Insurer deemed “party in interest” in insureds’ Chapter 11 case

The US Supreme Court ruled that an insurer with financial responsibility for bankruptcy claims is a “party in interest” under Bankruptcy Code §1109(b) that “may raise and may appear and be heard on any issue” in a Chapter 11 case.

Factual background

Petitioner Truck Insurance Exchange (“Truck”) is the primary insurer for companies that manufactured and sold products containing asbestos. Two of those companies, Kaiser Gypsum Co. and Hanson Permanente Cement (“Debtors”), filed for Chapter 11 bankruptcy after being faced with thousands of asbestos-related lawsuits.

Truck is contractually obligated to defend each covered asbestos personal injury claim and to indemnify the Debtors for up to $500,000 per claim. Debtors must pay a $5,000 deductible per claim and cooperate in the defense of the claims. The policies contained a per occurrence limit though they did not contain an aggregate limit.

During the bankruptcy proceedings, the Debtors filed a proposed reorganization plan (“Plan”) which creates an Asbestos Personal Injury Trust under 11 U.S.C. §524(g).[1] Of particular importance here, the Plan distinguishes between insured and uninsured claims. Insured claims are required to be filed in the tort system and Truck is required to defend those lawsuits. If a claimant obtains a favorable judgment, the Trust will pay the deductible and Truck will pay up to $500,000 per claim. By contrast, uninsured claims are submitted directly to the Trust for resolution. As part of that process, claimants are required to identify “all other [related] claims” and file a release authorizing the Trust to obtain documentation from other asbestos trusts regarding other submitted claims. These disclosures are intended to reduce fraudulent and duplicative claims.

Truck sought to oppose 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 argues that the Plan’s structure exposes it to fraudulent claims because it does not require the same disclosures and authorizations for insured claims as it does for uninsured claims. Truck also argues that the Plan alters its rights under its insurance policies “by relieving the Debtors of their assistance-and-cooperation obligations and by barring Truck from raising the Debtors’ bankruptcy conduct as a defense in future coverage disputes.”

Procedural history

Following the Bankruptcy Court’s recommendation, the District Court confirmed the Plan, concluding that Truck had limited standing to object because the Plan was “insurance neutral” in that it did not increase Truck’s prepetition obligations or impair its contractual rights under its policies. It simply restored Truck to its position prior to the Petition Date. The Fourth Circuit affirmed.

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).

US Supreme Court decision

Chapter 11 of the Bankruptcy Code allows a debtor reorganize its business under a court-approved plan which outlines the distribution of assets to creditors. Section 1109(b) of the Code addresses who can participate, and to what extent, in the reorganization proceedings:

“A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or an indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.”

The Supreme Court explained that this section provides an illustrative list of parties in interest though it is not meant to be comprehensive. The parties listed all have in common the fact that each may be directly affected by a reorganization plan, either because they have a financial interest in the estate’s assets or because they represent parties that do.

The plain meaning of the phrase “party in interest” refers to “entities that are potentially concerned with or affected by a proceeding.” Historically, Congress has consistently promoted greater participation in reorganization proceedings.

The Debtor and the claimants have no incentive to limit the post confirmation cost of defending and paying claims. This “realignment of the insured’s economic incentives…makes participation in the bankruptcy by insurers – who will ultimately be asked to foot the bill for most or all of those claims – critical.”

The Supreme Court held that insurers with financial responsibility for bankruptcy claims are parties in interest and have standing under Bankruptcy Code Section 1109(b) to challenge its insureds’ proposed reorganization plan, as an insurer may be directly and adversely affected by the plan. The Court went on to describe several ways in which a plan might affect an insurer’s interests: it can affect an insurer’s right to control settlement or defend claims; it can affect the insurer’s right to contribution from other carriers; it may violate debtor’s duty to cooperate and assist and it may promote fraudulent claims. The Brief for American Property Casualty Insurance Association et. al. offered the following scenario: “For example, a plan that purports to maintain an insurer’s coverage defenses could nonetheless allow claims at amounts far above their actual value and out of line with the claimants’ injuries or the payment of claims for which little to no proof of injury is required.”

The Court reasoned: “Where a proposed plan ‘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.’” The Court emphasized that Section 1109(b) “grants insurers neither a vote nor a veto; it simply provides them with a voice in the proceedings.” While the Court acknowledged that there may be instances that require courts to analyze whether certain “peripheral parties” have a direct interest sufficient enough to be heard, the Court said that this case is not one of them. The Court determined that “insurers such as Truck with financial responsibility for claims are not peripheral parties.”

Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., et al., No. 22-1079.

[1] Bankruptcy Code Section 524(g) was enacted to standardize the process for the resolution of asbestos claims. It addresses certain challenges that arise in the case of asbestos liability and in particular, the fact that the latency period for certain asbestos related diseases may be as long as 40 years, so a continuing stream of claims can be expected. Section 524(g) allows a debtor with substantial asbestos-related liability to establish and fund a trust that assumes the debtor’s liability for damages allegedly caused by the presence of, or exposure to, asbestos or asbestos-containing products. It then channels all present and future claims into the trust and implements certain safeguards to protect the interests of future claimants, ensure equal treatment for similar claims and obtain approval from at least 75% of current claimants.