FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In the Matter of: THORPE
INSULATION COMPANY,
Debtor,
MOTOR VEHICLE CASUALTY
COMPANY; CENTRAL NATIONAL
INSURANCE COMPANY OF OMAHA;
CENTURY INDEMNITY COMPANY,
successor to Cigna Specialty
Insurance Company, FKA
California Union Insurance
Company,
Appellants,
v. No. 10-56543
THORPE INSULATION COMPANY; D.C. No.
PACIFIC INSULATION COMPANY, 2:10-cv-01493-DSF
Appellees,
NATIONAL FIRE INSURANCE
COMPANY OF HARTFORD, as
successor by merger to
Transcontinental Insurance
Company; CONTINENTAL INSURANCE
COMPANY, as successor in interest
to certain policies issued by
Harbor Insurance Company;
OFFICIAL COMMITTEE OF UNSECURED
CREDITORS, of Thorpe Insulation
Company and Pacific Insulation
Company; CHARLES B. RENFREW,
Real Parties in Interest.
653
654 IN THE MATTER OF THORPE INSULATION
In the Matter of: THORPE
INSULATION COMPANY,
Debtor,
NATIONAL FIRE INSURANCE
COMPANY OF HARTFORD, as
successor by merger to
Transcontinental Insurance
Company; CONTINENTAL INSURANCE
COMPANY, as successor in interest
to certain policies issued by
Harbor Insurance Company,
Appellants,
v. No. 10-56622
THORPE INSULATION COMPANY;
PACIFIC INSULATION COMPANY, D.C. No.
2:10-cv-01493-DSF
Appellees, OPINION
CENTRAL NATIONAL INSURANCE
COMPANY OF OMAHA; MOTOR
VEHICLE CASUALTY COMPANY;
CENTURY INDEMNITY COMPANY,
successor to Cigna Specialty
Insurance Company, FKA
California Union Insurance
Company; OFFICIAL COMMITTEE OF
UNSECURED CREDITORS, of Thorpe
Insulation Company and Pacific
Insulation Company; CHARLES B.
RENFREW, Administrative Law
Judge,
Real Parties in Interest.
IN THE MATTER OF THORPE INSULATION 655
Appeal from the United States District Court
for the Central District of California
Dale S. Fischer, District Judge, Presiding
Argued and Submitted
August 30, 2011—Pasadena, California
Filed January 24, 2012
Before: Mary M. Schroeder and Ronald M. Gould,
Circuit Judges, and Richard Seeborg, District Judge.*
Opinion by Judge Gould
*The Honorable Richard Seeborg, United States District Judge for the
Northern District of California, sitting by designation.
IN THE MATTER OF THORPE INSULATION 659
COUNSEL
David C. Christian, II (argued), Seyfarth Shaw LLP, Chicago,
Illinois; James M. Harris, Seyfarth Shaw LLP, Los Angeles,
California; Todd C. Jacobs, Grippe & Elden LLC, Chicago,
Illinois, for appellants Continental Insurance Company and
National Fire Insurance Company of Hartford.
Tancred V. Schiavoni, O’Melveny & Myers LLP, New York,
New York; Richard B. Goetz, O’Melveny & Myers LLP, Los
Angeles, California; Jonathan Hacker, O’Melveny & Myers
LLP, Washington, D.C.; Alan S. Berman, the Berman Law
Group, Woodland Hills, California, for appellants Motor
Vehicle Casualty Company, Central National Insurance Com-
pany of Omaha, and Century Indemnity Company, successor
to Cigna Specialty Insurance Company f/k/a California Union
Insurance Company.
Thomas E. Patterson (argued), Kenneth N. Klee, Daniel J.
Bussel, and David M. Guess, Klee, Tuchin, Bogdanoff &
660 IN THE MATTER OF THORPE INSULATION
Stern LLP, Los Angeles, California; Jeremy V. Richards and
Scotta E. McFarland, Pachulski, Stang, Diehl & Jones LLP,
Los Angeles, California, for appellee Thorpe Insulation Com-
pany.
John A. Lapinski and Leslie R. Horowitz, Clark & Trevithick,
P.L.C., Los Angeles, California, for appellee Pacific Insula-
tion Company.
Peter Van N. Lockwood (argued), Caplin & Drysdale, Char-
tered, Washington, D.C.; Peter J. Benvenutti, Jones Day, San
Francisco, California, for appellee Counsel for the Official
Committee of Unsecured Creditors of Thorpe Insulation
Company and Pacific Insulation Company.
Gary Fergus, Fergus, A Law Office, San Francisco, Califor-
nia, for appellee Charles B. Renfrew, the Futures Representa-
tive.
OPINION
GOULD, Circuit Judge:
The district court affirmed a bankruptcy court’s confirma-
tion of a Chapter 11 plan of reorganization under 11 U.S.C.
§ 524(g), a special provision for the reorganization of compa-
nies facing substantial asbestos-related liability. Appellants
are several insurance companies that did not reach settlements
with Thorpe Insulation Company (Thorpe) and Pacific Insula-
tion Company (Pacific), together the Debtors in bankruptcy
court, and who were denied standing to challenge the reorga-
nization plan. The district court held that the reorganization
plan was insurance neutral, and so Appellants did not have
standing to object to the plan; and it also held that the plan
preempted Appellants’ state law contract rights. We affirm
the district court’s conclusion that the plan preempted Appel-
IN THE MATTER OF THORPE INSULATION 661
lants’ state law contract rights. We disagree with the position
of Debtors that the appeal is equitably moot, and, reaching the
merits, we reverse the district court’s conclusion that Appel-
lants lacked standing. We remand to the district court with
instructions that it return the case to the bankruptcy court to
give Appellants the opportunity to present their proof and
argument.
I. Background
A
Thorpe is a California company that distributed, installed,
and repaired asbestos insulation products between 1948 and
1972. This led to substantial asbestos-related litigation. In the
past thirty years, Thorpe has faced about 12,000 claims and
lawsuits for personal injury or wrongful death based on asbes-
tos exposure. Robert and Linda Fults owned Thorpe until
2008, when they transferred their shares to their sons Eric and
David Fults. In 2000, Thorpe incorporated Pacific as a
wholly-owned subsidiary and conveyed to it the assets associ-
ated with its materials division. Robert and Linda Fults were
the sole shareholders of Pacific. Pacific, a profitable business,
has been named in asbestos-related lawsuits as a successor-in-
interest to Thorpe. In 2004, Thorpe sold its remaining assets
to Farwest Insulation Contracting (“Farwest”), owned by Eric
and David Fults, in a private foreclosure sale. Farwest is also
a party to many asbestos-related lawsuits and insurance cover-
age litigation.
