Opening Briefs And Amicus - Git Bankruptcy Appeal

Received and Filed Case: 08-3650 08-3650 11/19/08 Marcia M. Waldron, Clerk

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No. 08-3650 In the United States Court of Appeals for the Third Circuit IN RE: GLOBAL INDUSTRIAL TECHNOLOGIES, INC., ET AL. HARTFORD ACCIDENT AND INDEMNITY COMPANY, ET AL., Appellants, v. GLOBAL INDUSTRIAL TECHNOLOGIES, INC., ET AL., Appellees. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

BRIEF FOR APPELLANT AIG MEMBER COMPANIES ZEICHNER ELLMAN & KRAUSE LLP Michael S. Davis 575 Lexington Avenue New York, NY 10022

TUCKER ARENSBERG, PC Beverly Weiss Manne 1500 One PPG Place Pittsburgh PA 15222

BIVONA & COHEN Joseph Boury 88 Pine Street New York, NY 10005

Counsel for the Appellant, 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

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CORPORATE DISCLOSURE STATEMENT AND STATEMENT OF FINANCIAL INTEREST Pursuant to Rule 26.1 and Third Circuit LAR 26.1, Appellant, AIG Member Companies make the following disclosure: 1) For non-governmental corporate parties please list all parent corporations:

American International Group, Inc. 2) For non-governmental corporate parties please list all publicly held companies that hold 10% or more of the party's stock:

American International Group, Inc.

3) If there is a publicly held corporation which is not a party to the proceeding before this Court but which has as a financial interest in the outcome of the proceeding, please identify all such parties and specify the nature of the financial interest or interests: 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 TUCKER ARENSBERG, P.C. 1500 One PPG Place Pittsburgh, PA 15222 (412) 594-5525 Email: bmanne@,tuckerlaw.com Counsel for Appellant National Union Fire Insurance Company of Pittsburgh, Pa; Insurance Company of the State of Pennsylvania; Lexington Insurance Company; American Home Assurance Company, and any other entities related to American International Group, Inc. that engaged in business transactions with the Reorganizing Debtors

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TABLE OF CONTENTS Page CORPORATE DISCLOSURE STATEMENT I.

TABLE OF AUTHORITIES .................................................................i

II.

STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION....................................................................................1

III.

STATEMENT OF RELATED CASES AND PROCEEDINGS..........1

IV.

STATEMENT OF THE STANDARD OF REVIEW...........................1

V.

STATEMENT OF THE ISSUES PRESENTED FOR REVIEW.........2

VI.

JOINDER OF AIG MEMBER COMPANIES .....................................2

VII. STATEMENT OF THE CASE AND STATEMENT OF THE FACTS...........................................................3 VIII. SUMMARY OF ARGUMENT ............................................................6 IX.

ARGUMENT ........................................................................................7 THE COURTS BELOW ERRED IN CONFIRMING A PLAN THAT PAYS OFF CLAIMS THAT WOULD NOT BE ALLOWED UNDER APPLICABLE BANKRUPTCY LAW TO GARNER FAVORABLE VOTING BY THE ASBESTOS CLAIMANTS

X.

CONCLUSION ...................................................................................16

COMBINED CERTIFICATIONS ................................................................18

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I.

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TABLE OF AUTHORITIES

Statutes

Page

11 U.S.C. § 105......................................................................................................7, 8 11 U.S.C. § 501........................................................................................................10 11 U.S.C. § 502..............................................................................8, 9, 10, 11, 12, 13 11 U.S.C. § 558........................................................................................................12 11 U.S.C. § 1129................................................................................................7, 8, 9 Cases In re Abbotts Dairies of Pa., Inc., 788 F.2d 143 (3d Cir. 1986)......................................................................................9 Addison v. Langston ( In re Brints Cotton Marketing, Inc.), 737 F.2d 1338, 1341 (5th Cir. 1984) .................................................................11, 12 Butner v. United States, 440 U.S. 48, 99 S. Ct. 914, 59 L. Ed. 2d 136 ..........................................................11 In re Brill, 318 B.R. 49 (Bankr. S.D.N.Y. 2004) ...........................................................................................13 In re American Reserve Corp., 840 F.2d 487 (7th Cir. 1988) ...................................................................................12 In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004)...........................................................................8, 11, 12 In re Continental Airlines, Inc., 203 F.3d 203 (3d Cir. 2000)...................................................................................... 8

(i)

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In re International Environmental Dynamics, Inc., 718 F.2d 322, 326 (9th Cir. Cal. 1983). ....................................................................9 In re PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000)...................................................................................8, 9 Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 99 L. Ed. 2d 169, 108 S. Ct. 963 (1988).....................................8 Phillips v. A-Best Products Co., 665 A.2d 1167, 542 Pa. 142 (1995) .........................................................................15 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 Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S. Ct. 237, 91 L. Ed. 162 (1946)..................................................12 Secondary Materials 4 Collier on Bankruptcy (15th rev. ed. 2003) .........................................................11

(ii)

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STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION

The AIG Member Companies1 join in and adopt the Statement of Subject Matter and Appellate Jurisdiction of Appellants Hartford and Century Indemnity.

III.

STATEMENT OF RELATED CASES AND PROCEEDINGS

The AIG Member Companies join in and adopt the Statement of Related Cases and Proceedings of Appellants Hartford and Century Indemnity.

IV.

STATEMENT OF THE STANDARD OF REVIEW

The AIG Member Companies join in and adopt the Statement of Standard of Review of Appellants Hartford and Century Indemnity.

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”.

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STATEMENT OF THE ISSUES PRESENTED FOR REVIEW

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: 4.

Did the bankruptcy court err in confirming a plan of reorganization

and establishment of a silica trust that contains no means of preventing the payment of invalid silica claims, and thus threatens to decrease the recovery of creditors with valid claims?

VI.

JOINDER OF AIG MEMBER COMPANIES

The AIG Member Companies join in the Appellate Brief and associated filings of Hartford and Century Indemnity.

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VII. STATEMENT OF THE CASE AND STATEMENT OF THE FACTS Appellant AIG Member Companies join in and incorporate the Statement of the Case and the Statement of the Facts articulated by Appellants Hartford and Century2 in their Appellate Brief. In addition, the AIG Member Companies state as follows: Global Industrial Technologies (“GIT”) and certain of its subsidiaries, including both A.P. Green Industries, Inc. (“APG”) and Harbison-Walker (collectively, the “Debtors” or “GIT Debtors”), filed Chapter 11 bankruptcy cases3 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.

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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 GIT Plan at (Docket 6242 with additional substantive 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 claims against the Silica Trust. See, JA 2441 - JA2484. As creditors of the Silica Trust, the AIG Member Companies’ percentage 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, on account of the allowance of worthless claims, reducing the overall percentage of 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

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be allowed and paid based upon exposure and diagnosis alone. JA73 (¶193), JA 2797 (¶193), JA 2799 (¶199), JA2973-4. That payment scheme will prevail even though Debtor testified, and the Bankruptcy Court opined, that the Post-2000 Silica Claimants should be “subject to all defenses” available to Debtors. See JA 70 and JA1042. Specifically, after 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 Distribution Procedures (“TDP”), many or perhaps 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. 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 allowed claimants whose pro-rata distribution will be diluted by the allowance, or insurers who will be asked to pay for the claim allowed by the Trust. JA 2968, 2972, et seq.

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VIII. SUMMARY OF ARGUMENT The AIG Member Companies respectfully submit that in addition to the 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 allows legally worthless silica-related injury claims to receive a recovery that 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 is not equitable and it should not have been confirmed. 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 establishment of a trust that allows invalid claims to dilute AIG Member Companies’ valid claims against the Trust. This objection is in addition to the objections of AIG Member Companies as insurers, as articulated and briefed by Hartford and Century in their Appellate brief, in which objections and Brief the AIG Member Companies join.

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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 Plan and the Silica Trust Distribution Procedures inappropriately structure a scheme whereby claims that would be unenforceable under applicable nonbankruptcy 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 under applicable non-bankruptcy law.

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ARGUMENT

THE COURTS BELOW ERRED IN CONFIRMING A PLAN THAT PAYS OFF CLAIMS THAT WOULD NOT BE ALLOWED UNDER APPLICABLE BANKRUPTCY LAW TO GARNER FAVORABLE VOTING BY THE ASBESTOS CLAIMANTS 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.

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However, nothing in Section 105 authorizes a court to override the command of 11 U.S.C. § 502(b)(1) -- that claims are to be allowed or disallowed pursuant to the principles of applicable nonbankruptcy law. This Court has time and time again held that Section 105 does not provide authority for a bankruptcy court to expand rights afforded to parties by the Bankruptcy Code. See, In re Continental Airlines, Inc., 203 F.3d 203, 211 (3d Cir. 2000). Nor may a bankruptcy court disregard provisions of the Code. In re 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 purposes of determining good faith under section 1129(a)(3) . . . the important 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

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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). Just as attempts to manufacture artificially, or to gerrymander, classes to obtain an accepting impaired non-insider class4 raise questions of good faith, so 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 creditors to challenge such claims under Section 502(b). 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 equal distribution to creditors. Thus a plan can be confirmed if it "complies with the applicable provisions of this title." 11 U.S.C. § 1129(a)(1). Failing to comply with the provisions of the Code as a device to get votes for a plan is simply not permissible. And in a case involving competing claims to a limited fund, a 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, 326 (9th Cir. Cal. 1983). 4

In order to confirm a Plan, Section 1129 requires that the plan be accepted by at least one class of impaired creditors. 11 U.S.C. §1129(a)(10).

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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 Companies from exercising their Section 502(a) rights to object. 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 misconstruction of what an allowed claim is for bankruptcy purposes. See, JA 24. 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 upon defenses to the claim cannot be an allowed claim pursuant to Section 502(b)(1). The Bankruptcy Code provides that a claim or interest, proof of which is filed under Section 501 is deemed allowed unless a party in interest objects. 11 U.S.C. § 501(a), emphasis added. 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 under any agreement[.]" 11 U.S.C. § 502(b)(1).

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As this Court has stated: '[t]o determine whether claims are enforceable for bankruptcy purposes, § 502 relies upon applicable non-bankruptcy law. See 4 Collier on Bankruptcy P 502.03[2][b][ii] (15th rev. ed. 2003) ('The validity and legality of claims is generally determined by applicable non-bankruptcy law."). A claim against the bankruptcy estate, therefore, "will not be allowed in a bankruptcy proceeding if the same claim would not be enforceable against the debtor outside of bankruptcy." (citations omitted). In re Combustion Engineering, Inc., 391 F.3d 190, 245 (3d Cir. 2004) State law ordinarily determines what claims of creditors are valid and subsisting obligations. As articulated recently by the United States Supreme Court: 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 allowable for bankruptcy purposes, in order to accomplish the statutory purpose of advancing a fair and ratable distribution of assets among the creditors. Addison v.

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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 to substantive nonbankruptcy law to determine the validity and amount of a claim 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 outside of the bankruptcy context is also available in bankruptcy." Travelers Cas. & 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 'claim' -- which the Code itself defines as a 'right to payment,' -- it is usually 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 that would be subject to the statute of limitations, which is a waivable defense

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under the laws of many jurisdictions, would nonetheless be disallowed. It cannot 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. 2004) (Section 502(b)(1) requires a claim to be disallowed if such claim is 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 claimants would be subject to defenses to liability that could either reduce or 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 and should not have been confirmed.

