In a rebuke of a common law doctrine that denied insurer standing in chapter 11, the U.S. Supreme Court ruled unanimously that insurers with financial responsibility for claims asserted in bankruptcy are parties in interest with standing to object to a plan.

TAKEAWAYS

• The Supreme Court found that the insurance neutrality doctrine, which historically denied insurer standing in chapter 11 if a plan did not impact an insurers’ policy rights, was too narrow in scope.
• The decision gives insurers the right to be heard, but it does not affect the merits of insurers’ positions on plan confirmation.

On June 6, 2024, in Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., the U.S. Supreme Court ruled unanimously that an insurer with financial responsibility for claims asserted in a bankruptcy has standing under the U.S. Bankruptcy Code to object to plan confirmation. The Supreme Court reversed a decision by the Fourth Circuit Court of Appeals denying an insurer standing based on the “insurance neutrality” doctrine but did not adopt the insurer’s position that the underlying insurance contract’s “duty to cooperate” triggered the insurer’s right to be heard in connection with the chapter 11 proceeding. Justice Sotomayor delivered the Supreme Court’s unanimous decision. Justice Alito did not take part in the decision.

Background
The Supreme Court’s decision concerns the chapter 11 bankruptcy of Kaiser Gypsum Company Inc. and its affiliate Hanson Permanente Cement Inc. (together, “Kaiser”). Kaiser filed for bankruptcy in 2016. At the time of filing, Kaiser was named as a defendant in approximately 14,000 asbestos-related lawsuits in state courts across the country.

Kaiser negotiated a largely consensual bankruptcy plan that establishes a trust under U.S. Bankruptcy Code section 524(g)—a provision of the Code that deals with asbestos-related liabilities. The trust is funded by a cash contribution from a Kaiser affiliate, a promissory note, and an assignment of Kaiser’s rights under commercial general liability insurance policies issued by Truck Insurance Exchange (“Truck”).

Some of the asbestos claims asserted against Kaiser were covered by the Truck policies, while others were not. Under the plan, the asbestos claims covered by the Truck policies proceeded in state courts against Kaiser “in name only” to permit collection of available insurance proceeds. Covered asbestos claims are subject to a $500,000 per-claim cap under the policies. Truck’s rights to defend itself from parties asserting coverage were fully preserved under the chapter 11 plan. Uncovered asbestos claims were channeled to the trust directly to be assessed under the claims resolution procedures.

At the center of the dispute over the reorganization plan were certain mandatory disclosures and authorizations required of claimants not covered by insurance, which were intended to limit payment only to legitimate claims. By contrast, no disclosures or authorizations were required of insured claimants under the plan.

Truck objected to the plan arguing that Kaiser breached its “duty to cooperate” under its insurance policy by failing to obtain certain protections against fraudulent or duplicative claims assertible against the policy. According to Truck, Kaiser’s contractual duty to cooperate and “assist in effecting settlements” required that Kaiser help Truck obtain these protections.

The Fourth Circuit disagreed with Truck, finding that the duty to cooperate applied only to “traditional litigation activities,” not chapter 11 plan negotiations. Because the plan did not violate Kaiser’s duty to cooperate or otherwise impact Truck’s rights and obligations, the Fourth Circuit found that Truck was not a “party in interest” and lacked standing to object to Kaiser’s plan under the “insurance neutrality” doctrine—a common law bankruptcy standing doctrine.

Under the “insurance neutrality” doctrine, insurers are barred from interjecting in chapter 11 plan proceedings. A plan is “insurance neutral” if it does not “increase the insurer’s pre-petition obligations or impair the insurer’s pre-petition policy rights.” If an insurers’ rights and obligations were unimpacted in an insurance neutral plan, then insurers lack standing to object, except to dispute whether a plan was insurance neutral.

Truck appealed the Fourth Circuit’s decision to the U.S. Supreme Court, seeking to resolve a split in authority between the Fourth and Seventh Circuits (which deny insurer standing based on the insurance neutrality doctrine) and the Third Circuit (which allows insurer standing). The Supreme Court granted Truck’s petition for certiorari on October 13, 2023.

Decision
The Supreme Court reversed the Fourth Circuit’s decision based on its interpretation of section 1109(b)—a provision in the U.S. Bankruptcy Code concerning standing in chapter 11. Section 1109(b) provides that a “party in interest … may raise and may appear and be heard on any issue” in a chapter 11 case. 11 U.S.C. § 1109(b).

The Supreme Court interpreted section 1109(b) broadly based on the plain meaning of its text and the context and history of the text and bankruptcy law. It found that by using the words “party” and “interest,” the statute was intended to cover entities that are “potentially concerned with, or affected by, a proceeding.” The historical context and purpose of both section 1109 and federal bankruptcy law supported greater participation in reorganization proceedings and a broad interpretation of section 1109(b).

Further, the Supreme Court found that plans of reorganization impact an insurer with financial responsibility in “myriad ways.” According to the Supreme Court, for example, a plan can impair an insurer’s contractual right to control settlement or defend claims, abrogate its ability to seek contribution from other insurance carriers, or permit collusion and/or fraudulent claims.

The Supreme Court also found that the Court of Appeals erred when it evaluated only whether the plan “altered Truck’s contract rights or its ‘quantum of liability’” under the insurance neutrality doctrine. According to the Supreme Court, this evaluation conflated the merits of the objection (i.e., whether the failure to obtain the mandatory disclosures breached the policy’s duty to cooperate) with the threshold party in interest inquiry. According to the Supreme Court, by focusing only on whether the plan impacted pre-bankruptcy obligations and rights under the policy, the insurance neutrality doctrine was too narrow in scope and ignored other ways a plan “can alter and impose obligations on insurers.”

Conclusion
The Supreme Court’s decision will now permit insurers to participate in chapter 11 plan proceedings irrespective of whether a bankruptcy plan impacts the insurer’s rights under its policies. Curiously, none of the Court’s perceived reasons for providing insurers with the ability to interject themselves into insureds’ bankruptcy proceedings to raise coverage defenses or challenge fraudulent claims appears necessary, as those rights are not precluded or otherwise cut off by virtue of the chapter 11 plan. Whether this ruling will have a material impact on chapter 11 proceedings, however, remains to be seen. While the decision will give insurers the right to be heard, it does not affect the merits of their objections.

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