Thorpe purchased insurance policies with many companies
that covered “products claims” (or “products/completed oper-
ations,” for injuries caused by asbestos exposure after a prod-
uct is relinquished or an operation completed), which are
subject to aggregate limits, and “operations claims” (or “non-
products,” for injuries caused by asbestos exposure before a
product is relinquished or an operation completed), which are
not subject to aggregate limits. Since 1978, Thorpe’s many
662 IN THE MATTER OF THORPE INSULATION
insurers have handled the defense and settlement of asbestos
suits. Thorpe’s insurers paid more than $180 million defend-
ing and indemnifying Thorpe until, in their view, the policies’
aggregate limits were exhausted.1
B
Debtors Thorpe and Pacific filed for protection under
Chapter 11 of the Bankruptcy Code on October 15, 2007 and
October 31, 2007, respectively. Thorpe estimated that, at the
time of the bankruptcy filing, 2,000 asbestos cases were pend-
ing against it, and Thorpe anticipated that many more suits
would be filed in the future.
Thorpe applied to employ the law firms of Snyder Miller
& Orton LLP and Morgan Lewis & Bockius LLP as special
insurance counsel. Appellants objected that the firms had con-
flicts of interest because they represented asbestos claimants
against Thorpe, but the bankruptcy court approved the
employment of the law firms, taking the view that Appellants
lacked standing to object. The issue was appealed, the district
court remanded for fact-finding, and the bankruptcy court
again approved the firms’ retention without input from Appel-
lants.
In May 2008, Thorpe, Pacific, the appointed Official Com-
mittees of Unsecured Creditors, and the appointed legal repre-
sentative for holders of future asbestos-related claims
(“Appellees”) filed a § 524(g) joint plan of reorganization.
The current and Fifth Amended Plan of reorganization was
filed in December 2009. It is that plan, approved by the bank-
ruptcy court and the district court, that is the subject of this
appeal.
1
It appears that the policies with Continental and Fireman’s fund were
exhausted in 1998, and the rest of the insurers contend that their policy
limits were exhausted in 2005.
IN THE MATTER OF THORPE INSULATION 663
Section 524(g) allows a bankruptcy court to issue sweeping
channeling injunctions in Chapter 11 cases involving asbestos
claims. § 524(g); 4 COLLIER ON BANKRUPTCY ¶ 524.07. The
statute was enacted to adopt the approach taken in the Johns-
Manville bankruptcy case, wherein a trust (the “Manville
Trust”) was established together with a series of injunctions
to channel asbestos-related claims to the trust. See Kane v.
Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988). Because
of the often lengthy latency period of asbestos-related inju-
ries, the § 524(g) injunction aims to “control the future litiga-
tion of all asbestos-related claims against the parties it
protects” by preventing “any entity from taking legal action
to collect a claim or demand that is to be paid in whole or in
part by a trust created through a qualifying plan of reorganiza-
tion.” COLLIER ON BANK. ¶ 524.07. The injunction may bar
actions against the debtor itself as well as claims against the
debtor directed at third parties who are directly or indirectly
liable—such as where a third party has insured the debtor. Id.;
§ 524(g)(4)(A)(ii). The bankruptcy court may establish such
an injunction if it determines that (1) “the debtor is likely to
be subject to substantial future demands for payment arising
out of” asbestos-related claims; (2) “the actual amounts, num-
bers, and timing of such future demands cannot be deter-
mined”; and (3) “pursuit of such demands outside the [trust]
is likely to threaten the [reorganization] plan’s purpose to deal
equitably with claims and future demands.”
§ 524(g)(2)(B)(ii).
The requirements for a § 524(g) injunction include: (1)
there must be a notice and a hearing and the 524(g) plan must
be in connection with the confirmation of a Chapter 11 plan
of reorganization; (2) there must be a trust established to
assume the liabilities of the debtor that has been named in
asbestos-related actions; (3) the trust must be funded in whole
or in part by the securities of at least one debtor and by the
obligation of the debtor to make future payments; (4) the trust
must own, or be entitled to own, a majority of the voting
shares of the debtor, its parent corporation, and any subsid-
664 IN THE MATTER OF THORPE INSULATION
iary; (5) the court must find that the debtor meets certain
criteria related to the significance of the threats posed by
potential asbestos liability; (6) the court must appoint a legal
representative to protect the rights of future claimants against
the debtor; and (7) the court must determine that the injunc-
tion is fair and equitable with respect to future claims (includ-
ing a determination that third parties like insurers that come
within the protection of the injunction have contributed ade-
quate amounts to the trust). § 524(g).
The Fifth Amended Plan filed by Debtors provided for the
issuance of injunctions to channel certain asbestos-related lia-
bilities to a newly-created trust, with sole responsibility for
distributions to present and future holders of asbestos-related
claims. The plan merges Thorpe and Pacific into the “Reorga-
nized Debtor” and discharges Thorpe, Pacific, and the Reor-
ganized Debtor from all debts. It creates a trust, controlled by
the Trust Advisory Committee, to oversee how claims are
allowed, valued, and distributed. The Trust uses “trust distri-
bution procedures” to evaluate claims.
In establishing the plan and trust, Thorpe reached settle-
ments with thirteen insurers (“settling insurers”) (in addition
to four insurers that settled, contingent on a bankruptcy filing,
before Thorpe filed). The settlements provided for more than
$600 million in cash and securities to fund the Trust in
exchange for releases of claims and protection of 524(g)
injunctions. The Debtors contributed the following to the
plan: their indemnity claim against the Johns-Manville asbes-
tos trust; the proceeds of the settlements with the Settling
Insurers; the “Asbestos Insurance Rights” as defined in the
plan; $500,000 cash; and two promissory notes in the amount
of $1.25 million, secured by 51% of the common stock of
Reorganized Debtor. Appellants received from the trust a
“Business Loss Allocation;” the trust pays to them a percent-
age of the money contributed to the trust by the insurance
companies up to $5.25 million.
IN THE MATTER OF THORPE INSULATION 665
The plan creates three injunctions. First, the Channeling
Injunction bars the assertion of any asbestos-related claim
against any protected party and allows for asbestos-related
claims only against the trust, the Reorganized Debtor, and
non-settling insurers. Second, the Settling Asbestos Insurer
Injunction protects settling insurers by preventing the asser-
tion of contribution claims held by non-settling insurers.2
Instead, the trust absorbs the cost of those barred contribu-
tions and reduces dollar-for-dollar any judgment obtained
against non-settling insurers holding contribution claims. Id.
Third, the Asbestos Insurer Injunction prohibits actions
against asbestos insurers without permission by the trust; the
trust may not allow such actions unless asbestos claimants
agree to the same judgment reduction that is binding on the
trust before proceeding against non-settling insurers.
The plan contains a valuation matrix. The Matrix gives a
way for the trust to value claims consistently across time
because of the lengthy latency period of asbestos-related inju-
ries. The value given a claim depends on, inter alia, the dis-
ease the claimant has, age, work history, and personal history
factors.
The plan assigns Debtors’ insurance rights to the trust,
including policies with the non-settling insurers. The plan
contains a section stating that it is “insurance neutral,” pre-
serving all “Asbestos Insurance Defenses.” However, in
apparent contradiction of the neutrality characterization, the
plan includes four exceptions to the otherwise preserved
defenses. It does not permit a defense:
(a) that is based on the assertion that the transfer of
the Asbestos Insurance Rights to the Trust . . . is
invalid, unenforceable or otherwise breaches the
2
Some non-settling insurers have insurance policies with the settling
insurers (“reinsurance”). This injunction prevents the non-settling insurers
from filing claims under those policies.
666 IN THE MATTER OF THORPE INSULATION
terms of any Asbestos Insurance Policy, Asbestos
Insurance Settlement, or any other agreement with
any Asbestos Insurer, (b) that has been released,
waived, altered or otherwise resolved, in full or in
part, in any Asbestos Insurance Settlement, or any
other agreement with any Asbestos Insurer, (c) to the
extent affected by application of principles of res
judicata, collateral estoppel, claim preclusion or
issue preclusion, or (d) premised upon the com-
mencement of Chapter 11 Cases under Section 301
of the Bankruptcy Code.
The plan allows claimants either to bring their claim against
the trust or to get permission from the trust to sue non-settling
insurers directly under Thorpe’s insurance policies.
Without giving Appellants the opportunity to be heard fully
on all relevant issues, the bankruptcy court affirmed the Fifth
Amended Joint Plan of Reorganization on February 1, 2010.
C
After confirmation of the plan by the bankruptcy court,
Appellants appealed the order confirming the Fifth Amended
Joint Plan of Reorganization. Under § 524(g), the district
court must affirm a plan and its injunctions for them to be
valid and enforceable. § 524(g)(3)(A). The district court
affirmed the plan, modifying the trust distribution procedures
slightly, and entered an order issuing and affirming the plan
on September 21, 2010.
Two groups of non-settling insurers appeal the district court
decision. These are: (1) Continental Insurance Company and
National Fire Insurance Company of Hartford (together,
“CNA”); and (2) Motor Vehicle Casualty Company, Central
National Insurance Company of Omaha, and Century Indem-
nity Co. (together, “ACE”) (both groups together, “Appel-
lants”). Appellants contend that the courts below erred in their
IN THE MATTER OF THORPE INSULATION 667
preemption rulings, that the plan does not comply with
§ 524(g), that the plan was not proposed in good faith, that the
plan was developed by conflicted counsel, and that they have
standing to object to the plan and to appeal.
We denied Appellants’ emergency motion for a stay pend-
ing appeal but consolidated the two appeals and granted expe-
dited briefing. The plan became effective on October 22,
2010, and implementation of the plan began. Appellees filed
a motion to dismiss as moot in February 2011, which the
motions panel referred to us.
II. Standard of Review
We have jurisdiction under 28 U.S.C. § 158(d)(1). We
review de novo the district court’s decision on appeal from
the bankruptcy court, applying the same standards applied by
the district court, without deference to the district court.
Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102, 1109
(9th Cir. 2010). The bankruptcy court’s conclusions of law
are reviewed de novo, and its findings of fact are reviewed for
clear error. Id. The preemption, standing, and insurance neu-
trality rulings present questions of law reviewed de novo.
III. Discussion
A. Mootness
Appellees contend that the appeal is moot because Appel-
lants did not obtain a stay and there has been substantial con-
firmation of the plan.3 We will not entertain an appeal if the
case is moot. The “party moving for dismissal on mootness
grounds bears a heavy burden.” Jacobus v. Alaska, 338 F.3d
3
Appellees’ contention on equitable mootness is not asserted within its
appellate brief, but was the subject of a separate motion to dismiss the
appeal as moot, filed by Appellees, and referred to our panel. For the rea-
sons that follow, we deny the motion to dismiss this appeal as moot.
668 IN THE MATTER OF THORPE INSULATION
1095, 1103 (9th Cir. 2003). There are two mootness doctrines
to consider—one deriving from Article III of the Constitution,
and one from equity. We address these in turn.
[1] The jurisdiction of federal courts is limited to actual
cases and controversies. U.S. CONST. art. III, § 2, cl. 2. “The
test for mootness of an appeal is whether the appellate court
can give the appellant any effective relief in the event that it
decides the matter on the merits in his favor. If it can grant
such relief, the matter is not moot.” Felster Publ’g v. Burrell
(In re Burrell), 415 F.3d 994, 998 (9th Cir. 2005) (quoting
Garcia v. Lawn, 805 F.2d 1400, 1402 (9th Cir. 1986)). We
conclude that the appeal is not constitutionally moot because
we could reverse plan confirmation or require modification of
the plan, thereby giving relief to Appellants.
[2] We next address whether this appeal is moot under the
doctrine commonly known as “equitable mootness,” which
has some sway in bankruptcy cases where public policy val-
ues the finality of bankruptcy judgments because debtors,
creditors, and third parties are entitled to rely on a final bank-
ruptcy court order. See, e.g., In re Onouli-Kona Land Co., 846
F.2d 1170, 1172 (9th Cir. 1988) (noting the need for finality
in bankruptcy); 13B FEDERAL PRACTICE & PROCEDURE
§ 3533.2.3 (3d ed.) (“Bankruptcy appeals provide numerous
examples of the need to protect third party interests arising
from substantial implementation of a reorganization plan
pending appeal.”). Equitable mootness occurs when a “com-
prehensive change of circumstances” has occurred so “as to
render it inequitable for this court to consider the merits of the
appeal.” In re Roberts Farms, 652 F.2d 793, 798 (9th Cir.
1981). The question is whether the case “present[s] transac-
tions that are so complex or difficult to unwind that the doc-
trine of equitable mootness would apply.” Lowenschuss v.
Selnick (In re Lowenschuss), 170 F.3d 923, 933 (9th Cir.
1999). The Second, Third, and Fifth Circuits have developed
tests to determine whether an appeal is equitably moot.4 We
4
The Second Circuit has developed a five part test to determine if con-
stitutional and equitable considerations moot an appeal where there has
IN THE MATTER OF THORPE INSULATION 669
have not yet expressly articulated a comprehensive test, but
our precedents have looked at whether a stay was sought,
whether the plan has been substantially consummated,
whether third party rights have intervened, and, if so, whether
any relief can be provided practically and equitably. Baker &
Drake, 35 F.3d at 1351 (1994) (“moot if a party opposing a
reorganization plan has failed to obtain a stay pending appeal,
and the plan has been carried out to ‘substantial [culmina-
tion].’ ”); In re Roberts Farms, Inc., 652 F.2d at 797-98
(1981) (moot if plan has been so far implemented that impos-
sible to fashion effective relief or where party challenging
been substantial consummation. “[S]ubstantial consummation will not
moot an appeal if all of the following circumstances exist: (a) the court
can still order some effective relief; (b) such relief will not affect the re-
emergence of the debtor as a revitalized corporate entity; (c) such relief
will not unravel intricate transactions so as to knock the props out from
under the authorization for every transaction that has taken place and
create an unmanageable, uncontrollable situation for the Bankruptcy
Court; (d) the parties who would be adversely affected by the modification
have notice of the appeal and an opportunity to participate in the proceed-
ings; and (e) the appellant pursued with diligence all available remedies
to obtain a stay of execution of the objectionable order . . . .” In re
Chateaugay Corp., 10 F.3d at 952-53 (internal citations and quotations
omitted).
The Third Circuit considers the following five factors: “(1) whether the
reorganization plan has been substantially consummated, (2) whether a
stay has been obtained, (3) whether the relief requested would affect the
rights of the parties not before the court, (4) whether the relief requested
would affect the success of the plan, and (5) the public policy of affording
finality to bankruptcy judgments.” Nordhoff Invs., Inc. v. Zenith Elecs.
