Opinion has potential implications for a broader set of parties with potential liabilities affected by a Chapter 11 process.
In Truck Ins. Exch. v. Kaiser Gypsum Co., Inc., No. 22-1079, 2024 U.S. LEXIS 2483 (June 6, 2024), the Supreme Court unanimously held that an insurer with financial responsibility for a bankruptcy claim qualifies as a “party in interest” under §1109(b) of the Bankruptcy Code and therefore has standing to “raise and . . . be heard on any issue” in a Chapter 11 proceeding. The Kaiser opinion not only provides an avenue to insurers looking to protect their interests in Chapter 11 proceedings, but emphasizes the “capacious” scope of “party in interest” standing to include other parties with potential liabilities affected by a Chapter 11 process.
Factual background – the Debtors' plan
The Debtors, Kaiser Gypsum Company, Inc. and its parent, Hanson Permanente Cement, manufactured and sold products that contained asbestos. The appellant, Truck Insurance Exchange (“Truck”) was the primary insurer for the Debtors.
The Debtors were subject to tens of thousands of asbestos-related lawsuits, which led them to file for Chapter 11. To resolve the asbestos-related liabilities, the Bankruptcy Court appointed representatives for current and potential future asbestos litigation claimants (the “Claimants”). The Debtors' chapter 11 plan (the “Plan”) also created a trust under section 524(g) of the Bankruptcy Code (the “Trust”) to assume the Debtors' liabilities pertaining to asbestos claims. Truck, as the Debtors' primary insurer, was contractually required to defend each asbestos claim and indemnify the Debtors up to $500,000. Under the Plan, insured claims would be litigated through the tort system, where Truck with the cooperation of the Debtors would defend the claims and, upon a finding of liability, indemnify the Debtors up to $500,000. Uninsured claims would be submitted to the Trust for resolution. For uninsured claims, as a fraud prevention mechanism, the claimants would have to disclose all other related asbestos claims and authorize the Trust to verify with other asbestos trusts regarding other claims.
Legal background – the Debtors' plan is confirmed over Truck's objection
All parties agreed to the Plan except Truck. Truck objected, among other things, on the ground that the disparate disclosure requirements between insured and uninsured claims could subject it to fraudulent tort claims worth millions of dollars and the costs associated with defending such claims. Over Truck's objections, the Bankruptcy Court recommended that the District Court confirm the Plan, which it did. Specifically, the District Court determined that because the Plan was “insurance neutral” – meaning it did not increase Truck's obligations or impair its contractual rights under the insurance policy – Truck was not a “party in interest” under §1109(b) and, therefore, lacked standing. The Fourth Circuit affirmed. Truck then appealed to the Supreme Court. The Supreme Court granted certiorari to decide whether “an insurer with financial responsibility for a bankruptcy claim is a ‘party in interest' under §1109(b).”
SCOTUS Opinion
Under §1109(b), “[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 Chapter 11 proceeding. The list of parties following “party in interest” is an “illustrative but not exhaustive list of parties in interest”.
In its opinion, the Court probed the purpose and meaning of section 1109(b) to determine the scope of party in interest standing. It found that the “common thread” among the parties in the list is that each of the parties potentially has a financial stake in the bankruptcy estate. It also concluded that the ordinary meaning of the words “party in interest” refers to “entities that are potentially concerned with or affected by a proceeding”. Finally, the court looked at the history and purposes of section 1109(b), noting that it was intended as a means to allow parties to protect themselves against the inherent power of the debtor's ownership in a Chapter 11 case. As such, the Court concluded that Congress intended the term “party in interest” to be interpreted broadly.
Turning specifically to insurers, the Court provided examples of the many ways a reorganization could affect an insurer's interest regardless of whether a plan could be deemed “insurance neutral”. With respect to Truck specifically, the Plan's channeling injunction released all current and future asbestos claims against the Debtors but did not do so for the insurers, who would remain liable in respect of such claims. As such, the Court opined that Truck as the insurer would have a financial interest in the Plan and therefore qualify as a party in interest. The Court noted that neither the Debtors nor the claimants who supported the Plan had an incentive to control Truck's liabilities, making Truck's participation necessary to protect its interest.
The Supreme Court rejected the “insurance neutrality” doctrine for purposes of determining standing as opposed to the substance of an objection. The Court held that the primary inquiry whether a party qualifies as a “party in interest” is “whether the reorganization proceedings might affect a prospective party, not how a particular reorganization actually affects that party.” Because the Plan could affect Truck's financial exposure, for example, by making Truck potentially liable for asbestos claims through the channeling injunction, the Court concluded that Truck had a right to be heard under §1109.
The Court made sure to note limitations to its ruling, emphasizing that a “party in interest” is not meant to include every entity that might be affected by a reorganization plan. However, the opinion did not delineate the outer limits of section 1109(b) standing for parties, but rather circumscribed it solely to insurers. Moreover, the Court was unconcerned about the potential impact of the ruling increasing derailments of Chapter 11 plan processes by “peripheral parties,” as there is a significant difference between being heard versus having a right to vote or veto a plan.
Because Truck had improperly been denied its right to object to the Plan, the Court reversed and remanded the matter to the Fourth Circuit.
Implications
The decision in Truck Insurance provides useful guidance on section 1109(b) standing that could affect the parties that debtors must take into account in the Chapter 11 plan process.
- Insurers with financial responsibility for liabilities of a debtor in a Chapter 11 case have standing to be heard on issues pertaining to a reorganization plan, even if the plan is apparently “insurance neutral” on its face.
- The Court's legal reasoning, and particularly its discussion of the broad scope of section 1109, could have further implications on which entities not specifically enumerated in section 1109(b) will have standing as parties in interest going forward, particularly parties that demonstrate potential financial exposure as a result of a plan.
- The Supreme Court's adoption of the reasoning of the U.S. Court of Appeals for the Third Circuit in another case that, for a plan that “allows a party to put its hands into other people's pockets, the ones with the pockets are entitled to be fully heard and to have their legitimate objections addressed” (citing In re Global Indus. Technologies, Inc., 645 F. 3d 201, 204, (CA3 2011)) is sure to be quoted by a wide variety of parties seeking to make their voices heard in bankruptcy. Courts will undoubtedly be asked to extend the boundaries for standing based on Truck Insurance over the next few years.
- For plans that involve insurers and other potentially financially exposed parties, it will be important for debtors to bring those parties into the fold earlier to avoid disruptive and costly litigation even if such debtors and their advisors had doubted the rights of such parties to be heard in such chapter 11 cases.
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