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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 concluded that the Post-2000 Silica Claimants would be “subject to defenses” available to Debtors. JA 73 (Memorandum Opinion of Confirmation of Third 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, simply upon a showing of exposure and injury --regardless of the existence of a defense (such as refusal to wear an employer provided mask). JA2943. The Futures Representative for Silica Claimants, Robert Pahigian, in his affidavit averred that the Plan and Silica TDPs “will be able to pay present claims and future demands in a substantially similar manner.”5 JA2796, 2842. But, under

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

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Pennsylvania law, the post-2000 Silica Claims would clearly be subject to 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 by payment of legally defensible claims which should be disallowed under the 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 post2000, 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.

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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 entering the Order of Confirmation.

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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.

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Dated: November 19,2008 The 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

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 Michael S. Davis, Esq. ZEICHNER ELLMAN & KRAUSE LLP 575 Lexington Avenue New York, New York 10022 Phone: 212-223-0400 Joseph Boury, Esq. BIVONA & COHEN, P.C. 88 Pine Street New York, New York 10005 Phone: (2 12) 363-3 100

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COMBINED CERTIFICATIONS Beverly Weiss Manne certifies as follows: 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.

2.

This brief complies with the type-volume limitations of Fed. R. App. P 32(a)(7)(B) because this brief contains 3090 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

3.

This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this brief has been prepared in a proportionally spaced typeface using Microsoft Word 2003 in Times New Roman 14-point font.

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.

5.

A virus detection program on Kaspersky Anti-Virus software was run on the file for the electronic version of the brief and no virus was detected.

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. Volume I of the Appendix is not included because it is attached to the Appellate Brief of Hartford and Century Indemnity, in which Brief AIG Member Companies have joined. Volumes I-V of the Appendix are being served by Hartford and Century Indemnity. Two copies of this Brief were served upon the following counsel of record by first class/priority mail, postage prepaid, addressed as follows:

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James J. Restivo, Jr., Esq. Paul M. Singer, Esq. David Ziegler, Esq. Reed Smith 435 Sixth Avenue Pittsburgh, PA 15219-0000 Edwin J. Harron, Esq. Sharon M. Zieg, Esq. Young, Conaway, Stargatt & Taylor 1000 West Street, P.O. Box 391 17th Floor, Brandywine Building Wilmington, DE 19899-0391 Joel M. Helmrich, Esq. Meyer, Unkovic & Scott 535 Smithfield Street 1300 Oliver Building Pittsburgh, PA 15222-0000 Gary P. Nelson, Esq. Sherrard, German & Kelly 620 Liberty Avenue Two PNC Plaza, 28th Floor Pittsburgh, PA 15222-0000 Douglas A. Campbell, Esq. David B. Salzman, Esq. Campbell & Levine 330 Grant Street 1700 Grant Building Pittsburgh, PA 15219-0000

BANK_FIN:316991-2 021087-134919

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Elihu Inselbuch, Esq. Caplin & Drysdale 375 Park Avenue, 35th Floor New York, NY 10152-0000 Peter V. Lockwood, Esq. Caplin & Drysdale One Thomas Circle, N. W. Washington, DC 20005-0000 Sally E. Edison, Esq. McGuireWoods 625 Liberty Avenue 23rd Floor, Dominion Tower Pittsburgh, PA 15222-0000 Craig Goldblatt, Esq. Danielle M. Spinelli, Esq. Seth P. Waxman, Esq. Wilmer Hale 1875 Pennsylvania Avenue, N.W. Washington, DC 20006 John D. Dernrny, Esq. Stevens & Lee 1105 North Market Street, Suite 700 Wilmington, DE 19801-0000

Dated: November 19,2008

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Filed 08-3650 12/04/08 Marcia M. Waldron, Clerk

Date Filed: 12/04/2008

No. 08-3650

In the United States Court of Appeals for the Third Circuit IN RE: GLOBAL INDUSTRIAL TECHNOLOGIES, INC., ET AL. HARTFORD ACCIDENT AND INDEMNITY COMPANY, ET AL., Appellants, v. GLOBAL INDUSTRIAL TECHNOLOGIES, INC., ET AL., Appellees. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

BRIEF FOR APPELLANTS HARTFORD AND CENTURY

WILLIAM J. BOWMAN JAMES P. RUGGERI EDWARD B. PARKS, II HOGAN & HARTSON LLP 555 Thirteenth Street, N.W. Columbia Square Washington, D.C. 20004 (202) 637-5600

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 Avenue, N.W. Washington, D.C. 20006 (202) 663-6000

Counsel for Appellants Hartford Accident and Indemnity Company, First State Insurance Company, and Twin City Fire Insurance Company Additional Parties and Counsel Listed on Inside Cover

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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 Counsel for 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)

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CORPORATE DISCLOSURE STATEMENT AND STATEMENT OF FINANCIAL INTEREST 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: A. Hartford Accident and Indemnity Company. Hartford Fire Insurance Company and The Hartford Financial Services Group, Inc. are parent corporations. The Hartford Financial Services Group, Inc. (publicly held) holds 100% of the stock of Hartford Fire Insurance Company (a non-party), which holds 100% of the stock of Hartford Accident and Indemnity Company. B. First State Insurance Company. Heritage Holdings, Inc. and The Hartford Financial Services Group, Inc. are parent corporations. The Hartford Financial Services Group, Inc. (publicly held) holds 100% of the stock of Heritage Holdings, Inc. (a non-party), which holds 100% of the stock of First State Insurance Company. C. Twin City Fire Insurance Company. Hartford Fire Insurance Company and The Hartford Financial Services Group, Inc. are parent corporations. The Hartford Financial Services Group, Inc. (publicly held) holds 100% of the stock of Hartford Fire Insurance Company (a non-party), which holds 100% of the stock of Twin City Fire Insurance Company. 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. Dated: November 19, 2008

/s/ Danielle Spinelli Danielle Spinelli WILMER CUTLER PICKERING HALE AND DORR LLP 1875 Pennsylvania Avenue, N.W. Washington, D.C. 20006 (202) 663-6000 Counsel for Appellants Hartford Accident and Indemnity Company, First State Insurance Company, and Twin City Fire Insurance Company

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IN THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT HARTFORD ACCIDENT AND INDEMNITY COMPANY, ET AL., Appellants,

GLOBAL INDUSTRIAL TECHNOLOGIES, INC., ET AL., Appellees. CORPORATE DISCLOSURE STATEMENT AND STATEMENT OF FINANCIAL INTEREST 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:

Century Indemnity Company. Century Indemnity Company is a wholly owned subsidiary of Brandywine Holdings Corporation, which is not a publicly traded company, and its ultimate parent corporation is ACE Limited, which is a publicly traded conlpany having a financial interest in this appeal. Westchester Fire Insurance Company. Westchester Fire Insurance Company is a wholly owned subsidiary of ACE US Holdings, Inc., which is not a publicly traded company, and its ultimate parent corporation is ACE Limited, which is a publicly traded company having a financial interest in this appeal. Dated: September 25,2008

1 105 N. Market Street, 7th Floor Wilmington, DE 1980 1 Telephone: (302) 425-3308

Counsel for Century Indemnity Company, as successor to CIGNA Specialty Company, formerly known as California Union Insurance Company, and Westchester Fire Insurtrnce Company,for itself and for Internutzonul Insurance Company (now known us TIG Insz~ranceCompuny) (bv operation o f novalion all rights uncl obligalion~zmu'er /he policies have been iran.sfirredJron~Inlernnlional Ins~lranceComptmny to Westchester Fire In.szrrance Compan,v)

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ................................................................................... iii PRELIMINARY STATEMENT ...............................................................................1 JURISDICTIONAL STATEMENT ..........................................................................3 STATEMENT OF THE ISSUES...............................................................................4 STATEMENT OF THE CASE..................................................................................5 STATEMENT OF RELATED CASES .....................................................................7 STATEMENT OF FACTS ........................................................................................7 A.

Debtors’ History And The Asbestos And Silica Claims.......................7

B.

Debtors’ Bankruptcy Filings And Plan .................................................8

C.

Plan Confirmation Proceedings...........................................................14

STANDARD OF REVIEW .....................................................................................15 SUMMARY OF ARGUMENT ...............................................................................16 ARGUMENT ...........................................................................................................19 I.

THE SECTION 105(a) INJUNCTION AGAINST SILICA CLAIMS IS UNLAWFUL ............................................................................19

II.

THE BANKRUPTCY CODE DOES NOT PREEMPT ANTIASSIGNMENT PROVISIONS IN THE INSURERS’ POLICIES ..............28 A.

The Text, Structure, History, And Context Of §1123(a) Make Clear That The Statute Does Not Preempt Anti-Assignment Provisions In Insurance Policies .........................................................30 1.

Section 1123(a)’s Text And Structure ......................................32

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III.

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2.

Pre-Code Practice And Legislative History..............................35

3.

The Broader Statutory Scheme .................................................42

4.

The Absurd Consequences Of Debtors’ Interpretation.............................................................................47

While This Court Has Not Addressed §1123(a)’s Preemptive Scope, Decisions From This Court And Other Courts Of Appeals Support The Narrower Construction ...................................................49

HARTFORD AND CENTURY HAVE STANDING TO OBJECT TO DEBTORS’ PLAN AND TO APPEAL THE ORDER CONFIRMING THE PLAN ....................................................................................................55

CONCLUSION........................................................................................................59

ii

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TABLE OF AUTHORITIES CASES Almendarez-Torres v. United States, 523 U.S. 224 (1998) .....................................35 BFP v. Resolution Trust Corp., 511 U.S. 531 (1994)..............................................31 Brockett v. Winkle Terra Cotta Co., 81 F.2d 949 (8th Cir. 1936) ...........................37 Butner v. United States, 440 U.S. 48 (1979)............................................................30 Clinton v. City of New York, 524 U.S. 417 (1998) ..................................................55 Cohen v. de la Cruz, 523 U.S. 213 (1998)..................................................35, 39, 41 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 Dewsnup v. Timm, 502 U.S. 410 (1992)............................................................35, 41 Hibbs v. Winn, 542 U.S. 88 (2004) ..........................................................................44 In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989) ..............................................23 In re Amatex Corp., 755 F.2d 1034 (3d Cir. 1985) .................................................58 In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004)......................................................................................... passim In re Congoleum Corp., 426 F.3d 675 (3d Cir. 2005) .........................................9, 58 In re Congoleum Corp., No. 03-51524, 2008 WL 4186899 (Bankr. D.N.J. Sept. 2, 2008) ........................................................................54 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

