SCOTUS Rules that Insurers Have a Voice in Bankruptcy
On June 6, the United States Supreme Court decided Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., No. 22-1079, holding that insurers with financial responsibility for bankruptcy claims are “parties in interest” under 11 U.S.C. § 1109(b) that “may raise and may appear and be heard on any issue” in a Chapter 11 bankruptcy case.
Truck Insurance Exchange is the primary insurer for companies that manufactured and sold products containing asbestos. Two of those companies, Kaiser Gypsum Company, Inc., and Hanson Permanente Cement, Inc., (the debtors), filed for Chapter 11 bankruptcy, after facing thousands of asbestos-related lawsuits.
As part of the bankruptcy process, the debtors filed a proposed reorganization plan (plan), which created an Asbestos Personal Injury Trust (trust) for all present and future asbestos-related claims. The plan also sought to treat insured and uninsured claims differently.
Specifically, the plan provided that uninsured claims would be submitted directly to the trust for resolution. To reduce fraudulent and duplicative claims, claimants with uninsured claims were required to identify all related claims and file a release authorizing the trust to obtain documentation from other asbestos trusts about their submitted claims.
Conversely, the plan required insured claims to be filed in the tort system without the disclosure requirements applicable to uninsured claims. Under that arrangement, Truck Insurance would have been contractually obligated to defend each insured asbestos personal injury claim and indemnify the debtors for up to $500,000 per claim.
Truck Insurance challenged the plan under § 1109(b) of the Bankruptcy Code, which permits any “party in interest” to “raise” and “be heard on any issue” in a Chapter 11 bankruptcy. Truck Insurance argued that the plan altered its rights under the insurance policies. The district court and the court of appeals concluded that Truck Insurance was not a “party in interest” concerning approval of the plan because the plan was “insurance neutral”—i.e., it did not increase Truck Insurance’s pre-petition obligations or impair its contractual rights. The insurance neutrality doctrine has previously left most insurers out of the plan confirmation process, especially in large mass tort cases, unless the insurer could show that the plan somehow altered their pre-petition obligations under their policy.
The Supreme Court reversed and remanded, explaining that § 1109(b)’s text, context, and history confirmed that insurers with financial responsibility for bankruptcy claims are “parties in interest” because they may be directly and adversely impacted by reorganization plans. The Supreme Court explained that § 1109(b)’s text is capacious, providing an illustrative—but not exhaustive—list of parties in interest, and that Congress uses the phrase “party in interest” when it intends broad application. The Supreme Court further explained that the plain-text understanding of the terms “party” and “interest” aligned with Congress’ consistent action to promote greater participation in reorganization proceedings.
The Supreme Court then rejected the “insurance neutrality” doctrine, explaining that the doctrine is conceptually wrong because it conflates the merits of an objection (i.e., whether the bankruptcy plan alters the insurer’s contractual rights or “quantum of liability”) with the threshold party in interest inquiry (i.e., whether the insurer might be directly or adversely impacted by the reorganization plan). The Supreme Court emphasized that an opportunity to be heard is not the same thing as a vote or veto on the reorganization proceedings.
As plainly stated by the Supreme Court, providing insurers a voice in bankruptcy proceedings is consistent with the Bankruptcy Code’s purpose of promoting fair and equitable reorganization.
This ruling is a significant benefit for insurers seeking to protect their rights and potential exposure in large bankruptcy cases where claims are being channeled to a trust for resolution and the insurance proceeds are the primary source for funding recoveries on those claims. Going forward, insurers will no longer have to establish that plans change their pre-petition obligations to be heard in Chapter 11 proceedings, including with respect to reorganization plans. Instead, insurers will need to show only that they have financial responsibility for bankruptcy claims to participate in the reorganization process.
Please contact Rick Shelby, Kevin Welsh or any member of the Phelps Bankruptcy and Reorganization team if you have questions or need advice or guidance.
