have confirmed a liquidating plan that would preempt
state laws that might have interfered with abandonment of the property.
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determination in the case leaving few effective means to appeal the plan. See, e.g.,
In re Adelphia Communications Corp., 361 B.R. 337 and 367 B.R. 84 (S.D. N.Y.
2007) and cases cited therein (despite finding that creditors would be irreparably
harmed and that they had a substantial likelihood of success on challenges to the
billion bond; when creditors failed to post that amount (or lesser sums), the appeal
“forbidden by law.”9 It is difficult to see how one can reconcile the broad scope
asserted for Section 1123, while also giving meaning to Section 1129(a)(3). The
bankruptcy court in In re Federal-Mogul Global Inc., 385 B.R. 560, 574 fn. 28
9
Mirant, 398 F.3d at 1104 (potential violation of Clayton Act could be
raised in confirmation “for any confirmable reorganization plan must have been
‘proposed in good faith and not by any means forbidden by law.’”); In re Koelbl,
751 F.2d 137, 139 (2nd Cir.1984) (“We accept the debtors' argument that ‘means
forbidden by law’ refers inter alia to state law. See In re Landau Boat Co., 13
Bankr. 788, 794 (Bankr. W.D. Mo. 1981); 5 Collier on Bankruptcy ¶ 1129.02, at
1129-13 (15th ed. 1984) (‘[S]ection 1129(a)(3) requires that the proposal of the
plan comply with all applicable law, not merely the bankruptcy law.’”); In re Flor,
166 B.R. 512 (Bankr. D. Conn. 1994) (pre-BAPCPA Chapter 11 plan that relied on
wage assignment that violated state law could not be confirmed because of conflict
with Section 1129(a)(3)).
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(Bankr. D. Del. 2008), in a case identical to this one, rejected the insurers’
argument there that the broad interpretation of Section 1123 could allow the debtor
derives if one assumes that Section 1123 expressly preempts all state law. The
court places its finger on the crux of the conflict – Section 1129(a)(3) requires that
a plan not be proposed by illegal means, while Section 1123 is read to allow
exactly that. But, having done so, the court erred in failing to recognize that it had
9/2/08) did address that issue, stating that the good faith requirements of Section
1123(a), “No bankruptcy court would confirm a plan that called for a debtor to
purpose.” Id. at 6. But that assertion is not an adequate answer for numerous
reasons. First, “good faith” is an amorphous concept that provides little clarity as
to what is precluded, thus leaving almost total discretion in this area to the
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bankruptcy courts. Second, in other contexts, courts have often held that one
cannot challenge an action on “good faith” grounds if the debtor is merely taking
advantage of what the Code allows. See, e.g., In re Sylmar Plaza, L.P, 314 F.3d
1070, 1074-75 (9th Cir. 2002) (even if plan was filed solely to allow solvent debtor
to deny default interest to creditor, and to pay that creditor at rate below that
offered to other creditors, that did not prove that plan was filed in bad faith since
purpose, but what if that goal can only be met if the debtor is allowed to violate
generally applicable state law? Does that mean the bankruptcy court has the power
to allow the debtor to write itself an exemption from that law? If it does not, then
what guidance should the courts use to determine what are acceptable violations of
nonbankruptcy law and which are unacceptable? Rejecting the broad reading of
10
Some courts take a narrower view of Section 1129(a)(3), holding that it
does not deal with the question of whether the debtor’s operations under its plan on
a going-forward basis would be legal, but only with the means used to actually
obtain confirmation. Even, those courts, though, generally do so based on the
premise that “discharge does not insulate the reorganized debtor from subsequent
enforcement actions for illegal conduct” because “Confirmation is not intended to
provide a “‘clean bill of health’ with regard to all laws with which a given plan
might conceivably conflict.” In re Frascella Enterprises, Inc., 360 B.R. 435, 445
(Bankr. E.D. Pa. 2007) citing In re Food City, Inc., 110 B.R. 808, 811-812 (Bankr.
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The final absurdity of this reading is the stark contrast between the treatment
debtor must return to the “cold, cruel world” outside the protective comfort of the
bankruptcy courts. See, e.g., Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th
Cir. 1991) (“Once the bankruptcy court confirms a plan of reorganization, the
debtor may go about its business without further supervision or approval. The firm
also is without the protection of the bankruptcy court. It may not come running to
Inv. Services Co., 141 B.R. 635, 640 (Bankr. E.D. Tenn. 1992) (confirmation is
intended to end the ‘tutelage’ status of Chapter 11). Conversely, during the
bankruptcy, the debtor enjoys numerous protections from litigation and the
and regulatory measures, because Sections 362(b)(1) and (4) create exceptions to
the automatic stay and 28 U.S.C. §§ 959(b) and §1452(a) require the debtor to
obey the law and bar removal of police and regulatory litigation from state court.
Under the Debtors’ reading of Section 1123, this treatment of the debtor is
completely reversed. During the case, the state may enforce its laws against the
W.D. Tex.1990). The broad reading of Section 1123, however, provides exactly
that sort of “clean bill of health” and can allow a the debtor to immunize itself
from those enforcement actions.