Corp., 258 F.3d 180, 185 (3d Cir. 2001). The court gives the factors vary-
ing weight depending on the particularity of the plan, putting the most
weight on whether the plan has been substantially consummated. Id.
The Fifth Circuit considers three factors: “(1) whether the complaining
party has failed to obtain a stay, (2) whether the plan . . . has been substan-
tially consummated, and (3) whether the relief requested would affect the
rights of parties not before the court or the success of the plan.” TNB Fin.,
Inc. v. James F. Parker Interests (In re Grimland, Inc.), 243 F.3d 228, 231
(5th Cir. 2001).
670 IN THE MATTER OF THORPE INSULATION
plan fails to use due diligence to seek a stay); In re Spirtos,
992 F.2d at 1006 (1993) (moot if no stay and rights of third
parties have intervened, but not if able to fashion relief that
is both effective and equitable).
[3] We endorse a test similar to those framed by the cir-
cuits that have expressed a standard: We will look first at
whether a stay was sought, for absent that a party has not fully
pursued its rights. If a stay was sought and not gained, we
then will look to whether substantial consummation of the
plan has occurred. Next, we will look to the effect a remedy
may have on third parties not before the court. Finally, we
will look at whether the bankruptcy court can fashion effec-
tive and equitable relief without completely knocking the
props out from under the plan and thereby creating an uncon-
trollable situation for the bankruptcy court. For reasons
explained below, we conclude that this appeal is not equitably
moot.5
[4] First, this is not a case where Appellants sat on their
rights; they sought a stay and were refused both by us and by
the Circuit Justice. A failure to seek a stay can render an
appeal equitably moot. In re Roberts Farms, 652 F.2d at
797-98. However, failure to obtain a stay does not require a
conclusion of equitable mootness where parties use due dili-
gence in seeking the stay. In re Lowenschuss, 170 F.3d at 933
(not equitably moot where sought stay but bankruptcy court
refused to grant it). In such a circumstance, where a party has
done nothing by its own inaction to encourage or permit
developments to proceed without its participation, courts
should be cautious about reaching a conclusion of equitable
5
We make no determination that Appellants’ rights have necessarily
been impaired, except in so far as they were not permitted to be heard on
the relevant issues in the bankruptcy court, nor that the plan is necessarily
deficient. We are remanding so that Appellants can have a full and fair
opportunity to present evidence and be heard on those issues before the
bankruptcy court.
IN THE MATTER OF THORPE INSULATION 671
mootness. To say that a party’s claims, although diligently
pursued, are equitably moot because of the passage of time,
before the party had a chance to present views on appeal,
would alter the doctrine to be one of “inequitable mootness.”
Although practicalities necessarily may take center stage in a
particular case, we decline in every case to elevate expediency
over the justice of the situation. If Appellants here have pre-
sented appellate claims that can be remedied by some reason-
able means without totally dislodging the § 524(g) plan, it
would be inequitable to dismiss their appeal on equitable
mootness grounds merely because the reorganization has pro-
ceeded. The failure to gain a stay is one factor to be consid-
ered in assessing equitable mootness, but is not necessarily
controlling.
[5] Second, we next determine whether substantial con-
summation of the plan has occurred. The Bankruptcy Code
defines substantial consummation as: (a) transfer of all or sub-
stantially all of the property proposed by the plan to be trans-
ferred; (b) assumption by the debtor or by the successor to the
debtor under the plan of the business or of the management
of all or substantially all of the property dealt with by the
plan; and (c) commencement of distribution under the plan.
11 U.S.C. 1101(2). Here, though distribution under the plan
has commenced, all or substantially all of the property the
plan proposes to transfer has not been transferred. The plan
involves $600 million in settlement proceeds, and, per the
current record, only $135 million has been transferred to the
trust.6 Further, the trust has only distributed $44.7 million for
pre-petition claims, claims submitted directly to the trust, the
Business Loss Allocation, operating expenses, and contingent
and professional fees—only $15 million of this has been to
asbestos claimants. This is not half, let alone “substantially
all,” of the property proposed to be transferred by the plan.
6
Appellants object to the declaration offered by Appellees containing
this information. We overrule the objection and consider the evidence.
672 IN THE MATTER OF THORPE INSULATION
We conclude that the plan has not been substantially consum-
mated.7
[6] Third, we must evaluate “whether modification of the
plan of reorganization would bear unduly on the innocent.” In
re 203 N. LaSalle St. Pshp., 126 F.3d 955, 961 (7th Cir.
1997), judgment rev’d on other grounds, 526 U.S. 434 (1999).
An important consideration is whether all the parties affected
by the appeal are before the court. See, e.g., In re Arnold &
Baker Farms, 85 F.3d at 1420; In re Spirtos, 992 F.2d at
1007. The plan has proceeded and third party rights have
intervened to some extent because the trust has both made and
received payments. Appellees argue that any changes made to
the plan would be inequitable because asbestos claimants
voted on the plan relying on the transactions it created, and
any change would unfairly affect the bargain they received.
However, in determining whether an appeal is equitably moot,
the question is not whether it is possible to alter a plan such
that no third party interests are affected, but whether it is pos-
sible to do so in a way that does not affect third party interests
to such an extent that the change is inequitable. If we fol-
lowed Appellees’ argument, no party that failed to obtain a
stay in § 524(g) cases would ever be able to appeal, because
third party rights would always be affected in some way. We
reject that position. The Third Circuit has allowed changes to
a 524(g) plan where the plan had already been approved by
claimants. Combustion Eng’g, 391 F.3d at 201-02 (bank-
ruptcy court added super-preemptory provision after approval
by majority of asbestos claimants).
[7] Also, the plan provides that it may be modified after
confirmation with consent of the trust advisory committee and
the Futures Representative but without a vote by asbestos
7
If the plan was substantially consummated, that would not be the end
of the inquiry. We would agree with our sister circuits, see note 5 supra,
that we could still assess whether effective relief might be given without
fully impairing the prior plan and other pertinent circumstances.
IN THE MATTER OF THORPE INSULATION 673
claimants. While the claimants agreed to the plan, they did not
agree to a plan that promised no future changes. Further, the
appointed Futures Representative is a party to this appeal. The
bankruptcy court and the Futures Representative can ensure
that any changes to the plan after remand are made in a way
that is equitable to all affected parties. Finally, the bankruptcy
court could fashion remedies that would not impact the asbes-
tos claimants in a negative way, such as requiring the Debtor
to contribute more money to the trust. Appellees argue that
the plan is also equitably moot because the reorganized debtor
received credit from California Bank & Trust, which creates
third party reliance on the plan. But even if the bank extended
credit to the reorganized debtor in reliance on the plan, we do
not think that remedies short of reversing plan confirmation
would affect the bank in an inequitable way.