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In re FCX, Inc., 853 F.2d 1149 (4th Cir. 1988) .......................................................54 In re Johns-Manville Corp., 36 B.R. 743 (Bankr. S.D.N.Y. 1984)...................21, 24 In re Johns-Manville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1986).........................20 In re Kaiser Aluminum Corp., 343 B.R. 88 (D. Del. 2006).....................................54 In re M. Frenville Co., 744 F.2d 332 (3d Cir. 1984) ...............................................20 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 S.I. Acquisition, Inc., 817 F.2d 1142 (5th Cir. 1987)......................................22 In re Silica Products Liability Litigation, 398 F. Supp. 2d 563 (S.D. Tex. 2005) ..............................................................................1, 2, 12, 13 In re UNR Industries, Inc., 725 F.2d 1111 (7th Cir. 1984) ...............................21, 24 Integrated Solutions, Inc. v. Service Support Specialties, Inc., 124 F.3d 487 (3d Cir. 1997) .................................................................. passim Kawaauhau v. Geiger, 523 U.S. 57 (1998) .............................................................43 Kelly v. Robinson, 479 U.S. 36 (1986) ....................................................................35 McConnell v. Federal Election Commission, 540 U.S. 93 (2003) ..........................55 Medtronic, Inc. v. Lohr, 518 U.S. 470 (1996) ...................................................30, 41 Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494 (1986)........................................................31, 35, 47 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 United Savings Association v. Timbers of Inwood Forest Associates, 484 U.S. 365 (1988).................................................................................35, 42 Warner Bros. Pictures, Inc. v. Lawton-Byrne-Bruner Insurance Agency, 79 F.2d 804 (8th Cir. 1935) ...........................................................................38 Weinberger v. Hynson, Westcott & Dunning, Inc., 412 U.S. 609 (1973)................42 Whitman v. American Trucking Associations, 531 U.S. 457 (2001) .......................46 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

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Tex. Civ. Prac. & Rem. Code Ann. §90.004 ..........................................................................................................13 §90.006 ..........................................................................................................13 LEGISLATIVE MATERIALS H.R. Conf. Rep. No. 98-882 (1984).........................................................................40 H.R. Rep. No. 96-1195 (1980).................................................................................40 H.R. Rep. No. 103-835 (1994)...........................................................................21, 22 S. Rep. No. 98-65 (1983) .........................................................................................40 Analysis of H.R. 12889, 74th Cong., 2d Sess. (1936).............................................38 Pub. L. No. 73-296, 48 Stat. 911 (1934)............................................................36, 38 Pub. L. No. 75-696, 52 Stat. 840 (1938)..................................................................36 Pub. L. No. 98-353, 98 Stat. 333 (1984)..................................................................40 OTHER AUTHORITIES Collier on Bankruptcy (14th ed. 1977) ....................................................................37 Hanna, John & McLaughlin, James Angell, The Bankruptcy Act of 1898 as Amended Including the Chandler Act of 1938 (1939)...................................38 Parloff, Roger, Welcome to the New Asbestos Scandal, Fortune, Sept. 6, 2004 ..................................................................................................57 Phillips, Walter Ray & Nadler, Charles Elihu, The Law of Debtor Relief: Bankruptcy and Non-Bankruptcy Devices (1972).........................................37 Remington, Harold, A Treatise on the Bankruptcy Law of the United States (1961).............................................................................................................37 Weinstein, Jacob I., The Bankruptcy Law of 1938 (1938).......................................38

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PRELIMINARY STATEMENT In recent years, plaintiffs’ lawyers have flooded the courts with dubious or outright fraudulent claims of silica-related injury. As the district judge presiding 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. Debtors filed for bankruptcy to address their substantial asbestos liability. 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.

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After that—even though Debtors had faced fewer than 200 silica claims in the 25 years before bankruptcy—approximately 5,000 silica claims poured 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 likely to hit a hole-in-one than an occupational medicine specialist is to find a single case of both silicosis and asbestosis,” Silica Prods., 398 F. Supp. 2d at 603—yet Debtors’ solicitation resulted in thousands of such claims. Despite these obvious indicia of fraud, and despite their own projection that the reorganized Debtors would be highly profitable, Debtors nonetheless 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 settlements and by the assignment of rights to Debtors’ insurance policies. The plan also purported to bar insurers from invoking any defense to insurance coverage arising out of Debtors’ violation of policy provisions restricting the 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

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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 necessary for their reorganization. As to the provisions of the plan purporting to strip insurers of their bargained-for defenses to coverage, the bankruptcy court wrongly held that the Bankruptcy Code preempts those defenses, reasoning that §1123(a) of the Code authorizes a debtor to override any non-bankruptcy law or 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 basic bankruptcy principles and gives rise to absurd consequences. 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 proceedings under 28 U.S.C. §1334(b). On September 24, 2007, the bankruptcy court issued an order purporting to “recommend” the district court’s 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 and memorandum opinion confirming the plan. JA28-80; JA188-200. Appellants filed a timely amended notice of appeal. JA3045-3054. The district court had jurisdiction of that appeal under 28 U.S.C. §158(a). On December 18, 2007, the district court issued an order, in Misc. No. 07319, affirming the confirmation order. JA3055-3067. Appellants filed a timely 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 bankruptcy court’s confirmation order. JA11-27. Appellants filed a timely notice of appeal to this Court on August 25, 2008. JA1-10. This Court has jurisdiction under 28 U.S.C. §158(d)(1) and §1291. STATEMENT OF THE ISSUES 1.

Did Debtors meet their burden of demonstrating that an injunction

under 11 U.S.C. §105 channeling present and future silica-related claims against Debtors to a trust was necessary to Debtors’ reorganization?2

2

Raised: Bankr. Docket Nos. 5993, 5994, 5996. Ruled on: JA47-63 (bankruptcy court); JA19-21 (district court).

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Are provisions in Appellants’ insurance policies restricting their

assignment to third parties preempted by the Bankruptcy Code?3 3.

Do Hartford and Century have standing to object to confirmation of

Debtors’ plan of reorganization and to appeal the order confirming the plan?4 STATEMENT OF THE CASE 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 A.P. Green.5 Debtors’ plan of reorganization provides for an injunction under §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 preempt provisions in the insurance policies restricting such an assignment. Appellants objected to Debtors’ plan. Debtors moved to strike Hartford and 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 standing). The bankruptcy court held hearings on confirmation of Debtors’ plan in 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 the silica injunction was necessary to their reorganization. JA2538-2550. The parties sought modification of the bankruptcy court’s confirmation order, JA26752681, and on November 14, 2007, the bankruptcy court issued a final revised order confirming Debtors’ plan. JA188-200. Appellants appealed to the district court, which affirmed the bankruptcy court’s confirmation order. JA26-27. This appeal followed.

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STATEMENT OF RELATED CASES In the bankruptcy court, GIT’s Chapter 11 case was jointly administered with the Chapter 11 case of North American Refractories Company (“NARCO”), a 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. 083651. This appeal has been consolidated with the NARCO appeal for the purpose of disposition. STATEMENT OF FACTS A.

Debtors’ History And The Asbestos And Silica Claims

Debtor A.P. Green Industries, Inc., a Missouri corporation founded in 1915, manufactures and sells refractory products—construction materials used in hightemperature environments. In 1998, A.P. Green was acquired by GIT, also a Debtor here. JA816. In 1999, GIT itself was acquired by RHI AG as part of RHI’s strategy to consolidate the North American refractories business. JA810.6 Before the mid-1970s, several of the refractory products manufactured and sold by A.P. Green allegedly contained asbestos. Certain plaintiffs sued A.P. Green, claiming injury from exposure to those products. JA820. As of the

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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 resolve more than 200,000 asbestos-related claims, and an additional 235,000 asbestos-related claims were pending. JA820-821. 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 by silica-containing products. JA106, JA1011. Including those 169 claims, Debtors identified fewer than 200 claims asserted against A.P. Green for silicarelated 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. B.

Debtors’ Bankruptcy Filings And Plan

In February 2002, GIT and certain of its subsidiaries, including A.P. Green, filed Chapter 11 bankruptcy cases. JA763-770. Debtors sought bankruptcy protection not to address silica liability, but to address “adverse business conditions” and “to deal with the overwhelming number of asbestos liability lawsuits and claims pending against them.” JA117; see also JA780 (Debtors filed for bankruptcy due to “the costs of asbestos litigation,” a “deterioration of general business conditions,” and an inability “to secure working capital financing”).

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In order to confirm a plan of reorganization that would resolve that “overwhelming” asbestos liability, Debtors needed the approval of 75% of the 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 of express asbestos exclusions, which became typical provisions in liability 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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Claims Representative—that is, many of the persons in charge of operating the trust and overseeing the evaluation and payment of silica claims—would be lawyers representing the interests of alleged silica claimants. JA1332-1404. Debtors are making no contribution of their own funds to the silica trust, which will be funded entirely by insurance. JA2894-2895. The trust is to receive $35.5 million in proceeds from several insurance settlements. In addition, A.P. Green will assign to the trust its rights under its insurance policies with asbestos exclusions, including policies issued by Appellants. JA892, JA2894-2895, 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 claimants against Debtors). JA1466-1469. Ultimately, 5,125 votes were cast on 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.

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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 claimants to file “supplemental submissions,” which provided minimal information regarding the claimants’ diagnosis of a silica-related disease, their exposure to A.P. Green silica-containing products, and any prior diagnoses of, or claims for, asbestos-related disease. JA610 (Bankr. Docket No. 6305). Debtors received a total of 4,636 supplemental submissions. JA108. Most were submitted by counsel, many were incomplete, and some contained no information at all other than the claimant’s name and address. JA1650-1652. At the same time that Debtors’ creative vote-solicitation strategy was generating an influx of new silica claims, developments outside bankruptcy cast 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 noted that of the approximately 9,000 plaintiffs who submitted medical 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 employed diagnostic methods that “ranged from questionable to abysmal.” Id. at 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 occupational medicine specialist is to find a single case of both silicosis and 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 were manufactured for money.” Id. at 635. A separate, but equally potent development driving a decline in silica-related claims was state tort reform. Texas, for example, required asbestos and silica plaintiffs, within 30 days of bringing suit, to provide specific medical evidence of disease, including a detailed diagnosis by a physician. See Tex. Civ. Prac. & Rem. Code Ann. §90.004, §90.006 (Vernon 2005); JA2169-2170. Mississippi required plaintiffs to meet specific venue requirements in order to bring a silica-related lawsuit, making it much harder to sue out-of-state defendants. JA2169-2170. Other states have also enacted legislation requiring evidence of impairment for silica-related claims. Id. These developments, combined with a review of the supplemental 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 who submitted supplemental forms were diagnosed by doctors whose diagnoses were rejected as fraudulent by Judge Jack. JA2074. In addition, over half the claimants had previously filed asbestos-related claims or been diagnosed with an asbestos-related disease, JA2159—making it extremely unlikely that they also had a legitimate silica-related claim. In re Silica Prods. Liab. Litig., 398 F. Supp. 2d at 603; see also JA1431 (Decl. of David Weill) (noting the near impossibility of a 13

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person’s contracting both an asbestos-related and a silica-related disease in a working lifetime). Fully 82% of the claims bore at least one of these markers of fraud. JA2159. C.