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debtor in its own courts. After confirmation, though, debtors may write themselves
an exception from those laws for their future operations, solely by showing that a
provision will assist them to implement a plan. If Congress does not allow debtors
to flout state law during bankruptcy, it makes no sense it intended to allow them to
CONCLUSION
This Court should reverse the portion of the district court’s order affirming
Debtors’ Chapter 11 plan and clarify that its analysis in Combustion Engineering
did not entail any decision on the scope of Section 1123 and that the scope of that
substantive arguments here. It should thereafter remand the case to the bankruptcy
ANNE MILGRAM
ATTORNEY GENERAL OF NEW JERSEY
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Case: 08-3650 Document: 00314856981 Page: 33 Date Filed: 12/01/2008
CERTIFICATE OF COMPLIANCE
In addition, pursuant to LAR 31.1(c), I certify that the text of the brief filed
with the Court by electronic mail is identical, except for the signatures, to the text
of the paper copies. I further certify that a virus detection program has been run on
the electronic file and that no virus was detected. I rely on the virus detection
program McAfee Virus Enterprise 8.0.0. (company: Networks Associates
Technologies, Inc.) in making this representation.
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Case: 08-3650 Document: 00314856981 Page: 34 Date Filed: 12/01/2008
SETH P. WAXMAN
CRAIG GOLDBLATT
DANIELLE SPINELLI
NANCY L. MANZER
CATHERINE M.A. CARROLL
LISA EWART
WILMER CUTLER PICKERING
HALE AND DORR LLP
1875 Pennsylvania Ave., N.W.
Washington, D.C. 20006
(202) 663-6000
seth.waxman@wilmerhale.com
craig.goldblatt@wilmerhale.com
Danielle.spinelli@wilmerhale.com
catherine.carroll@wilmerhale.com
lisa.ewart@wilmerhale.com
WILLIAM J. BOWMAN
JAMES P. RUGGERI
EDWARD B. PARKS, II
HOGAN & HARTSON LLP
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-5600
Counsel for Appellants Hartford Accident
and Indemnity Company, First State
Insurance Company, and Twin City Fire
Insurance Company
wjbowman@hhlaw.com
jpruggeri@hhlaw.com
ebparks@hhlaw.com
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Case: 08-3650 Document: 00314856981 Page: 35 Date Filed: 12/01/2008
JOHN D. DEMMY
STEVENS & LEE, P.C.
1105 North Market Street, 7th Floor
Wilmington, DE 19801
(302) 425-3308
jdd@stevenslee.com
LEONARD P. GOLDBERGER
STEVENS & LEE, P.C.
1818 Market Street, 29th Floor
Philadelphia, PA 19103
(215) 751-2864
lpg@stevenslee.com
JOSEPH GIBBONS
AMY E. VULPIO
WHITE AND WILLIAMS LLP
1800 One Liberty Place
Philadelphia, PA 19103
(215) 864-7000
gibbonsj@whiteandwilliams.com
vulpioa@whiteandwilllaims.com
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Case: 08-3650 Document: 00314856981 Page: 36 Date Filed: 12/01/2008
psinger@reedsmith.com
dzeigler@reedsmith.com
Counsel for Appellee Global Industrial Technologies, Inc.
ROBERT G. SABLE
SALLY E. EDISON
MCGUIRE WOODS LLP
Dominion Tower, 23rd Floor
625 Liberty Avenue
Pittsburgh, PA 15222
(412) 667-7936
rsable@mguirewoods.com
sedison@mcguirewoods.com
Counsel for Appellee Official Committee of Unsecured Trade Creditors
EDWIN J. HARRON
SHARON M. ZIEG
YOUNG CONAWAY STARGATT & TAYLOR LLP
The Brandywine Building, 17th Floor
1000 West Street
Wilmington, DE 19801
(302) 571-6600
eharron@ycst.com
szieg@ycst.com
Counsel for Appellee Lawrence Fitzpatrick, Legal Representative to the Future
Claimants
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(412) 258-6720
gpn@sgkpc.com
Counsel for Appellee Philip Pahigian, Legal Representative to the Future Silica
Personal Injury Claimants
MICHAEL S. DAVIS
ZEICHNER ELLMAN & KRAUSE LLP
575 Lexington Avenue
New York, NY 10022
(212) 223-0400
mdavis@zeklaw.com
JOSEPH BOURY
BIVONA & COHEN
88 Pine Street
New York, NY 10005
(212) 363-3100
joseph.boury@bivonacohen.com
Counsel for Appellants AIG Member Companies, including National Union Fire
Insurance Company of Pittsburgh, PA, Insurance Company of the State of
Pennsylvania, Lexington Insurance Company and American Home Assurance
Company
I further certify that, on this 1st day of December, 2008, I caused ten
bound copies of the foregoing BRIEF OF AMICUS CURIAE STATES to be filed
with the Court via overnight courier (UPS) to the following address:
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I also certify that an electronic copy, in .pdf format, of the foregoing BRIEF
OF AMICUS CURIAE STATES was filed with the Office of the Clerk by
Electronic mail at the address indicated: electronic_briefs@ca3.uscourts.gov.
33