[8] Fourth, and most importantly, we look to whether the
bankruptcy court on remand may be able to devise an equita-
ble remedy. Because traditional equitable remedies are
extremely broad and vest great discretion in a court devising
a remedy, we expect that if there is violation of Appellants’
legal rights from the plan, the bankruptcy court should be able
to find a remedy that is appropriate. The plan has thus far pro-
ceeded to a point where it may not be viable totally to upset
the plan, to tip over the § 524(g) apple cart. Yet, that does not
mean that there could not be plan modifications adequate to
give remedy for any prior wrong. Where equitable relief,
though incomplete, is available, the appeal is not moot. Paul-
man v. Gateway Venture Partners III, L.P. (In Re Filtercorp,
Inc.), 163 F.3d 570, 578 (9th Cir. 1998).
There are several ways here that Appellants could get some
relief without completely upsetting the plan. First, Appellees
challenge the sufficiency of plan funding. The district court,
on appeal, could require Appellees to contribute more to the
trust. As an example, the court could require Appellees to
return the $2.5 million they have received pursuant to the
Business Loss Allocation. In re Spirtos, 992 F.2d at 1007
674 IN THE MATTER OF THORPE INSULATION
(“We can fashion effective relief by ordering Debtor, who is
a party to this appeal, to return the money to the estate.”); see
also Platinum Capital, Inc. v. Sylmar Plaza, L.P. (In re Syl-
mar Plaza, L.P.), 314 F.3d 1070, 1074 (9th Cir. 2002) (find-
ing appeal not equitably moot because remedy was monetary
and debtors were solvent). Second, Appellants could receive
relief from the bankruptcy court if it amends the plan to make
clear that the trust distribution procedures are not binding on
direct suits filed against Appellants; because a potentially
binding effect is part of what gives the insurers a legally pro-
tected interest, see section III.B.1, infra, a remedy on these
lines may be appropriate. See e.g. Combustion Eng’g, 391
F.3d at 201-02 (bankruptcy court added super-preemptory
provision after approval by majority of asbestos claimants and
district court also made changes). Third, the bankruptcy court
could allow Appellants to present evidence and argue for
modification of the trust distribution procedure. Varela v.
Dynamic Brokers, Inc. (In re Dynamic Brokers, Inc.), 293
B.R. 489, 494 (B.A.P. 9th Cir. 2003) (finding appeal not equi-
tably moot where payments were to be made over twenty
years and distribution could be adjusted over time). Fourth,
the Appellants would receive relief by placing the trust under
new governance if the bankruptcy court credits their argument
that the trust is in the hands of biased parties.
[9] If abandonment of the § 524(g) plan were the only pos-
sible remedy, then there might be equitable mootness. How-
ever, we expect that there are many options open to the
bankruptcy court other than complete plan reversal that can
remedy some of Appellants’ claims if proved valid. There-
fore, we hold that this appeal is not equitably moot.
B. Standing
Two types of standing are at issue: (1) standing to object
to the confirmation of the plan in bankruptcy court
(“bankruptcy standing”) and (2) standing to appeal that con-
firmation ruling (“appellate standing”). Appellate standing
IN THE MATTER OF THORPE INSULATION 675
requires that a party be directly and adversely affected by the
order of the bankruptcy court—that it diminish the appellant’s
property, increase its burdens, or detrimentally affect its
rights. Duckor Spradling & Metzger v. Baum Trust (In re
P.R.T.C., Inc.), 177 F.3d 774, 777 (9th Cir. 1999). On bank-
ruptcy standing, the interests in a fair plan are paramount, and
the bankruptcy court is open to all “parties in interest.” 11
U.S.C. § 1109(b). A party denied standing in the bankruptcy
court has appellate standing to challenge that determination.
See, e.g., In re Global Indus. Tech, Inc. (In re GIT), 645 F.3d
201, 209 n.23 (3rd Cir. 2011) (en banc). All parties agree that
Appellants have appellate standing to appeal the finding of
insurance neutrality and to appeal the preemption holding.
Because there is no real issue on appellate standing here, we
turn to consider bankruptcy standing, and whether the bank-
ruptcy court should have heard Appellants more fully on the
issues of concern to them.
[10] To have standing in bankruptcy court, Appellants
must meet three requirements: (1) they must meet statutory
“party in interest” requirements under § 1109(b) of the bank-
ruptcy code; (2) they must satisfy Article III constitutional
requirements; and (3) they must meet federal court prudential
standing requirements.
(1)
We first consider whether Appellants had statutory stand-
ing under § 1109(b), which provides that:
[a] party in interest, including the debtor, the trustee,
a creditors’ committee, an equity security holders’
committee, a creditor, an equity security holder, or
any indenture trustee, may raise and may appear and
be heard on any issue in a case under this chapter.
§ 1109(b). The “party in interest” standard has generally been
construed broadly. See In re GIT, 645 F.3d at 210-11 (list not
676 IN THE MATTER OF THORPE INSULATION
exclusive); Kaiser Aerospace & Elec. Corp. v. Teledyne
Indus. (In re Piper Aircraft Corp.), 244 F.3d 1289, 1304 n.11
(11th Cir. 2001) (party in interest is defined non-exclusively
in § 1109(b)); Hasso v. Mozsgai (In re La Sierra Fin. Servs.),
290 B.R. 718, 728 (B.A.P. 9th Cir. 2002) (list is nonexclu-
sive); In re Shoen, 193 B.R. 302, 311 (Bankr. D. Ariz. 1996)
(broad definition); In re Standard Insulations, Inc., 138 B.R.
947, 950 (Bankr. W.D. Mo. 1992) (party in interest not lim-
ited to examples listed). “[C]ourts must determine on a case
by case basis whether the prospective party has a sufficient
stake in the proceedings so as to require representation.” In re
Amatex Corp., 755 F.2d 1034, 1042 (3rd Cir. 1985).
[11] The Seventh Circuit determined that § 1109(b) was
not intended to provide standing exclusively for the listed
examples, but rather was meant to give standing to “anyone
who has a legally protected interest that could be affected by
a bankruptcy proceeding.” In re James Wilson Assocs., 965
F.2d 160, 169 (7th Cir. 1992). The Third Circuit agreed, find-
ing that the list of potential parties in interest in § 1109(b) is
not exclusive and adopting the “legally protected interest” test
as a “helpful amplification” of its “sufficient stake in the
proceeding[s]” test set out in In re Amatex. In re GIT, 645
F.3d at 210. Indeed, the Third Circuit noted that Article III
standing and standing under the Bankruptcy code were effec-
tively co-extensive. Id. at 211.
The bankruptcy court in this case approached the question
of standing for Appellants as one of insurance neutrality, an
approach taken by other courts. See, e.g., In re GIT, 645 F.3d
201; In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir.
2004); Baron & Budd, P.C. v. Unsecured Asbestos Claimants
Comm., 321 B.R. 147 (D.N.J. 2005). The bankruptcy court
concluded that because the plan was insurance neutral, Appel-
lants had no standing.8
8
Appellees argue that this case is indistinguishable from In re Combus-
tion Engineering where the Third Circuit found that non-settling insurers
IN THE MATTER OF THORPE INSULATION 677
[12] Appellants argue that the plan is not insurance neutral
because of possible preclusive effects of the plan, because
they are responsible for claims channeled to the trust, because
the trust permits direct file suits against Appellants, because
they are a contingent beneficiary of the trust, and because the
plan and trust distribution procedure can be changed without
court supervision.9 We conclude that the plan may economi-
cally affect Appellants in substantial ways. A plan is not
insurance neutral when it may have a substantial economic
impact on insurers.
[13] First, Appellants claim that there is a possibility that
the plan will have a preclusive effect in asbestos suits brought
against them by claimants. We conclude this claim has merit.
Though the plan recites that it is insurance neutral, this char-
acterization in and of itself does not settle the issue. Instead,
we must look to the real-world impacts of the plan to see if
it increases insurance exposure and likely liabilities of Appel-
lants.
The plan creates four exceptions to Appellants’ insurance
had no standing because the plan was insurance neutral. Even if that case
had been adopted as controlling Ninth Circuit precedent, it is distinguish-
able. In re Combustion Engineering was decided in the context of appel-
late standing and applied the more stringent “person aggrieved” standard,
not the “party in interest” standard used in determining whether standing
in bankruptcy is appropriate. Further, the plan in In re Combustion Engi-
neering was vastly different. There, the plan explicitly preserved all insur-
ance defenses except for the assignment clause in the insurance contracts.
Here, the plan contains exceptions to insurance defenses that go beyond
the anti-assignment clause exception. Thus, the standard in In re Combus-
tion Engineering was different, as was the plan.
9
Appellants also argue that they had standing because of the preemption
of their anti-assignment state rights. Appellants had standing on that issue.
Further, assignment of the insurance contracts to the trust does not provide
standing to challenge anything other than preemption as long as all other
rights are preserved. Combustion Eng’g, 391 F.3d at 216. Preemption of
anti-assignment clauses do not, alone, destroy the insurance neutrality of
the plan.
678 IN THE MATTER OF THORPE INSULATION
defenses. One such exception is that insurance defenses are
not preserved “to the extent affected by application of princi-
ples of res judicata, collateral estoppel, claim preclusion or
issue preclusion.” The bankruptcy court held that the plan was
insurance neutral, but, at the same time, it held that “the Debt-
ors’ insurers may or may not be bound by the Trust’s resolu-
tion of its claimed liability on an Asbestos Related Claim.”
The bankruptcy court further provided that “[w]hether and to
what extent the values generated by the Internal Procedures
will bind a particular Non-Settling Asbestos Insurer will be
resolved in the Coverage Litigation.”10
[14] These conclusions appear to be contradictory, or at
least in serious tension with each other. If the Appellants may
be bound by the Trust’s determination of an amount of liabil-
ity on an asbestos claim, it would be hard to see how that
would not have a real impact on the appellant insurance com-
panies. If the actual amount of payments due from insurance
companies is increased by the plan from what those liabilities
would be absent the plan, then the plan has monetary impact
in the real world of insurance, and is not insurance neutral.
Here Appellants reasonably complain that they were not per-
mitted to participate in establishing the valuation matrix. That
would be no problem if they could challenge amounts set by
it, but it is a problem for them if they may be bound by it
without prior participation.
[15] The language in the plan and in the bankruptcy
court’s order is different from the “super-preemptory” lan-
guage contained in the plan in In re Combustion Engineering,
where the court determined the plan had no impact on insur-
ers. There, the plan stated:
Notwithstanding anything to the contrary in this
10
The Coverage Litigation are cases in California state court in which
some non-settling insurers and Thorpe are litigating the extent of coverage
provided by the insurance policies.
IN THE MATTER OF THORPE INSULATION 679
Order, the Plan or any of the Plan Documents, noth-
ing in this Order, the Plan or any of the Plan docu-
ments (including any other provision that purports to
be preemptory or supervening), shall in anyway [sic]
operate to, or have the effect of, impairing the insur-
ers’ legal, equitable or contractual rights, if any, in
any respect.
In re Combustion Eng’g, 391 F.3d at 209. Even if there is a
super-preemptory provision, “care must be taken to ensure
that, in fact, the insurer’s rights are completely unaffected. If
the insurer’s rights are affected in any way, the insurer will
have standing to object to the alteration of its rights.” COLLIER
ON BANK. ¶ 1109.04. Here, the express exceptions to Appel-
lants’ defenses signal that the plan is not insurance neutral.
Second, Appellants must indemnify payments made by the
trust pursuant to settlements with asbestos claimants. Without
participation by Appellants, the trust determines how much to
pay to the claimants and then may seek payment from Appel-
lants. For the same reasons discussed above, the plan would
not necessarily permit the insurers to challenge settlement
amounts as unreasonable.
Third, under the plan, the trust can allow asbestos claimants
to file direct suits against Appellants. “As a general matter,
. . . parties with potential responsibility to pay claims against
debtors regularly have standing to participate in bankruptcy
cases.” Baron & Budd, 321 B.R. at 158. For this reason, each
of the insurers who may be sued directly and may be liable
to claimants should be viewed as a party in interest to the pro-
ceedings establishing the trust. Moreover, if the trust runs out
of money because it is insufficiently funded or because the
trust distribution procedures are insufficiently stringent, the
likelihood of claims being brought against the non-settling
insurers increases. If the trust runs out of money, the channel-
ing injunctions will preclude claimants from seeking damages
680 IN THE MATTER OF THORPE INSULATION
from any other insurers than the non-settling insurers. This
would have a substantial economic impact on Appellants.
Fourth, the plan may have economic consequences for
Appellants by affecting their reinsurance with settling insur-
ers. Because the injunction protects the settling insurers,
Appellants’ only recourse for any contribution, subrogation,
or indemnification resulting from reinsurance is against the
trust making them beneficiaries. The order confirming the
plan states that the trust may not permit a direct claim against
a non-settling insurer unless the claimant agrees in writing to
reduce the judgment by the amount the settling insurer owes
to Appellants. The order further provides that in direct action
litigation, if the non-settling insurer is found to have a claim
against a settling insurer for litigation costs, and they are
unable to recover those costs through a judgment reduction,
then the non-settling insurer can bring an action against the
Trust for that amount. If the Trust runs out of money because
it is insufficiently funded, then any costs that Appellants
could have recovered against it will be lost. The right to
recover costs is a right provided for by a contract negotiated
between the settling insurer and the non-settling insurer. This
right is a legally protected right. Any inadequacy in the trust
threatens to diminish the value of Appellants’ claims. There-
fore, the insurers’ allegations that the plan does not comply
with the funding requirements of § 524(g) are sufficient to
establish standing.
[16] In summary, the plan allows direct actions against
Appellants. It allows the trust to pay out claims according to
the trust distribution plan and then to seek indemnification
from Appellants. It terminates Appellants’ ability to collect
claims from settling insurers. It affects the nature of Appel-
lants’ contracts with Appellees. Though § 524(g) contem-
plates this kind of interference with insurers’ contracts, there
is no doubt that the vast changes to the insurance policies and
relationships have the potential substantially to impact Appel-
lants economically. The plan is therefore not insurance neu-
IN THE MATTER OF THORPE INSULATION 681
tral, which provides the non-settling insurers with party in
interest standing under § 1109(b). We hold that appellants had
bankruptcy standing and should have been permitted to be
heard in challenging the plan, if they had Article III standing
and satisfied prudential standing requirements.
