A Seat at the Table: Supreme Court Rules Insurers Have a Right to Be “Heard on Any Issue” in Chapter 11 Cases

Author: Samuel Frasher

On June 6, 2024, the United States Supreme Court issued its long-awaited ruling in?Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., et al. The Court held an insurer with financial responsibility for claims in bankruptcy is a “party in interest” which may object to a plan of reorganization under chapter 11 of the Bankruptcy Code.[i]

Section 524(g) of the Bankruptcy Code, part of the Bankruptcy Reform Act of 1994, allows a Chapter 11 debtor with significant asbestos liabilities to channel all current and future claims into a trust funded by the debtor.[ii] This provision aims to treat future claimants equitably, given the long latency period of some asbestos-related illnesses which may arise, while also enabling the debtor to exit bankruptcy as a viable economic entity.[iii]

To obtain relief under this section, the debtor must meet several criteria designed to protect the due process rights of claimants, especially future ones.[iv] These criteria include appointment of a representative for future claimants and court determination the plan is fair to both current and future claimants.[v] Additionally, 75% of current claimants must vote to approve the plan.[vi]

Often, debtors have little or no incentive to fight these claims in bankruptcy cases because the plans assume virtually all payments to tort creditors will come from insurers. Despite insurers potentially being on the hook for costs, bankruptcy courts have refused to allow insurers to object to confirmation of these plans as “parties in interest” unless the plans expressly impair the insurers’ contractual rights under the policies.[vii]

In the face of thousands of asbestos-related lawsuits since 1978, Kaiser Gypsum Company, Inc. and Hanson Permanente Cement, Inc., collectively known as the “debtors,” filed for Chapter 11 bankruptcy in 2016.[viii] As part of the bankruptcy process, the debtors filed a proposed reorganization plan (the “plan”) that created an Asbestos Personal Injury Trust (“trust”) under section § 524(g) of the Bankruptcy Code.[ix]

Truck Insurance Exchange (“Truck”) was Kaiser’s primary insurer and was contractually obligated to defend each covered asbestos personal injury claim and to indemnify the debtors for up to $500,000 per claim.[x] The plan treated insured and uninsured claims differently, requiring insured claims to be filed in the tort system to benefit the insurance coverage while uninsured claims were submitted directly to the trust for resolution.[xi]

Truck sought to oppose the plan under § 1109(b) of the Bankruptcy Code, which allows a “party in interest” to object to confirmation of a bankruptcy plan.[xii] Truck argued the plan exposed Truck to millions in fraudulent, duplicative claims because it failed to require claimants to disclose whether they had made parallel claims against other asbestos manufacturers.[xiii] In contrast, the plan did require such disclosure for the portion of claims covered by the debtor, such as the deductible.[xiv]

The district court, and later the U.S. Court of Appeals for the Fourth Circuit, ruled Truck was not a “party in interest” concerning approval of the plan because the plan was “insurance neutral”—i.e., it did not increase Truck’s prepetition obligations or impair its contractual rights.[xv]

Truck appealed to the Supreme Court, where the asbestos claimants and Kaiser Gypsum (the debtor) filed separate briefs supporting the insurer’s exclusion from the process.[xvi] They argued Truck could not be a party in interest because the plan left the insurer in the same position as it would have been without bankruptcy.[xvii] ?

The Supreme Court reversed, agreeing with Truck: the Fourth Circuit had adopted too narrow a definition of “party in interest.”[xviii] The Court clarified that a “party in interest” is any entity with an interest that may be directly and adversely affected by the reorganization proceedings.[xix] This broad definition of “party in interest,” the Court explained, coheres with Congress’s consistent efforts to “promote greater participation in reorganization proceedings,” and it reflects Congress’s understanding that “[b]road participation promotes a fair and equitable reorganization process.”[xx] The Court held insurers with financial responsibility for bankruptcy claims, such as Truck, are “parties in interest” which may object to reorganization plans and virtually any other contested matter in a bankruptcy case where their interests are implicated.[xxi]

The Court also rejected the use of the “insurance neutrality” doctrine on the basis that the doctrine “makes little practical sense” and is inappropriate to determine whether a party fits within the plain meaning of “party in interest,” which the Court interpreted to mean entities that are potentially concerned with or affected by a proceeding.[xxii]

The Supreme Court’s decision has broad implications for mass tort bankruptcies involving significant settlements funded by insurers. The Supreme Court has recognized that insurers with financial responsibility for bankruptcy claims have a right to be “heard on any issue” in Chapter 11 cases, including by objecting to reorganization plans. It is yet to be seen how great an impact these rights will have, given that insurers still do not typically have the right to vote on these reorganization plans, even if they impact insurance rights. ?Accordingly, insurers should monitor bankruptcies that affect them and review plans to ensure that insured claims are treated equitably under such terms. They should be prepared to object where that is not the case.

Sources

[i] Truck Ins. Exch. v. Kaiser Gypsum Co., No. 22-1079, 602 U.S. __, 144 S. Ct. 1414 (2024).

[ii] 11 U.S.C. § 524

[iii] Id.

[iv] Id.

[v] Id.

[vi] Id.

[vii] See In re Johns-Manville Corp., 36 B.R. 743 (Bankr. S.D.N.Y. 1984);?In re UNR Indus., Inc., 46 B.R. 671 (Bankr. N.D. Ill. 1985); See also, Truck Ins. Exch. v. Kaiser Gypsum Co., No. 22-1079, 602 U.S. __, 144 S. Ct. 1414, *6 (2024).

[viii] 144 S.Ct., at *4.

[ix] 144 S.Ct., at *1.

[x] Id.

[xi] Id.

[xii] Id.

[xiii] Id.

[xiv] Id.

[xv] Truck Ins. Exch. v. Kaiser Gypsum Co. (In re Kaiser Gypsum Co.), 60 F.4th 73, 80 (4th Cir. 2023).

[xvi] Truck Ins. Exch. v. Kaiser Gypsum Co., No. 22-1079, 602 U.S. __, 144 S. Ct. 1414, *1 (2024).

[xvii] 144 S.Ct., at *9.

[xviii] 144 S.Ct., at *11-2.

[xix] Id.

[xx] 144 S.Ct., at *12.

[xxi] Id.

[xxii] 144 S.Ct., at *16.

View this article on the Tyson & Mendes website here: https://www.tysonmendes.com/a-seat-at-the-table-supreme-court-rules-insurers-have-a-right-to-be-heard-on-any-issue-in-chapter-11-cases/

Looking to receive our newsletter to your email? Sign up here: https://www.tysonmendes.com/sign-up-for-updates/

Learn more about Samuel Frasher here: https://www.tysonmendes.com/attorneys/samuel-frasher/