Plan Confirmation Proceedings

Unsurprisingly, the asbestos and silica claimants approved Debtors’ plan. In 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 insufficient to support a silica injunction. Rather than simply denying confirmation, however, the bankruptcy court adjourned the confirmation hearing to allow submission of additional evidence regarding the silica claims and Debtors’ ability to pay them. As discussed above, approximately 4,600 silica claimants filed such supplemental submissions. Following a continued confirmation hearing in October 2006, the bankruptcy court confirmed the plan, concluding that the silica injunction was necessary to Debtors’ reorganization. JA188-200. The court made no findings as 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

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adverse and constitute a default under its financing covenants, or through a trust.” JA55. The bankruptcy court issued a separate order addressing the insurers’ 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 under their policies). JA201-209. Because Appellants AIG Member Companies 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 As to the bankruptcy court’s judgment that Debtors were entitled to a §105 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 legal standard for issuance of such an injunction. In re Continental Airlines, 203 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. Continental, 203 F.3d at 208. SUMMARY OF ARGUMENT I.

As this Court has made clear, a bankruptcy court’s authority under

§105 of the Bankruptcy Code to issue an injunction effectively discharging claims that otherwise could not be discharged in bankruptcy is strictly circumscribed. 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. II.

The bankruptcy court likewise erred in concluding that §1123(a) of

the Bankruptcy Code preempts the anti-assignment provisions in Appellants’ 16

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insurance policies. Section 1123(a) provides that, “[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall” contain eight required 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) §1123(a)’s eight requirements. Nothing in §1123(a), however, requires a debtor to transfer its property to a third party, and the provision simply does not affect statelaw restrictions on such transfers. As this Court stated in rejecting a similar argument that the Bankruptcy Code preempted state-law restrictions on assignment of property, it is a “fundamental principle that the estate succeeds only to the 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 provisions of Debtors’ policies merely because Debtors would find it convenient to assign them under their plan. The lower courts’ contrary reading cannot be reconciled with §1123(a)’s 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 through which it chooses to implement its plan—including applicable antitrust,

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environmental, or even criminal laws—even though the Bankruptcy Code nowhere requires that a debtor engage in such a transaction in the first place. 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’ plan. As a result of Debtors’ bankruptcy, their creation of a trust with assets 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 practical stake in the proceedings sufficient to permit them to be heard in bankruptcy court, and increases their burdens and impairs their rights in a manner that gives them the right to be heard on appeal.

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ARGUMENT I.

THE §105(a) INJUNCTION AGAINST SILICA CLAIMS IS UNLAWFUL Debtors had virtually no silica liability prior to bankruptcy. Together with

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 self-inflicted wounds. On this record, it is not possible to conclude that Debtors have met their burden of demonstrating the need for a §105 injunction. A Chapter 11 debtor who reorganizes in bankruptcy typically obtains a discharge of claims against it arising before confirmation of its plan. 11 U.S.C. §1141(d)(1). Claims arising post-confirmation are not affected by the bankruptcy and may be asserted against the reorganized debtor, consistent with the basic due process principle that claimants’ rights may not ordinarily be abrogated without notice and an opportunity to be heard. The bankruptcy court here, however, entered a channeling injunction that effectively granted Debtors a discharge not only of the present silica claims against them, but also of future silica claims that

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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 order … that is necessary or appropriate to carry out the provisions” of the 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. Rather, precedent makes clear that §105 channeling injunctions against 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 reorganization—that is, where the assertion of future tort claims against a reorganized debtor would be likely to lead to its liquidation, leaving future claimants with nothing. Thus, in Johns-Manville, the bankruptcy court issued such an injunction only after finding that Manville faced billions of dollars of asbestosrelated liability, and that “in the absence of the [i]njunction, one of the central purposes of Title 11, i.e. preventing the inequitable, piece-meal dismemberment of the debtor’s estate, cannot be achieved.” In re Johns-Manville Corp., 68 B.R. 618, 10

Under the GIT plan, all claims against A.P. Green allegedly arising from exposure to a silica-containing product prior to the petition date are channeled to the trust, even if injury manifests itself only much later (although claims arising from post-petition exposure are not channeled and may be asserted against the reorganized Debtors). Such claims, stemming from pre-petition exposure but manifesting only after the debtor exits bankruptcy, are not present claims discharged in Chapter 11. See In re M. Frenville Co., 744 F.2d 332, 336-337 (3d Cir. 1984); Schweitzer v. Consolidated Rail Corp., 758 F.2d 936, 942-944 (3d Cir. 1985). 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, “Manville could … be forced into liquidation,” which would “leav[e] many asbestos claimants uncompensated”). The same considerations prompted an injunction against future claims in another pioneering asbestos bankruptcy, UNR Industries: “If future claims cannot be discharged before they ripen, UNR may not be able to emerge from bankruptcy with reasonable prospects for continued 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). The injunction imposed in Johns-Manville was so extraordinary that even after the plan was confirmed, there remained a “lingering uncertainty … as to 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 channeling injunction mechanism devised in Johns-Manville and UNR and 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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to be subject to substantial future demands for payment” of asbestos-related tort 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 asbestos liability that is so overwhelming that, without a channeling injunction, the 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 to prevent “asbestos companies [from being] forced into liquidation”). Section 524(g) applies only to asbestos—and not silica—claims. As Debtors themselves recognized below, however, in light of the extraordinary nature of injunctive relief against future mass-tort claims, it is appropriate to require any 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 would be appropriate only if Debtors can demonstrate that they will be overwhelmed by silica liability and their reorganization would be impossible without the injunction.11 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 evaluate the propriety of a §105 injunction of claims against a non-debtor third 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 bankruptcy court would need to make “specific factual findings” demonstrating 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 releases and channeling injunctions affecting future claims effectively grant a discharge of claims that otherwise could not be discharged under the Bankruptcy Code.12 In concluding that approximately 5,000 silica claims—asserted only in response to Debtors’ solicitation after the bankruptcy filing and bearing 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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unmistakable signs of fraud—justified the extraordinary relief of a §105 injunction, 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 into liquidation,” Johns-Manville, 36 B.R. at 746, or would lack “reasonable prospects for continued existence as a going concern,” UNR, 725 F.2d at 11191120. Rather, the bankruptcy court relied solely on its conclusion that the reorganized debtor would face some business risk associated with the silica claims—not the enterprise-threatening risk faced by the debtors in Johns-Manville 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 recognized in Continental, that use of §105 would “turn bankruptcy principles on their head.” 203 F.3d at 217. On the undisputed facts, it is plain that Debtors have not met their burden of showing that the silica injunction is necessary to their reorganization. It is not 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 account of silica-related claims. JA106, JA1011. In the approximately 25 years 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 million paid to resolve asbestos claims before the bankruptcy, JA105. Debtors and plaintiffs’ lawyers—working hand-in-hand—generated a wave 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 previously filed asbestos-related claims or been diagnosed with an asbestos-related disease—making it highly unlikely that they also had a silica-related disease. 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. JA21692170. The bankruptcy court’s conclusion that Debtors had shown a necessity for the injunction is insupportable in light of these obvious indications that the reorganized Debtors would have been fully capable of defending against the trumped-up silica claims in the tort system. Nor is there any dispute that the reorganized Debtors would have ample means to mount such a defense. According to Debtors’ own projections, the reorganized Debtors are projected to be a large and sophisticated business, competing on a global stage, with annual sales approaching half a billion dollars. 25

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The company was expected to generate substantial operating profits—between $30 and $40 million a year—after its emergence from bankruptcy. JA957. And its equity value was projected to grow substantially—from a stated $50 million on emergence to $115 million only three years later. JA1934.13 The bankruptcy court brushed aside the undisputed facts regarding the silica claims’ questionable validity and the reorganized Debtors’ financial strength, reasoning: “Whether or not [the] claims prove to be compensable, Debtor must 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 a large judgment cannot justify a channeling injunction under §105. If it could, 13

Debtors also have access to a substantial line of credit and approximately $31 million in insurance settlement proceeds that have been designated for the payment of silica claims. The bankruptcy court refused to consider these assets because, as negotiated by Debtors in anticipation of a plan containing a silica injunction, the credit agreement and settlement agreements did not specifically contemplate the payment of silica claims by reorganized Debtors. JA57-58. But the record contains no evidence at all that the channeling injunction was material to the bank lender, or that Debtors could not have negotiated different terms for the loan or settlement agreements. In essence, the bankruptcy court shifted the burden of proof to Appellants, stating that they had not shown that those funds would be available to pay silica claims in the absence of a silica injunction. Id. But it was Debtors’ burden to demonstrate the necessity for the injunction, and they surely cannot meet that burden by pointing to the terms of agreements they negotiated on the assumption that a §105 injunction would issue, while presenting no evidence that they ever tried to negotiate any different terms. 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 reorganized Debtors retain liability for silica claims based on post-petition exposure, they could still face an unexpected judgment arising out of a silica claim, as their President acknowledged at trial. JA1955-1956. This Court has already recognized that the mere possibility of a large judgment is insufficient by itself to warrant granting a debtor even the ordinary protections of Chapter 11, let alone the extraordinary relief of an injunction against future claims. See In re SGL Carbon Corp., 200 F.3d 154, 163 (3d Cir. 1999) (holding that debtor’s desire to avoid the risk of “a potentially crippling antitrust judgment” in a pending lawsuit was not a sufficient justification to invoke the protection of the bankruptcy laws). 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” standard—had not made sufficient findings of fact to demonstrate that the injunction was necessary to the debtor’s reorganization. 203 F.3d at 215. 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 legal standard in entering the §105 injunction. II.

THE BANKRUPTCY CODE DOES NOT PREEMPT ANTIASSIGNMENT PROVISIONS IN THE INSURERS’ POLICIES Liability insurance policies typically provide that rights under the policies

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, an insured’s nonconsensual assignment of rights under its policies to a third party 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. JA2894-2895. Moreover, the plan purports to provide that confirmation precludes insurers from asserting “defenses … that are based on or arise out of any ‘antiassignment’ provision(s)” in the assigned policies. JA2903. Below, Appellants objected that the plan could not lawfully override their ability to assert an anti-assignment defense in coverage litigation. The bankruptcy court rejected that argument, holding that §1123(a)(5) of the Bankruptcy Code 28

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expressly preempted the policies’ anti-assignment provisions. JA206.14 Section 1123(a)(5) provides that, “[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall … provide adequate means for the plan’s implementation.” It then lists ten non-exclusive examples of actions that might be 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 Court’s decisions supports Debtors’ attempt unilaterally to rewrite the terms of 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 policy rights are assigned outside bankruptcy—that such an assignment is a 14

Although the bankruptcy court devoted portions of its opinion to a discussion of the merits of the anti-assignment defense under state insurance law (JA203-205), the parties agreed below that the bankruptcy court’s holding rested on its construction of the preemptive effect of the Bankruptcy Code, not on state law. 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, state-law rights, in order to prevent debtors from obtaining “a windfall merely by 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 suggests that Debtors are entitled to obtain such a windfall here. A.

The Text, Structure, History, And Context Of §1123(a) Make Clear That The Statute Does Not Preempt Anti-Assignment Provisions In Insurance Policies

Federal law may override state law “by express provision, by implication, or 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 scope of [a statute’s] intended invalidation of state law.” Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996). Moreover, there is a “strong presumption against inferring Congressional preemption in the bankruptcy context.” Integrated Solutions, Inc. v. Service 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 nonbankruptcy law, ‘the intention would be clearly expressed, not left to be collected or inferred from disputable considerations of convenience in 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 be construed to adopt, rather than to displace, pre-existing state law.” BFP v. Resolution Trust Corp., 511 U.S. 531, 544-545 (1994). Against this backdrop, Debtors’ interpretation of §1123(a) as preempting all non-bankruptcy law that restricts or regulates any transaction a debtor might choose to include in a plan cannot be sustained. Debtors’ reading is unsupported 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 override non-bankruptcy law governing transactions proposed in a plan; and it renders other, related provisions of the Bankruptcy Code meaningless, violating 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. For instance, it would authorize a debtor to merge in violation of applicable antitrust law or to transfer property without complying with applicable 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 nonbankruptcy law that would otherwise regulate or restrict it—permitting a debtor to grant itself a get-out-of-jail-free card with respect to any transaction it chooses to include in its plan. That is a result Congress could never have intended. 1.

Section 1123(a)’s Text And Structure

Section 1123(a)—part of the section entitled “Contents of plan”—provides: “Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall” contain eight provisions, enumerated in §1123(a)’s eight paragraphs. Specifically, 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 selection of officers, directors, and trustees in a manner consistent with the interests of stakeholders; and (8) for individual debtors, provide for the payment of the debtor’s future earnings to creditors as necessary.15

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 for the plan’s implementation,” in turn enumerates ten non-exclusive examples of 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” (subparagraph (C)). None of those ten transactions, however, is required to appear 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). The phrase “[n]otwithstanding any otherwise applicable nonbankruptcy law” 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” contain those eight elements “notwithstanding any otherwise applicable 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 provision prohibiting the issuance of non-voting equity securities.” To the extent state law authorizes a corporation to issue non-voting equity securities, therefore, that law is overridden by §1123(a)(6). Similarly, §1123(a)(5) preempts any non33

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bankruptcy law that would authorize a debtor to propose a plan that did not “provide adequate means for [its] implementation.” By its terms, however, §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 does not, merely by including examples of non-required transactions that might be used to implement a plan, effect a wholesale preemption of all non-bankruptcy law that might govern such transactions. Under the construction of the statute urged by Debtors and adopted by the lower courts, by contrast, §1123(a)’s “notwithstanding” language preempts any 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, the phrase “[n]otwithstanding any otherwise applicable nonbankruptcy law” 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

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part of the section prescribing the “[c]ontents of [the] plan”16—extends any further than that. 2.

Pre-Code Practice And Legislative History

That straightforward reading of §1123(a) is strongly supported by the provision’s history. Since the 1930s, bankruptcy law has contained provisions governing the contents of a plan, specifically requiring that a plan contain adequate means for its execution or implementation, and giving examples of transactions through which a debtor might implement a plan. As discussed below, those provisions have never been thought to supersede the non-bankruptcy law governing such transactions. The Supreme Court has consistently held that the Bankruptcy Code may be interpreted to alter “past bankruptcy practice” only if there is a “clear indication that Congress intended such a departure.” Cohen v. de la Cruz, 523 U.S. 213, 221 (1998) (citation omitted).17 And there is no indication whatever that the addition of the “notwithstanding” language to §1123(a) in

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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1984—an amendment Congress described as a “technical stylistic change”—was intended to effect a dramatic reversal of pre-Code practice. Section 1123(a) originated as §77B(b) of the 1898 Bankruptcy Act, added by amendment in 1934 as part of the codification of corporate reorganization practice. Section 77B(b)(9), the predecessor to §1123(a)(5), provided that “[a] 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 part of the property of the debtor to another corporation or to other corporations.” Pub. L. No. 73-296, 48 Stat. 911, 913-914 (1934). Section 77B(b) contained no express preemptive language. Four years later, §77B(b)(9) was recodified as §216(10) and slightly modified to read, in part: “A plan of reorganization ... shall provide adequate 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 or more other corporations theretofore organized or thereafter to be organized.” Pub. L. No. 75-696, 52 Stat. 840, 895-896 (1938). Section 216, like §77B(b), did not include any express preemptive language. In the decades after the 1934 enactment of the corporate reorganization 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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edition of the leading Collier treatise emphasized, in discussing §216(10)’s 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 commentators likewise noted that confirmation of a plan “cannot exempt a corporation from state law” governing the transactions through which a plan is implemented. 11 Remington, A Treatise on the Bankruptcy Law of the United States §4601, at 402 (1961); see also Phillips & Nadler, The Law of Debtor Relief: Bankruptcy and Non-Bankruptcy Devices §922, at 1009-1010 (1972). Numerous pre-Code precedents declined to exempt the transactions through which a plan of reorganization was implemented (including the specific examples 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 Delaware law); Warner Bros. Pictures, Inc. v. Lawton-Byrne-Bruner Ins. Agency 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 by the Clayton Act”).18 When the bankruptcy laws were comprehensively overhauled in 1978, §216 of the 1898 Act became §1123 of the Bankruptcy Code. Section 1123 was substantively very similar to its predecessor. It provided in part: “(a) A plan 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. 38

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whether organized before or after the confirmation of such plan.” Consistent with the pre-Code provisions, §1123 as enacted in 1978 contained no express preemptive language. There is no suggestion whatever in either the statute or the legislative history that the 1978 Act was intended to alter the accepted understanding of the provision. Accordingly, for the first fifty years of its existence—from its creation in 1934 to the addition of the “notwithstanding” language in 1984—the provision of 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 would be barred by applicable non-bankruptcy law. In light of this firmly 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 when it added the “notwithstanding” language. The addition of the phrase “notwithstanding any otherwise applicable 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 39

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comment on the addition of the “notwithstanding” language was that it “makes it 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 “notwithstanding” language merely clarified what was already implicit in §1123(a) 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 not exempt those transactions from non-bankruptcy law. 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 amendment as a “technical stylistic change[].” S. Rep. No. 98-65, at 84 (1983). And the same proposed amendment was included in the bill that ultimately became law in 1984, in a subtitle headed “Miscellaneous Amendments to Title 11.” Pub. L. No. 98-353, §507, 98 Stat. 333, 385 (1984).19 The conference report on the 1984 amendment referred to this subtitle as the “technical amendments” section, 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. 40

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Rep. No. 98-882 (1984), reprinted in 1984 U.S.C.C.A.N. 576, 581 (statement of Sen. Thurmond); id. at 587 (statement of Sen. Dole). There is thus no suggestion in the legislative history that Congress viewed the addition of the “notwithstanding” language as effecting any significant 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 a ‘stylistic change’” demonstrates the requisite clear indication of an intention to 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 U.S. 470, 491 (1996) (plurality).

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The Broader Statutory Scheme

Debtors’ view of the scope of preemption under §1123(a) not only is refuted 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 most harmonious, comprehensive meaning possible in light of the legislative 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 Bankruptcy Code, a complex statute reflecting an overarching Congressional 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 that interpretation of the Bankruptcy Code is a “holistic endeavor” and rejecting construction of a Code provision that was plausible in isolation but “produce[d] a substantive effect” that was not “compatible with the rest of the law”). First, Debtors’ interpretation creates an inexplicable conflict with §1142(a) of the Code. Section 1142(a)—entitled “Implementation of plan”—provides: “Notwithstanding any otherwise applicable nonbankruptcy law, rule, or regulation relating to financial condition, the debtor and any entity organized or to be 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 lists some non-exclusive examples, it is §1142(a) that actually governs the implementation of the plan. Under §1142(a), any transaction in a confirmed plan may be carried out notwithstanding non-bankruptcy law “relating to financial condition.”20 Section 1142(a) does not, however, preempt non-bankruptcy law unrelated to the debtor’s financial condition. Debtors’ broad interpretation of the preemptive language of §1123(a) thus makes no sense. If §1123(a)—which governs only what a plan must contain— empowered a debtor to override any applicable non-bankruptcy law that would govern a transaction simply by including the transaction in its plan, then §1142(a)’s more limited express preemption of law that would otherwise apply to a plan’s implementation would be superfluous, violating basic principles of statutory interpretation. See Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998) (courts should be “hesitant to adopt an interpretation of a congressional enactment which renders 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 §1123(a) and §1142(a) is to conclude that “a plan proposed in conformity with §1123(a) [may] be confirmed,” and the plan may then be implemented in accordance with §1142(a)—that is, notwithstanding non-bankruptcy law “relating to financial condition.” Id. at 948.21 The contrary view renders §1142(a)’s specific and limited preemptive language meaningless.

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 44

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Second, interpreting §1123(a) to authorize debtors to override any nonbankruptcy law restricting or regulating the exemplary transactions listed in §1123(a)(5) would make a hash of the Bankruptcy Code’s carefully reticulated provisions governing those specific transactions. For example, §1123(a)(5)(E) lists, as one possible means for a plan’s implementation, “satisfaction or modification of any lien.” That provision, however, cannot sensibly be read to 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, §1129(b)(2) provides that a plan may be confirmed over a secured creditor’s objection only if the creditor retains its lien and its secured claim is paid in cash, or the creditor receives the “indubitable equivalent” of its claim. In light of §1129(b)(2), §1123(a)(5)(E) cannot plausibly be read to grant the debtor the sweeping power to modify liens however it sees fit. Similarly, §1123(a)(5)(G) lists, as an example of a transaction through which a plan may be implemented, “curing or waiving of any default.” Again, however, the Bankruptcy Code contains specific provisions governing the circumstances under which a debtor must cure a default and the manner in which it

may be used to implement a plan. It is §1142(a)—which governs the implementation of plans—that speaks to the latter question. 45

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must do so. For example, §365(b) provides that a trustee or debtor-in-possession who wishes to assume an executory contract or unexpired lease must (subject to certain limited exceptions) cure any default, compensate the counterparty for any pecuniary loss resulting from the default, and provide adequate assurance of future performance. If §1123(a)(5)(G) granted the debtor the unilateral power to cure or waive any default, the detailed scheme set out in §365(b) would make no sense. As these examples demonstrate, the Bankruptcy Code generally preserves 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 F.3d at 493. Debtors’ construction of §1123(a) as granting sweeping authority to disregard non-bankruptcy law whenever it is convenient to do so flies in the face of this overarching principle and the specific provisions of the Code in which it is embodied. Congress does not “hide elephants in mouseholes,” “alter[ing] the fundamental details of a regulatory scheme in vague terms or ancillary provisions.” Whitman v. American Trucking Ass’ns, 531 U.S. 457, 468 (2001). The “notwithstanding” language in §1123(a) cannot be read to work such a radical alteration to the overall scheme set out in the Bankruptcy Code.

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The Absurd Consequences Of Debtors’ Interpretation

Finally, Debtors’ interpretation of §1123(a)’s preemption clause has 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 §1123(a)(5). Moreover, because the list of transactions in §1123(a)(5) is merely 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.” Debtors’ interpretation thus means—for example—that a debtor could unilaterally override environmental law barring transfer of contaminated property, see §1123(a)(5)(B). This result is not only absurd on its face, but would permit Chapter 11 debtors to engage in the same conduct condemned by the Supreme 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. Under Debtors’ reading of the statute, however, a Chapter 11 trustee or debtor-inpossession could achieve the same result disapproved in Midlantic—abandoning or

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otherwise transferring property in contravention of state law—by virtue of §1123(a)(5)(B). Similarly, Debtors’ construction of §1123(a)(5)(B) would permit a debtor to transfer a highly regulated piece of property—such as a nuclear power plant—to a third party in contravention of applicable federal and state licensing requirements. 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 bankruptcy to transfer its liability insurance policies to a large corporation—say, General Motors—thus vastly increasing the risk the insurer agreed to underwrite. Likewise, on Debtors’ reading, §1123(a)(5)(C) would expressly authorize a debtor to merge with a competitor in violation of applicable antitrust law. 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 implementation of its plan—even a criminal transaction or one that threatened national security—would be preempted. The patent absurdity of that reading of §1123(a) is reason enough to reject it.

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While This Court Has Not Addressed §1123(a)’s Preemptive Scope, Decisions From This Court And Other Courts Of Appeals Support The Narrower Construction

The lower courts failed to engage at all with the text, structure, or legislative 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 adopted Debtors’ view of the preemptive scope of §1123(a)(5). But, although Combustion Engineering alluded to §1123(a)(5), it had no occasion to address that provision’s preemptive scope. And both this Court’s precedents and the only previous appellate decision to address §1123(a)(5)’s preemptive effect in a case in which the issue was genuinely contested support the narrower construction of that provision. The lower courts’ reading of Combustion Engineering rested on one brief passage in this Court’s lengthy and complex opinion—a passage that must be understood in context. The Combustion Engineering plan assigned to a §524(g) trust certain insurance policies issued by the London Market Insurers to two nondebtor affiliates, Basic and Lummus. London objected that policies belonging to non-debtors could not lawfully be assigned to the trust. This Court addressed that argument as follows, in a passage that warrants quotation in full:

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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 50

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Lummus policies, but found it unnecessary to remand to the bankruptcy court on that issue because it held the Combustion Engineering plan unlawful on other grounds. Id. In short, Combustion Engineering never considered whether and under what circumstances the Bankruptcy Code might preempt non-bankruptcy restrictions on transfer of a debtor’s insurance policies from the debtor’s estate to a third party. While the Court quoted §1123(a)(5) in a footnote, it did so merely to underscore 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 circumstances insurance policies become property of the bankruptcy estate in the first place. It is for that reason that the Court’s discussion focused not on §1123(a)(5), but instead on §541(c)(1)—which, by its terms, preempts only restrictions on transfer of a debtor’s property to the bankruptcy estate, not restrictions on transfer of that property once it has become part of the estate. Indeed, as Combustion Engineering specifically noted, under §541, “[t]o the 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 51

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to 11 U.S.C. §541(a)(1)). Nothing in Combustion Engineering suggests that §1123(a)(5) overrides that basic principle. The lower courts’ reading of Combustion Engineering is particularly implausible in light of this Court’s prior decision in Integrated Solutions. In that case this Court addressed “a basic preemption issue” very similar to that presented here: “whether Congress intended to permit bankruptcy trustees to dispose of tort 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 has “adopted a restrained approach to concluding that Congress has intended to preempt state law in the bankruptcy context,” doing so only where Congress has made it unequivocally clear it intended that result. Id. at 492. 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 lease estate property—preempted state law barring assignment of property to a 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 an … important purpose of the Bankruptcy Code: namely, upholding the

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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 Solutions found impermissible—transfer of property of the estate to a third party in contravention of state law—is plainly authorized by §1123(a)(5). It is surely implausible to conclude that Combustion Engineering effectively overruled Integrated Solutions sub silentio in a footnote, without even mentioning the decision or discussing the fundamental bankruptcy principles on which it rested. Similarly, nothing in Combustion Engineering suggests that this Court intended to break—again, without discussion—from the Ninth Circuit’s decision in PG&E rejecting Debtors’ sweeping construction of §1123(a)’s preemption clause. PG&E is the only previous appellate decision to address the §1123(a)(5) 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 the provision. See 350 F.3d at 938-948. 22

Integrated Solutions noted that §363 and §704 do not contain express preemption clauses, and contrasted them with a number of other provisions in the Bankruptcy Code, including §1123(a), that do. 124 F.3d at 493. But the Court never hinted that any provision of the Code, including §1123(a), might preempt the state law at issue. And its reasoning extended well beyond §363 and §704: it repeatedly relied on the basic presumption that “once a property interest has passed to the estate, it is subject to the same limitations imposed upon the debtor by applicable nonbankruptcy law,” absent a clear indication that Congress had a contrary intent. 124 F.3d at 492 (citation omitted). 53

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The only reported court of appeals decision other than PG&E to address the preemptive scope of §1123(a)(5) is the Fourth Circuit’s decision in In re FCX, Inc., 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 §1123(a)(5)(D) empowered the debtor to surrender the collateral notwithstanding 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 alternative reading of §1123(a)—none apparently being offered by the parties. Nor did it consider the pre-Code practice and legislative history supporting the narrower view of §1123(a)’s preemptive scope, the relationship between §1123(a) and the remainder of the Bankruptcy Code, or the absurd results that would follow from its interpretation were it applied to other subparagraphs within §1123(a)(5).23

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).

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In sum, the lower courts’ conclusion that §1123(a) preempts the antiassignment provisions of Debtors’ insurance policies finds no support in the text, 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 federal interests.” Integrated Solutions, 124 F.3d at 492. There is no such overriding federal interest in permitting Debtors to erase a fundamental term from their agreements with insurers and thereby tilt future coverage litigation in their favor, and the Bankruptcy Code does not grant Debtors that power. III.

HARTFORD AND CENTURY HAVE STANDING TO OBJECT TO DEBTORS’ PLAN AND TO APPEAL THE ORDER CONFIRMING THE PLAN As the lower courts found and as Debtors concede, the AIG Member

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 Hartford demonstrates in its opening brief in the NARCO appeal, confirmation of a 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 North American Refractories Co., No. 08-3651 (“NARCO Br.”). 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 language in the plan cannot deprive the insurers of standing. As demonstrated in the NARCO brief, see NARCO Br. 42-46, the availability of defenses to coverage does not mean that an insurer is unaffected by the confirmation of a plan

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. Indeed, this bankruptcy is a particularly stark example of the practical harm worked on insurers by mass-tort trust procedures. In this case, Debtors had 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 dubious validity—claims they now seek to channel to a trust funded solely by 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 mass-tort bankruptcies: “Defendants are increasingly making common cause with 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, Sept. 6, 2004, at 186, 202. 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 show a “practical stake in the outcome of the proceedings.” In re Amatex Corp., 755 F.2d 1034, 1041 (3d Cir. 1985). 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 Court has previously recognized in the mass-tort bankruptcy context, where it is “highly unlikely that any of the parties other than the insurers” would raise an objection, a prudential restriction designed to prevent “a myriad of parties” from 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 bankruptcy court with instructions to deny confirmation. Dated: November 19, 2008

Respectfully submitted,

/s/ Danielle Spinelli 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 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

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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.

/s/ John D. Demmy 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 Counsel for 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)

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CERTIFICATION OF BAR MEMBERSHIP (LAR 46.1) Pursuant to Third Circuit Local Appellate Rule 46.1, I, Danielle Spinelli, hereby certify that I am a member in good standing of the bar of the United States Court of Appeals for the Third Circuit.

Dated: November 19, 2008 /s/ Danielle Spinelli Danielle Spinelli WILMER CUTLER PICKERING HALE AND DORR LLP 1875 Pennsylvania Avenue, N.W. Washington, D.C. 20006 (202) 663-6000 Counsel for Appellants Hartford Accident and Indemnity Company, First State Insurance Company, and Twin City Fire Insurance Company

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CERTIFICATE OF COMPLIANCE Pursuant to Fed. R. App. P. 32(a)(7)(C)(i), I hereby certify that: 1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because this brief contains 13,965 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii). 2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this brief has been prepared in a proportionally spaced typeface, 14-point Times New Roman, using Microsoft Word 2003. 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.

Dated: November 19, 2008 /s/ Danielle Spinelli Danielle Spinelli WILMER CUTLER PICKERING HALE AND DORR LLP 1875 Pennsylvania Avenue, N.W. Washington, D.C. 20006 (202) 663-6000 Counsel for Appellants Hartford Accident and Indemnity Company, First State Insurance Company, and Twin City Fire Insurance Company

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CERTIFICATE OF FILING AND SERVICE I, Danielle Spinelli, hereby certify that on this 19th day of November, 2008, I caused two copies of the foregoing BRIEF OF APPELLANTS HARTFORD AND CENTURY, along with one copy of the JOINT APPENDIX filed herewith, to be served by overnight courier (Federal Express) on the parties to this appeal at the addresses listed below. I further certify that I caused an electronic copy of the foregoing BRIEF OF APPELLANTS HARTFORD AND CENTURY to be served on the parties to this appeal at the electronic mail addresses listed below: JAMES J. RESTIVO, JR. PAUL M. SINGER DAVID ZEIGLER REED SMITH LLP 435 Sixth Avenue Pittsburgh, PA 15222 (412) 288-3026 [email protected] [email protected] [email protected] Counsel for Appellee Global Industrial Technologies, Inc. PETER VAN N. LOCKWOOD CAPLIN & DRYSDALE CHARTERED One Thomas Circle, N.W. Washington, D.C. 20005 (202) 862-5000 [email protected] Counsel for Appellee Official Committee of Asbestos Creditors ROBERT G. SABLE SALLY E. EDISON MCGUIRE WOODS LLP Dominion Tower, 23rd Floor 625 Liberty Avenue Pittsburgh, PA 15222 (412) 667-7936 [email protected] [email protected] Counsel for Appellee Official Committee of Unsecured Trade Creditors

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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 [email protected] [email protected] 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 [email protected] 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 [email protected] BEVERLY WEISS MANNE TUCKER ARENSBERG, PC 1500 One PPG Place Pittsburgh PA 15222 (412) 594-5525 [email protected]

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JOSEPH BOURY BIVONA & COHEN 88 Pine Street New York, NY 10005 (212) 363-3100 [email protected] 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: [email protected].

/s/ Danielle Spinelli Danielle Spinelli

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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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11 U.S.C. § 1123—Contents of Plan (a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall— (1) designate, subject to section 1122 of this title, classes of claims, other than claims of a kind specified in section 507(a)(2), 507(a)(3), or 507(a)(8) of this title, and classes of interests; (2) specify any class of claims or interests that is not impaired under the plan; (3) specify the treatment of any class of claims or interests that is impaired under the plan; (4) provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest; (5) provide adequate means for the plan’s implementation, such as— (A) retention by the debtor of all or any part of the property of the estate; (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; (C) merger or consolidation of the debtor with one or more persons; (D) sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of all or any part of the property of the estate among those having an interest in such property of the estate; (E) satisfaction or modification of any lien; (F) cancellation or modification of any indenture or similar instrument; (G) curing or waiving of any default; (H) extension of a maturity date or a change in an interest rate or other term of outstanding securities; (I) amendment of the debtor’s charter; or (J) issuance of securities of the debtor, or of any entity referred to in subparagraph (B) or (C) of this paragraph, for cash, for property, for existing securities, or in exchange for claims or interests, or for any other appropriate purpose; (6) provide for the inclusion in the charter of the debtor, if the debtor is a corporation, or of any corporation referred to in paragraph (5)(B) or (5)(C) of this subsection, of a provision prohibiting the issuance of nonvoting equity securities, and providing, as to the several classes of securities possessing voting power, an appropriate distribution of such power among such classes, including, in the case of any class of equity securities having a preference over another class of equity securities 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;

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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 (B) the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest; (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.

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Amendments to Bankruptcy Act of 1898,Pub. L. No. 75-696, 52 Stat. 840 (1938) (excerpts) Article X—Provisions of Plan Sec. 216. A plan of reorganization under this chapter— (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

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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

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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.

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Amendments to Bankruptcy Act of 1898,Pub. L. No. 73-296, 48 Stat. 911 (1934) (excerpts) Sec. 77B. Corporate Reorganizations.— *

*

*

(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[.]

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Received and Filed Case: 08-3650 08-3650 12/01/08 Marcia M. Waldron, Clerk

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No. 08-3650

In the United States Court of Appeals for the Third Circuit In re: GLOBAL INDUSTRIAL TECHNOLOGIES, INC., et al. Debtors -----------------------------HARTFORD ACCIDENT AND INDEMNITY COMPANY; FIRST STATE INSURANCE COMPANY CO; TWIN CITY FIRE INSURANCE COMPANY; CENTURY INDEMNITY COMPANY, as successor to CIGNA Specialty Company, formerly known as California Union Insurance Company; 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 Co. to Westchester Fire Insurance Co.); NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA; INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA; LEXINGTON INSURANCE COMPANY; AMERICAN HOME ASSURANCE COMPANY, and any other entities related to American International Group, Inc. that engaged in business transactions with the Reorganizing Debtors, Appellants ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

BRIEF AND APPENDIX OF AMICUS CURIAE STATES 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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JOHN W. SUTHERS Attorney General State of Colorado

JON BRUNNING Attorney General State of Nebraska

RICHARD S. GEBELEIN Attorney General State of Delaware

CATHERINE CORTEZ MASTO Attorney General State of Nevada

LAWRENCE G. WASDEN Attorney General State of Idaho

GARY K. KING Attorney General State of New Mexico

G. STEVEN ROWE Attorney General State of Maine

HARDY MYERS Attorney General State of Oregon

DOUGLAS F. GANSLER Attorney General State of Maryland

HENRY MCMASTER Attorney General State of South Carolina

MIKE COX Attorney General State of Michigan

ROBERT E. COOPER, JR. Attorney General State of Tennessee

JEREMIAH W. (JAY) NIXON Attorney General State of Missouri

MARK L. SHURTLEFF Attorney General State of Utah

MIKE MCGRATH Attorney General State of Montana

DARRELL V. MCGRAW, JR. Attorney General. State of West Virginia ROBERT M. MCKENNA Attorney General State of Washington

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TABLE OF CONTENTS TABLE OF AUTHORITIES .................................................................................... ii STATEMENT OF INTEREST OF AMICUS CURIAE ...........................................1 SUMMARY OF CASE..............................................................................................4 ARGUMENT .............................................................................................................6 SECTION 1123 DOES NOT CREATE A BROAD PREEMPTION OF STATE LAW FOR CONFIRMED PLANS .............................................6 A.

Combustion Engineering Did Not Decide the Scope of Preemption Under Section 1123 ...........................................................8

B.

Section 1123 Does Not Impose a Broad Preemption of State Law ....12 1.

Preemption is Not Lightly Inferred...........................................12

2.

The Preemptive Effect of Section 1123 is Far Narrower Than The Standard Used by the Courts Below..................................15 a.

Neither the Language of Section 1123(a) or the Legislative History Supports a Broad Reading ..............15

b.

A Broad Reading of Section 1123 Puts in it Conflict With the Rest of the Bankruptcy Code...........................21

CONCLUSION........................................................................................................26 CERTIFICATION OF BAR MEMBERSHIP…………………………………….27 CERTIFICATE OF COMPLIANCE……………………………………………..28 CERTIFICATE OF FILING AND SERVICE……………………………………29 APPENDIX Debtor’s First Amended Disclosure Statement………………………..Appendix 1 Notice of Emergency Motion………………………………………… Appendix 2 i

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TABLE OF AUTHORITIES Cases BFP v. Resolution Trust Corp., 511 U.S. 531, (1994)............................................ 13 City of New York v. Quanta Resources Corp. (In re Quanta Resources Corp.), 739 F.2d 912 (3d Cir. 1984) ..........................................................................................3 Gillis v. California, 55 S.Ct. 4 (1934)........................................................................3 In re Adelphia Communications Corp., 361 B.R. 337 (S.D. N.Y. 2007)............... 22 In re Adelphia Communications Corp., 367 B.R. 84.............................................. 22 In re Baker & Drake, 35 F.3d 1348 (9th Cir. 1994)............................................... 18 In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004) ................. passim In re Congoleum Corp. 2008 WL 4186899 (Bankr. D.N.J. 9/2/08)................... 4, 23 In re Davis Industries, Inc., No. RS99-19302-MJ (Bankr. C.D. Cal. 2000).... 18, 19 In re Federal-Mogul Global Inc., 385 B.R. 560 (Bankr. D. Del. 2008) ............ 4, 22 In re Flor, 166 B.R. 512 (Bankr. D. Conn. 1994) .................................................. 22 In re Food City, Inc., 110 B.R. 808 (Bankr. W.D. Tex.1990)................................ 24 In re Frascella Enterprises, Inc., 360 B.R. 435 (Bankr. E.D. Pa. 2007)................ 24 In re Koelbl, 751 F.2d 137 (2nd Cir.1984) ............................................................. 22 In re Landau Boat Co., 13 Bankr. 788 (Bankr. W.D. Mo. 1981)........................... 22 In re Sylmar Plaza, L.P, 314 F.3d 1070 (9th Cir. 2002) ........................................ 24 In the Matter of CMC Heartland Partners, 966 F.3d 1143 (7th Cir. 1991)..... 18, 21 Integrated Solutions, Inc. v. Service Support Specialties, Inc., 124 F.3d 487 (3rd Cir. 1997 .......................................................................................................... 9, 13 Kelly v. Robinson, 479 U.S. 36 (1986) ............................................................. 14, 17 Lockyer v. Mirant Corp., 398 F.3d 1098 (5th Cir. 2005) ........................... 18, 19, 22 Midlantic Nat’l Bank v. New Jersey Dep’t of Envt’l. Prot., 474 U.S. 494 (1986) 13, 14, 15, 21 Morton v. Mancari, 417 U.S. 535, 94 S.Ct. 2474, 41 L.Ed.2d 290 (1974)............ 13 Pacific Gas & Elec. Co. v. California, 350 F.3d 932 (9th Cir. 2003) .......... 5, 11, 19 Pettibone Corp. v. Easley, 935 F.2d 120 (7th Cir. 1991) ....................................... 25 Pioneer Inv. Services Co., 141 B.R. 635 (Bankr. E.D. Tenn. 1992) ...................... 25 Pittsburgh & Lake Erie R.R. Co. v. Railway Labor Executives' Ass'n, 491 U.S. 490 (1989)................................................................................................................... 13 Securities and Exchange Commission v. First Financial Group of Texas, 645 F.2d 429, 439 fn. 16 (5th Cir. 1981)...............................................................................2 United States v. Fausto, 484 U.S. 439, 108 S.Ct. 668, 98 L.Ed.2d 830 (1988) ..... 13 Watt v. Alaska, 451 U.S. 259, 101 S.Ct. 1673, 68 L.Ed.2d 80 (1981); .................. 13

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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 H.R. Rep. No. 96-1195 (1980).......................................................................... 16, 20 OTHER AUTHORITIES 1 Collier Bankruptcy Man. P 362.04 at 362-23 (4th ed. 1980) .................................2 2 Collier on Bankruptcy P 362.04 at 362-36 (15th ed. 1980.....................................2 5 Collier on Bankruptcy ¶ 1129.02, at 1129-13 (15th ed. 1984).............................22

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STATEMENT OF INTEREST OF AMICUS CURIAE The States of New Jersey, Colorado, Delaware, Idaho, Maine, Maryland, Michigan, Missouri, Montana, Nebraska, New Mexico, Nevada, Oregon, South Carolina, Tennessee, Utah, West Virginia, and Washington (collectively referred to 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 based on an overly broad reading of the introductory language in Section 1123(a) 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 preemptive scope of Section 1123, as applied to the assignability of proceeds from a debtor’s insurance policies, in In re Combustion Engineering, Inc., 391 F.3d 190 (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 preemption as it related to Section 541(c)(1), nothing in its opinion needed to – or

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 that might affect a debtor’s ability to implement a proposed plan. The conclusion of the bankruptcy and the district courts herein – that the opening phrase in Section 1123(a), “Notwithstanding any otherwise applicable 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 is not meant to be a “haven for wrongdoers.” 1 Collier Bankruptcy Man. P 362.04 at 362-23 (4th ed. 1980); 2 Collier on Bankruptcy P 362.04 at 362-36 (15th ed. 1980) as cited by Securities and Exchange Commission v. First Financial Group of 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

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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 asserts that it needs to avoid the restrictions in order to successfully reorganize. 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 ignoring the limits on charitable conversions, to barring enforcement of clean-up obligations for contaminated property that it retains post-petition, to denying state 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 Congress in adding this language to Section 1123 in 1984 as a “technical 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’ antiassignment defense;3 their only concern is with the extremely dangerous consequences of the means by which the lower courts arrived at the conclusion that insurers are barred from even raising those issues. 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 case, they also received a substantial number of silicosis claims. In proceedings 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.

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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), which states that, “Notwithstanding any otherwise applicable nonbankruptcy law, a 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

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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, the even more limited analysis espoused by the appellants. ARGUMENT SECTION 1123 DOES NOT CREATE A BROAD PREEMPTION OF STATE LAW FOR CONFIRMED PLANS The bankruptcy court erred in finding, specifically, that Section 1123(a) of the Bankruptcy Code preempts the anti-assignment provisions in appellants’ 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 of the debtor’s proposed plan. Section 1123(a) provides that, “[n]otwithstanding 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

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provide “adequate means for the plan’s implementation” and suggests a wide variety of possible options for implementing a plan. Section 1123(a) plainly does preempt a nonbankruptcy law provision that would explicitly interfere with a truly mandatory aspect of that section – such as the bar on issuance of non-voting stock in Section 1123(a)(6). But, to extrapolate 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 to debtors of preemptive authority of staggering proportions. While Congress presumably has the legal authority to do that, it would be highly unreasonable to conclude that it did so in the guise of passing a “technical correction,” particularly where there is no evidence in the legislative history that it thought it was making such a momentous change. Nor would it be logical to 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 means forbidden by law.”

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Combustion Engineering Did Not Decide the Scope of Preemption Under Section 1123

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 wellestablished 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 analysis are wrong. With regards to the issue of what was decided by Combustion Engineering, 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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rights of a debtor to transfer or assign[] its interests in bankruptcy.” Combustion 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 estate at the beginning of the case. 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 suggestion appears to be rebutted by the Court’s citation to the legislative history. “As section 541(a)(1) clearly states, the estate is comprised of all legal or equitable interests of the debtor in property as of the commencement of the case [including those transferred in pursuant to the authority of Section 541(c)(1)]. To the extent 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 such a conversion might be deemed to be an assignment of the property, the 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

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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 possessed pre-petition.”4 Id. at 495. 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 of non-debtors to whom the preemption provisions of Section 541(c)(1) did not 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 source of preemption of limits on assignments, and then stated that “The Bankruptcy Code expressly contemplates the inclusion of debtor insurance policies in the bankruptcy estate,” citing Section 1123(a)(5)(B) for that proposition. 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 issue in Combustion Engineering, it would have rejected those arguments and 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.

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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 under non-bankruptcy law.) B.

Section 1123 Does Not Impose a Broad Preemption of State Law. 1.

Preemption is Not Lightly Inferred.

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.

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[W]e “are not at liberty to pick and choose among congressional enactments, and when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.” Morton v. Mancari, 417 U.S. 535, 551, 94 S.Ct. 2474, 2483, 41 L.Ed.2d 290 (1974). We should read federal statutes “to give effect to each if we can do so while preserving their sense and purpose.” Watt v. Alaska, 451 U.S. 259, 267, 101 S.Ct. 1673, 1678, 68 L.Ed.2d 80 (1981);. see also United States v. Fausto, 484 U.S. 439, 453, 108 S.Ct. 668, 67677, 98 L.Ed.2d 830 (1988). Pittsburgh & Lake Erie R.R. Co. v. Railway Labor Executives' Ass'n, 491 U.S. 490, 510 (1989). In view of the breadth of bankruptcy jurisdiction, this Court and the 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 against inferring Congressional preemption in the bankruptcy context”); Midlantic Nat’l Bank v. New Jersey Dep’t of Envt’l. Prot., 474 U.S. 494, 501 (1986) (“[i]f Congress wishes to grant . . . an extraordinary exemption from nonbankruptcy law, ‘the intention would be clearly expressed, not left to be collected or inferred from disputable considerations of convenience in administering the estate of the bankrupt.’”) Similarly, absent a “clear and manifest” purpose to the contrary, “the Bankruptcy Code will be construed to adopt, rather than to displace, pre-existing state law.” BFP v. Resolution Trust Corp., 511 U.S. 531, 544-545 (1994).

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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 intention to do so overwhelmingly clear. For example, in Kelly v. Robinson, 479 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 in deciding on whether to grant equitable relief and that “this reflection of 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 discharge exception in Section 523(a)(7) would be held to apply to criminal 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 the literal terms of the exception. Id. at 47-48. The Court took a similar approach in Midlantic, where, in the face of language in Section 554 that placed no limit on a debtor’s right to abandon

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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 are not clearly expressed in the statute. 2.

The Preemptive Effect of Section 1123 is Far Narrower Than The Standard Used by the Courts Below. a.

Neither the Language of Section 1123(a) or the Legislative History Support a Broad Reading.

In light of this strong policy against a broad preemption of state regulatory authority, the Debtors’ argument for a sweeping view of the scope of the introductory language in Section 1123(a) cannot be sustained. The Amici States 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 further support the position taken by the appellants.

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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 must be feasible, as is required under Section 1129(a)(11). The examples of 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 should structure the plan so as to make it not likely to fail. The initial “[n]otwithstanding” phrase does ensure that nonbankruptcy law – 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 other hand, the “notwithstanding” language could equally serve to prevent nonbankruptcy law from placing additional requirements on a plan drafter.5 In any

5

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event, nothing in that introductory phrase necessarily requires preemption of all nonbankruptcy laws merely because they would bar the debtor from confirming a plan that would violate the laws applicable to every other entity. The opposite construction – that the “notwithstanding” language inherently 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 liability for cleaning up a contaminated piece of property that it continued to own 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 employees to purchase their own cabs and become independent contractors, so as 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 manufacturing and sales operations to meet concerns raised by government entities 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 could be in a better position to satisfy creditors’ claims – but in doing so might create an entity that would be an illegal monopoly under federal antitrust laws. Each of those bears elements of a real case – In the Matter of CMC 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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debtor could be required post-confirmation to perform a clean-up despite the 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 excerpts from Debtor’s Emergency Motion to Continue Hearing on Debtor’s First 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 debtor could accomplish nothing meaningful in bankruptcy. (Docket No. 620, 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 approved that would authorize ongoing violations of nonbankruptcy law. 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 the debtor’s obligations under nonbankruptcy laws on a going-forward basis. The 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. As the appellants demonstrate (Brief, pp. 35-41), nothing in the history of this language suggests that Congress intended such a perverse result, especially one so at odds with well-established precedent prior to the amendments in 1984. 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 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 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 included in a “Miscellaneous Amendments” section of the bill that was eventually

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passed in 1984, and was repeatedly referred to as making only a “technical” change. It would be a monumental act of sleight of hand for Congress to have 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. b.

A Broad Reading of Section 1123 Puts it in Conflict With the Rest of the Bankruptcy Code.

If the Debtors’ view of Section 1123 is correct, then a debtor in Chapter 11 (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 confirmation and gain the bankruptcy court discretionary approval. That discretion, in turn, could be exercised without criteria or limits, other than that the provision at issue should be shown to be an “adequate means” for implementation of the plan. There need not even be a showing that the language was necessary for reorganization, since Section 1129 allows plans of liquidation to be confirmed on 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. 21

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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 confirmation order, district court conditioned issuance of stay on posting of $1.3 billion bond; when creditors failed to post that amount (or lesser sums), the appeal was dismissed as equitably moot). That result is incompatible, as the appellants demonstrate (Brief 42-46), with other Code provisions dealing with confirmation and implementation of a plan. In addition to those provisions, a further conflict is created with Section 1129(a)(3), which provides that a plan may not be confirmed if it is proposed by a means “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)). 22

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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 to amend its charter to allow it to engage in a criminal activity, stating This argument ignores the premise that § 1123(a)(5)(B) will not be used to permit an entity to engage in a criminal enterprise. Cf. § 1129(a)(3) (plan shall be confirmed only if, inter alia, it has been proposed “in good faith and not by any means forbidden by law.) That is an admirable “premise,” but it is unclear from whence that premise 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 not resolved the conflict by simply asserting an unsupported “premise.” The court in In re Congoleum Corp. 2008 WL 4186899 (Bankr. D.N.J. 9/2/08) did address that issue, stating that the good faith requirements of Section 1129 would be sufficient to counter any concerns as to the breadth of Section 1123(a), “No bankruptcy court would confirm a plan that called for a debtor to indiscriminately flaunt [sic] other laws if it served no legitimate bankruptcy 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 the Code allowed for those terms). Finally, and perhaps most significantly, what is a “legitimate bankruptcy purpose?” Certainly, a successful reorganization is a legitimate bankruptcy 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 Section 1123, on the other hand, solves those problems.10

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. 24

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The final absurdity of this reading is the stark contrast between the treatment of police and regulatory actions while a debtor is in bankruptcy, as opposed to their treatment after it emerges from bankruptcy. Normally, following confirmation, a 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 the bankruptcy judge every time something unpleasant happens.”); In re Pioneer 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 pressures of collection. It is not, however, excused from compliance with police 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. 25

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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 escape those laws after bankruptcy. CONCLUSION This Court should reverse the portion of the district court’s order affirming the bankruptcy court’s analysis of Section 1123(a) as a basis for confirming 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 Section does not extend so broadly as to preclude consideration of the appellants’ substantive arguments here. It should thereafter remand the case to the bankruptcy court for further consideration in accordance with this opinion. Dated: December 1, 2008

Respectfully submitted, ANNE MILGRAM ATTORNEY GENERAL OF NEW JERSEY By: /s/ Andrea M. Silkowitz__________ ANDREA M. SILKOWITZ Assistant Attorney General R.J. Hughes Justice Complex 25 Market Street, P.O. Box 112 Trenton, New Jersey 08625 (973) 648 4730

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CERTIFICATION OF BAR MEMBERSHIP (LAR 46.1)

Pursuant to Third Circuit Local Appellate Rule 46.1, I, Andrea M. Silkowitz, hereby certify that I am a member in good standing of the bar of the United States Court of Appeals for the Third Circuit.

Dated: December 1, 2008 /s/ Andrea M. Silkowitz_____ ANDREA M. SILKOWITZ R.J. Hughes Justice Complex 25 Market Street, P.O. Box 112 Trenton, New Jersey 08625 (973) 648 4730

Counsel for State of New Jersey

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CERTIFICATE OF COMPLIANCE Pursuant to Fed. R. App. P. 32(a)(7)(C)(i), I hereby certify that: 1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because it is limited to 26 pages. 2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this brief has been prepared in a proportionally spaced typeface, 14-point Times New Roman, using Microsoft Word 2003. 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. Dated: December 1, 2008 /s/ Andrea M. Silkowitz______ ANDREA M. SILKOWITZ Assistant Attorney General R.J. Hughes Justice Complex 25 Market Street, P.O. Box 112 Trenton, New Jersey 08625 (973) 648 4730

Counsel for State of New Jersey

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CERTIFICATE OF FILING AND SERVICE I, Andrea M. Silkowitz, hereby certify that on this 1st day of December, 2008, I caused two copies of the foregoing BRIEF OF AMICUS CURIAE STATES to be served by United States mail on the parties to this appeal at the addresses listed below. I further certify that I caused an electronic copy of the foregoing BRIEF OF AMICUS CURIAE STATES to be served on the parties to this appeal at the electronic mail addresses listed below: 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 [email protected] [email protected] [email protected] [email protected] [email protected] 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 [email protected] [email protected] [email protected] 29

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JOHN D. DEMMY STEVENS & LEE, P.C. 1105 North Market Street, 7th Floor Wilmington, DE 19801 (302) 425-3308 [email protected] LEONARD P. GOLDBERGER STEVENS & LEE, P.C. 1818 Market Street, 29th Floor Philadelphia, PA 19103 (215) 751-2864 [email protected] JOSEPH GIBBONS AMY E. VULPIO WHITE AND WILLIAMS LLP 1800 One Liberty Place Philadelphia, PA 19103 (215) 864-7000 [email protected] [email protected] Counsel for 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) JAMES J. RESTIVO, JR. PAUL M. SINGER DAVID ZEIGLER REED SMITH LLP 435 Sixth Avenue Pittsburgh, PA 15222 (412) 288-3026 [email protected] 30

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[email protected] [email protected] Counsel for Appellee Global Industrial Technologies, Inc. PETER VAN N. LOCKWOOD CAPLIN & DRYSDALE CHARTERED One Thomas Circle, N.W. Washington, D.C. 20005 (202) 862-5000 [email protected] Counsel for Appellee Official Committee of Asbestos Creditors ROBERT G. SABLE SALLY E. EDISON MCGUIRE WOODS LLP Dominion Tower, 23rd Floor 625 Liberty Avenue Pittsburgh, PA 15222 (412) 667-7936 [email protected] [email protected] 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 [email protected] [email protected] 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 31

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(412) 258-6720 [email protected] 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 [email protected] BEVERLY WEISS MANNE TUCKER ARENSBERG, PC 1500 One PPG Place Pittsburgh PA 15222 (412) 594-5525 [email protected] JOSEPH BOURY BIVONA & COHEN 88 Pine Street New York, NY 10005 (212) 363-3100 [email protected] 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: 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 32

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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: [email protected]. /s/ Andrea M. Silkowitz______ Andrea M. Silkowitz Assistant Attorney General

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