(2)
Having found that Appellants are parties in interest under
§ 1109(b), we consider whether they also satisfy the require-
ments of Article III standing. To have constitutional standing
under Article III, the party seeking standing must demonstrate
an injury in fact that is traceable to the challenged action and
that is likely to be redressed by a favorable decision. Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560 (1992). As applied
in the Chapter 11 context, Article III standing exists where
“the participant holds a financial stake in the outcome of the
proceeding such that the participant has an appropriate incen-
tive to participate in an adversarial form to protect his or her
interests.” COLLIER ON BANK. ¶ 1109.04; see also United
States v. 5208 Los Franciscos Way, 385 F.3d 1187, 1191 (9th
Cir. 2004).
[17] Appellants had Article III standing. As discussed
above, the plan affects Appellants’ contractual rights, affects
their financial interests, and has the possibility of affecting
their litigation rights in court. The plan potentially increases
the liabilities of the insurance companies with real world eco-
nomic impact, and, as such, Appellants have sufficiently
alleged an injury in fact. This injury is traceable to the plan.
It is only because of the plan that Appellants’ contractual
rights and expectations were changed. This injury would be
redressed by judicial action, such as if the bankruptcy or dis-
trict court reversed confirmation of the plan or altered the plan
to make it insurance neutral. All three required elements of
the Lujan test are satisfied, and Appellants have Article III
standing.
682 IN THE MATTER OF THORPE INSULATION
(3)
“In addition to the immutable requirements of Article III,
‘the federal judiciary has also adhered to a set of prudential
principles that bear on the question of standing.’ ” Bennett v.
Spear, 520 U.S. 154, 162 (1997) (quoting Valley Forge Chris-
tian Coll. v. Americans United for Separation of Church and
State, Inc., 454 U.S. 464, 474-475 (1982)). This prudential
principle is a “judicially self-imposed limit[ ] on the exercise
of federal jurisdiction.” Allen v. Wright, 468 U.S. 737, 751
(1984). It is “founded in concern about the proper—and prop-
erly limited—role of the courts in a democratic society.”
Warth v. Selden, 422 U.S. 490, 498 (1975). One of these pru-
dential requirements is that “[a] plaintiff’s grievance must
arguably fall within the zone of interests protected or regu-
lated by the statutory provision or constitutional guarantee
invoked in the suit.” Bennett, 520 U.S. at 162. “The ‘zone of
interests’ requirement is analogous to ‘statutory standing.’ ”
In re Chiu, 266 B.R. 743, 749 (B.A.P. 9th Cir. 2001) (quoting
Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 669 n.13 (7th
Cir. 1998)). “[T]he predecessor provisions of section 1109(b)
of the Code, constituted an effort to encourage and promote
greater participation in reorganization cases. . . . Section
1109(b) continues in this tradition and should be understood
in the same way.” In re Amatex, 755 F.2d at 1042; see also
7 COLLIER ON BANK. ¶ 1109.04[2][b] (“A fundamental pur-
pose of section 1109(b) is to grant any party with a financial
stake in the case the right, at the party’s election, to partici-
pate with respect to the judicial determination of any issue
bearing on the ultimate disposition of his or her interest.”).
[18] Appellants have § 1109(b) standing, or bankruptcy
standing. Also, as insurers of the Debtors, they were within
the “zone of interests” protected or regulated by the statutory
provision. Congress intended § 1109(b) to confer broad stand-
ing so that those whose rights would be affected by reorgani-
zation proceedings could participate and protect their rights.
IN THE MATTER OF THORPE INSULATION 683
(4)
[19] Having determined that Appellants met statutory
(“party in interest”), constitutional (Lujan Article III test), and
prudential (“zone of interests”) standing requirements, we
next consider the extent of their standing in bankruptcy court.
Section 1128(b) states that “[a] party in interest may object to
the confirmation of a plan.” § 1128(b). Because Appellants
are parties in interest, they should have had standing to object
to confirmation of the plan. In re GIT, 645 F.3d at 211
(“Status as a party in interest is of particular relevance here
because the Bankruptcy Code expressly provides that parties
in interest ‘may object to confirmation of a plan.’ ”); see also
COLLIER ON BANK. ¶ 1109.04[2][a] (“[E]very court would
seem to agree that section 1109(b) applies in full force to a
plan confirmation proceeding given the momentous nature of
this proceeding in most cases.”). For this reason the non-
settling insurers had a right to be heard, to present evidence,
and to participate in the proceedings culminating in approval
of the § 524(g) plan.
C. Preemption
Appellants also appeal the district court’s determination
that their anti-assignment contract rights were preempted by
state law. The plan assigns Thorpe’s insurance rights to the
trust and excludes from Appellants’ defenses any defense
based upon violation of the anti-assignment clauses. How-
ever, the policies under which Thorpe is insured contain lan-
guage requiring Appellants’ consent before an assignment or
transfer of policy rights. Under California law, assignment of
insurance benefits may violate an anti-assignment provision if
the claim against the policy has not been “reduced to a sum
of money due or to become due under the policy.” Henkel
Corp. v. Hartford Accident and Indemnity Co., 29 Cal. 4th
934, 944 (2003). The bankruptcy and district courts deter-
mined that bankruptcy law preempted the anti-assignment
clauses in the insurance policies.
684 IN THE MATTER OF THORPE INSULATION
“We must be cautious about conflict preemption where a
federal statute is urged to conflict with state law regulations
within the traditional scope of the state’s police powers,” and
we begin with a “presumption against preemption.” Chae v.
SLM Corp., 593 F.3d 936, 944 (9th Cir. 2010). But, “[i]t is a
familiar and well-established principle that the Supremacy
Clause . . . invalidates state laws that ‘interfere with, or are
contrary to,’ federal law.” Hillsborough Cnty. v. Automated
Med. Laboratories, Inc., 471 U.S. 707, 712 (1985). In deter-
mining whether preemption exists, “[t]he purpose of Congress
is the ultimate touchstone . . . .” Medtronic, Inc. v. Lohr, 518
U.S. 470, 485 (1996).
Preemption can occur either expressly or impliedly. “Ex-
press and implied preemption under the Bankruptcy Code are
two distinct concepts.” PG&E Co., v. Cal. ex rel. Cal. Dep’t
of Toxic Substances Control, 350 F.3d 932, 948 (9th Cir.
2003). “Congress may indicate pre-emptive intent through a
statute’s express language or through its structure and pur-
pose.” Altria Group, Inc. v. Good, 129 S. Ct. 538, 543 (2008)
In the absence of express preemption, Congressional intent
can be inferred where “it is impossible for a private party to
comply with both state and federal requirements, . . . or where
state law ‘stands as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress.’ ”
Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 372-73
(2000) (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).
(1)
[20] Here Congress has expressly preempted Appellants’
contract rights. Section 541(c) provides that “an interest of the
debtor in property becomes property of the estate . . . notwith-
standing any provision in an agreement, transfer instrument,
or applicable nonbankruptcy law . . . that restricts or condi-
tions transfer of such interest by the debtor . . . .” 11 U.S.C.
§ 541(c)(A). In In re Combustion Engineering, the Third Cir-
cuit held that the Bankruptcy Code “expressly contemplates
IN THE MATTER OF THORPE INSULATION 685
the inclusion of debtor insurance policies in the bankruptcy
estate.” In re Combustion Eng’g, 391 F.3d at 219 n.27. The
court held that § 541 “effectively preempts any contractual
provision that purports to limit or restrict the rights of a debtor
to transfer or assigns [sic] its interest in bankruptcy.” Id.; see
also In re Kaiser Aluminum Corp., 343 B.R. 88, 95 (D. Del.
2006) (541(c) expressly preempts anti-assignment clauses).
Appellants argue that precedent precludes a finding that
541(c)(1)(A) preempts the contract provisions. They point to
In re Farmers Markets and argue that § 541(c) does not pre-
empt state laws that put limitations on transfers of property to
third parties. In re Farmers Markets, Inc., 792 F.2d 1400,
1402 (9th Cir. 1986). That case involved the question of
whether § 541(c) preempted a state law that disallowed the
transfer of a liquor license until the holder paid certain state
taxes. Id. at 1401. There, the court held that § 541(c) does not
invalidate all transfer restrictions on property in which the
debtor holds an interest, but “avoids only those restrictions
which prevent transfer of the debtor’s property to the estate.”
Id. at 1402. Therefore, the state could require the estate to pay
the taxes before allowing the transfer of the license to a third
party. Id. at 1404. Here, however, the trust is not a third party.
The order confirming the plan provides that the trust is
appointed as the estate representative. The trust is part of the
debtor’s estate. Instead of attempting to sell or assign any-
thing to third parties, the debtor was attempting to transfer its
rights and property to the trust, part of the estate. Accord-
ingly, In re Farmers Markets does not preclude a finding that
541(c) preempts Appellants’ anti-assignment contract rights.
Appellants also argue that in PG&E we held that a reorga-
nization plan may preempt nonbankruptcy law “only to the
extent that such law ‘relates to financial condition.’ ” PG&E,
350 F.3d at 937. They argue that since Appellants’ rights do
not relate to a “financial condition” preemption is not appro-
priate here. In PG&E we dealt only with §§ 1123(a) and
1142(a), and issues of express preemption by those provi-
686 IN THE MATTER OF THORPE INSULATION
sions, and did not interpret § 541(c) as we do here. PG&E is
not applicable to the preemption issue in this case, as it
doesn’t tell us whether the anti-assignment clauses in the con-
tracts between insurers and the debtors are preempted by
§ 541(c).
(2)
Even if 541(c) did not expressly preempt the anti-
assignment provisions, this would not end the inquiry because
“[i]t is possible for there to be no express preemption under
a particular provision of the Bankruptcy Code, but nonethe-
less to be implied preemption under the Code.” PG&E, 350
F.3d at 948. “Even where Congress has not completely dis-
placed state regulation in a specific area, state law is nullified
to the extent that it actually conflicts with federal law.” Hills-
borough Cnty., 471 U.S. at 713. “We discern congressional
objectives by ‘examining the federal statute as a whole and
identifying its purpose and intended effects.’ ” Chae, 593 F.3d
at 943 (quoting Crosby, 530 U.S. at 373).
[21] Here, enforcing the anti-assignment clauses would
stand as “an obstacle to the accomplishment and execution of
the full purposes and objectives of Congress.”11 English v.
Gen. Elec. Co., 496 U.S. at 79 (quoting Hines, 312 U.S. at
67). As the district court noted, Henkel would bar any com-
pany with significant insurance contracts governed by Cali-
fornia law from taking advantage of 524(g). For a plan to be
approved, the trust must be sufficiently funded. As here, com-
panies usually can do so only by settling with insurers and
putting those funds in the trust. Yet, if we enforced the anti-
assignment provisions, it would be to the detriment of the
11
Appellants argue primarily that enforcing the anti-assignment provi-
sions does not make it impossible to reorganize. Even if we accept Appel-
lants’ premise, this does not wholly resolve preemption. Instead, we must
assess whether the anti-assignment provisions stand as an obstacle to the
objectives of Congress. See Crosby, 530 U.S. 363; Chae, 593 F.3d 936.
IN THE MATTER OF THORPE INSULATION 687
potential efficacy of a § 524(g) plan. After a debtor had filed
for bankruptcy, no insurer would settle, with the aim of fund-
ing a § 524(g) plan, because by refusing to settle, the insurer
could position itself to claim forfeiture of the insurance if a
plan proceeded and there was a consequent breach of the anti-
assignment provisions. “Simply making a reorganization
more difficult for a particular debtor, however, does not rise
to the level of ‘standing as an obstacle to the accomplishment
of the full purposes and objectives of Congress.’ ” In re Baker
& Drake, Inc., 35 F.3d at 1354 (quoting Schneidewind v. ANR
Pipeline Co., 485 U.S. 293, 300 (1988)). This is not the case
here, because enforcing the anti-assignment provisions would
subject virtually all § 524(g) reorganizations to an insurer
veto.
[22] We are unconvinced by Appellants’ argument that
Appellees are merely allowed to reorganize under § 524(g)
but not entitled to do so and accordingly preemption is not
appropriate. Section 524(g) was specifically designed to allow
companies with large asbestos-related liabilities to use Chap-
ter 11 to transfer those liabilities, along with substantial
assets, to a trust responsible for paying future asbestos claims.
See H.R. Rep. No. 103-835, at 46-47 (1994). It requires that
a trust be established that assumes the debtor’s asbestos liabil-
ities. § 524(g)(2)(B)(I). Part of the “cornerstone” of the reor-
ganization is contribution by the insurers to the trust.
Travelers Indem. Co. v. Bailey, 129 S. Ct. 2195, 2199 (2009).
For such reasons we hold that the anti-assignment provisions
contained in the contracts between Appellants and Appellees
stand as an obstacle to completion of a successful § 524(g)
plan, and therefore are preempted by federal bankruptcy law.
IV. Conclusion
We reject Appellees’ argument that this appeal should be
dismissed as “equitably moot.” Although the plan has pro-
ceeded to a point where it may be inequitable to toss it out
entirely, we also conclude that there are likely viable remedies
688 IN THE MATTER OF THORPE INSULATION
available to Appellants, short of entirely tossing the plan out,
within the broad remedial discretion of the bankruptcy court,
if it determines that Appellants’ claims (discussed in footnote
one) have merit.
The bankruptcy court and district court erred by concluding
that the proposed § 524(g) plan was insurance neutral and that
Appellant insurers did not have party in interest standing to
challenge the plan. Because the plan had likely effects that
would increase economic exposure of the insurer Appellants
to asbestos claimants, they had a right to be heard fully and
fairly before the plan was finalized. Also, we affirm the bank-
ruptcy court’s and district court’s conclusions that the anti-
assignment clauses in the contracts between insurers and the
Debtor were preempted by federal law.
[23] There is no entirely tidy way to resolve this case
because the plan has proceeded without stay and without full
input from insurer parties who will be economically affected
by the plan. But we have concluded that the starting place is
for us to reverse the judgment of the district court, and to
remand to the district court with instructions that it remand to
the bankruptcy court to permit Appellants to submit their
proof on all issues they previously preserved.
REVERSED AND REMANDED with instructions.