(Article from Insurance Law Alert, June 2024)
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Holding
In a unanimous opinion, the United States Supreme Court ruled that an insurer can intervene in a Chapter 11 bankruptcy proceeding of manufacturers subject to asbestos claims, finding that the insurer has standing as a “party in interest” under federal bankruptcy law. Truck Ins. Exch. v. Kaiser Gypsum Co., 2024 U.S. LEXIS 2483 (U.S. June 6, 2024).
Background
Kaiser Gypsum and its parent company, Hanson Permanente Cement, manufactured and sold products containing asbestos. Faced with thousands of lawsuits, both companies filed for Chapter 11 bankruptcy. A proposed reorganization plan created a trust that was funded by the Debtors and assumed the Debtors’ liabilities. The Plan also transferred all of the Debtors’ rights under insurance policies to the trust. Truck Insurance was the Debtors’ primary insurer for two decades.
The Plan treated insured and uninsured claims differently. Insured claims were to be filed in court, with Truck Insurance defending such claims and paying up to $500,000 per claim for any favorable judgments obtained by claimants. In contrast, uninsured claims were to be submitted directly to the trust, subject to specific requirements aimed at reducing fraudulent or duplicative claims, such as the identification of other related claims and signed releases authorizing the trust to obtain documentation from other asbestos trusts.
Truck Insurance objected to the Plan, arguing that it was not proposed in good faith because it did not require the aforementioned disclosures and authorizations for insured claims, among other things.
A district court confirmed the Plan, concluding that Truck Insurance had limited standing to object to the Plan because it was “insurance neutral.” The Fourth Circuit affirmed, ruling that Truck Insurance was not a “party in interest” under §1109(b) of the Bankruptcy Code because the Plan did not increase Truck Insurance’s pre-petition obligations or impair its pre-petition rights under the insurance policies. The United States Supreme Court reversed.
Decision
The Supreme Court ruled that Truck Insurance was a “party in interest” because it had financial responsibility for bankruptcy claims and might be “directly and adversely” affected by the Plan. The Court noted myriad ways in which a bankruptcy plan might abrogate an insurer’s contractual rights, such as the right to control settlement or seek contribution from other insurers.
With respect to the Plan at issue, the Court ruled that Truck Insurance had a financial interest in preventing millions of dollars in fraudulent tort claims for which it would be responsible, based on the lack of adequate disclosure requirements. Further, the Court emphasized that Truck Insurance was the only entity with an incentive to “limit the post-confirmation cost of defending or paying claims.”
As the Court observed, an expansive reading of “party in interest” comports with the purpose of §1109(b)—to ensure an equitable reorganization process that does not unfairly benefit the debtor.
Comments
The Court expressly rejected the Fourth Circuit’s application of the “insurance neutrality” doctrine, which focuses on whether a bankruptcy plan increases the insurer’s pre-petition obligations or impairs its pre-petition rights. The Court explained:
Conceptually, the insurance neutrality doctrine conflates the merits of an objection with the threshold party in interest inquiry. The §1109(b) inquiry asks whether the reorganization proceedings might affect a prospective party, not how a particular reorganization plan actually affects that party. . . . Practically, the insurance neutrality doctrine is too limited in its scope. It zooms in on the insurer’s prepetition obligations and policy rights. That wrongly ignores all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers.