496 B.R. 644
1st Cir. BAP2013Background
- Six related debtors in jointly-administered cases appeal the bankruptcy court's denial of confirmation of a joint liquidating plan.
- Plan would seize Self-Insurance Funds held by Maine, New Hampshire, and Missouri authorities and related entities to satisfy workers' compensation obligations.
- Plan would channel claims and disputes through a Self-Insurance Claims Escrow, paying only from that escrow with pro rata distribution.
- Debtors contend they have a right to excessive turnover of funds under state self-insurance laws, or at least a surplus recoverable as a chose in action.
- Bankruptcy court held Debtors have no property interest in the Self-Insurance Funds themselves, only contingent chattel claims, and that §1123(a)(5) does not preempt state law to allow Plan-disposition of third-party funds; plan deemed infeasible under §1129(a)(11).
- Amended plan later removed self-insurance provisions; on appeal the panel affirmed denial of confirmation of the original plan and noted the Amended Plan would be confirmable if the original plan were not barred by nonbankruptcy law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Plan is feasible under §1129(a)(11). | Debtors argue the Plan could be feasible because it would compel turnover of funds. | Appellees argue the Plan is infeasible because Debtors lack a property interest in the funds. | No; feasibility is defeated by state-law limits on Debtors' rights to the funds. |
| Whether §1123(a)(5) preempts applicable nonbankruptcy law to allow Plan provisions affecting third-party funds. | Debtors contend §1123(a)(5) preempts state law and permits disposition of third-party funds. | Appellees argue preemption is limited and cannot override third-party property rights or public health/safety laws. | §1123(a)(5) preemption is not unlimited; it cannot override third-party property rights or health/safety laws. |
| Whether the Self-Insurance Funds are property of the Debtors' estates. | Debtors treat funds as property or at least recoverable surplus. | Funds are not property of the estates; they are contingent rights or held in trust. | Funds are not property of the Debtors' estates; they are contingent chattel or trust assets. |
| Whether the Self-Insurance Claims Channeling Injunction violates state nonbankruptcy law. | Debtors claim channeling injunction is permissible under §1123(a)(5) to implement plan. | Appellees contend the injunction encroaches on state self-insurance law and transfers. | Plan cannot be confirmed because channeling injunction would violate state self-insurance laws. |
| Whether §1129(a)(1) or other provisions would independently foreclose confirmation. | Debtors rely on other subsections to show compliance. | Appellees emphasize noncompliance with state laws and preemption limits. | Court does not need to decide §1129(a)(1) here; §1123(a)(5) and §1129(a)(3) decisively foreclose. |
Key Cases Cited
- Federal-Mogul Global, Inc. v. Global, 684 F.3d 355 (3d Cir. 2012) (court upholds §1123(a) preemption scope as not unlimited; not all nonbankruptcy law is overridden)
- Pac. Gas & Elec. Co. v. Cal. ex rel. Cal. Dep’t of Toxic Substances Control, 350 F.3d 932 (9th Cir. 2003) (discusses breadth of §1123(a) preemption and not to extend beyond health/safety context)
- Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973 (1st Cir. 1995) (preemption analysis guiding breadth of 1123(a)(5))
- In re FCX, Inc., 853 F.2d 1149 (4th Cir. 1988) (illustrates preemption of nonbankruptcy law by plan implementation means)
- In re Renegade Holdings, Inc., 429 B.R. 502 (Bankr.M.D.N.C. 2010) (Plan provisions necessary to implement a plan may preempt state law)