Key Takeaways

• The United States Supreme Court considered whether an insurer was a party in interest under the Bankruptcy Code for purposes of objecting to a reorganization plan involving a manufacturer’s bankruptcy proceedings arising out of numerous asbestos claims

• The Court ruled that an insurer with financial responsibility for bankruptcy claims is sufficiently affected by the proceedings to be a party in interest and can raise objections to a reorganization plan

• Therefore, insurers who are impacted by a reorganization plan under Chapter 11 of the Bankruptcy Code may participate in the bankruptcy proceedings as a party in interest and comment and object to reorganization plans that affect their interests

Companies faced with numerous mass tort claims, such as asbestos claims, often seek bankruptcy protection. Reorganization plans may include § 524(g) channeling injunctions in which insurance assets are put into a trust to pay tort claimants. Although insurers are routinely involved in negotiating these reorganization plans, a question arose as to whether an insurer had standing to object to such a plan under § 1109(b) of the Bankruptcy Code. The U.S. Supreme Court held on June 6, 2024 in Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., et al. that an insurer is a party in interest under the Bankruptcy Code.

The Facts of the Case and Procedural History

Kaiser Gypsum Co. manufactured and sold asbestos containing products and faced tens of thousands of asbestos related lawsuits. Kaiser filed for Chapter 11 bankruptcy and as part of a reorganization plan proposed an Asbestos Trust under 11 U.S.C. § 524(g). Under that provision, debtors may fund a trust and present and future asbestos claims are all channeled into the trust. The plan transferred all of Kaiser’s rights under their insurance policies to the Trust. Eventually, Kaiser, all of the claimants, and other creditors agreed to the plan, including all of its insurers, other than Truck Insurance Exchange.

Truck was Kaiser’s primary insurer from 1965 to 1983. Truck objected to the plan for three reasons. First, Truck argued that the plan was not proposed in good faith and was a collusive agreement between the debtor and the claimant representatives as it did not require “the same disclosures and authorizations” for insured and uninsured claims. Truck argued that this would expose it to fraudulent claims. Second, the plan altered its rights under the policies, including under the assistance and cooperation clause. Third, the plan did not comply with § 524(g), including that it did not “deal equitably with claims and future demands.”

The District Court followed the Bankruptcy Court’s recommendation and confirmed the plan. The court concluded that Truck had limited standing to object solely on the basis that Truck believed the plan was not insurance neutral. The court further found that the plan was, in fact, insurance neutral because it did not impair or increase Truck’s obligations. The Fourth Circuit agreed that Truck was not a “party in interest” under § 1109(b) because the plan was insurance neutral. 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).”

The Holding

The Supreme Court found that an insurer “with financial responsibility for a bankruptcy claim is a ‘party in in interest’ because it may be directly and adversely affected by the reorganization plan.” The court stated that § 1109(b), permitting any party in interest to be heard, was broad in its application of who is a party in interest. Anyone with a direct financial interest should have an opportunity to be heard if it affects their interests. The Bankruptcy Code is designed to prevent reorganization plans that “will simply turn out to be too good a deal for the debtor’s owners.”

As to the insurance neutrality doctrine, the court found it to be conceptually wrong and that it made little practical sense. The court explained that how the plan affects the insurer’s obligations is not the question. The fact that the insurer’s financial exposure is affected is enough to give the insurer the right to voice its objection.

Advice to Insurers 

The Supreme Court has made it clear that an insurer has an interest in bankruptcy proceedings that affect its financial interests. While insurers are routinely involved in such proceedings arising out of mass tort situations, the Supreme Court’s decision compels insureds, claimants and the bankruptcy court to address an insurer’s concerns about any reorganization plan that affects its interests. In particular, the court observed that a “Bankruptcy Reorganization Plan can affect an insurer’s interests in myriad ways” and went on to provide these examples that insurers may wish to cite in opposing a reorganization plan:

• A reorganization plan can impair an insurer’s contractual right to control settlement or defend claims.
• A plan can abrogate an insurer’s right to contribution from other insurance carriers.
• A plan may be collusive (as alleged by Truck), in violation of the duty of the debtor/insured to cooperate and assist in the defense of claims.
• A plan may impair the insurer’s financial interests by inviting fraudulent claims.