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  • Writer's pictureKirk Hartley

19 States File Amicus Brief to Oppose Broad Preemptive Orders Issued By Asbestos Bankruptcy Courts &

This post follows up on the amicus brief mentioned in yesterday’s post regarding the GIT asbestos chapter 11 case that is set for oral argument on May 20 in the Third Circuit.

19 state AGs filed an amicus brief in the GIT case to urge the 3rd Circuit to block the efforts of the debtor and the asbestos and silica plaintiff’s bar to use bankruptcy court preemption powers to give asbestos and silica claimants exclusive access to GIT’s insurance policies. The AG’s brief explains that the 19 states are concerned because their states may be claimants in environmental cases seeking damages from GIT. In their view, bankruptcy court orders should not preclude states from seeking monies from GIT insurance policies that otherwise should be available to pay damages. the states might win. In other words, the tiny number of silica claims described in yesterday’s post, plus asbestos claims, should not be be used to ordinary preempt state law and should not leave the asbestos and silica personal injury claimants with exclusive access to insurance policy proceeds generated from GIT insurance policies.

The amicus brief explains in detail why that result is bad policy, and join with the insurers in attacking the broad preemption powers that the bankruptcy court purported to exercise under bankruptcy code section 1123. According to the amici, the conclusion of the lower courts is “extremely dangerous” because it allows bankruptcy court to become a “haven for wrongdoers.”

The amicus brief is well worth reading in its entirety, and is available at the end of the compilation of GIT briefs available here. The following sets out some full text from the amicus brief, at 2-4, in order to provide a taste of intensity of the 19 states that disagree with the broad preemption result sought by the debtor and the asbestos and silica claimants:

“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 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. 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 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; 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. (footnotes omitted).”

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