Kaiser Gypsum Company Inc. and Hanson Permanente Cement, Inc. (collectively, the “Debtors”), manufacturers of asbestos-containing cement products, filed for chapter 11 bankruptcy on September 30, 2016 (“Petition Date”) in the United States Bankruptcy Court for the District of Western District of North Carolina (“Bankruptcy Court”) after being named in more than 38,000 asbestos-related lawsuits since 1978 and facing approximately 14,000 pending lawsuits as of the Petition Date. To address the asbestos-related claims, the Debtors’ Plan established a § 524(g) Asbestos Personal Injury Trust (“Trust”), which was funded by $50 million. Truck Insurance Exchange (“Truck”), the primary insurer, was required to defend each asbestos personal injury claim and indemnify the Debtors up to $500,000 per claim (less the Debtors’ deductible) in accordance with its insurance policies. Truck was the only party to oppose the Debtors’ Plan claiming that it exposed Truck to millions of dollars in fraudulent claims because the Plan did not contain the same disclosure and authorizations requirements for insured and uninsured claims. Additionally, Truck alleged that the Plan altered its rights under its insurance policies, thus the Plan was not insurance neutral in violation of § 1129(a)(3), and the Plan did not comply with provisions of § 524(g).
Following the Bankruptcy Court’s recommendation, the Debtors’ Plan was confirmed on August 12, 2021 by the United States District Court, Western District of North Carolina, over Truck’s objection. Truck then filed an appeal with the Fourt Circuit. The District Court ruled that Truck had limited standing to object because the Plan was “insurance neutral,” meaning that the Plan did not increase Truck’s pre-petition obligations, nor did it impair Truck’s contractual rights under the insurance policies. The Fourth Circuit affirmed, and the Supreme Court granted certiorari.
In an 8-0 unanimous decision (with Justice Alito recused), the Supreme Court held that Truck, an insurer with financial responsibility for bankruptcy claims, qualifies as a “party in interest” under § 1109(b). The Supreme Court reasoned that Truck has standing to oppose the Debtors’ Plan because it may be directly and adversely affected by the proposed reorganization and structure of the Trust. Specifically, Truck would have to pay for a majority of the personal injury claims, and the channeling injunction would further insulate the Debtors from any financial responsibility as it permanently and forever stays, restrains and enjoins any action against Debtors. “That potential financial harm—attributable to Truck’s status as an insurer with financial responsibility for bankruptcy claims—gives Truck an interest in bankruptcy proceedings and whatever reorganization plan is proposed and eventually adopted.”
In rendering its decision, the Supreme Court determined that the “insurance neutrality” doctrine is “conceptually wrong and makes little practical sense.” The Supreme Court stated that the insurance neutrality doctrine conflates the merits of the objection and the threshold standing issue, i.e., whether a person or entity is a party in interest under § 1109. The Supreme Court further opined that the insurance neutrality doctrine is too limited in its scope because it merely focuses on the insurer’s pre-petition obligations and does not take into consideration how a bankruptcy proceeding and reorganization alters or imposes obligations on the insurers.
The Supreme Court cautioned that its decision “does not opine on the out bounds of § 1109” and “a party in interest is not intended to include literally every conceivable entity that may be in-volved in or affected by the chapter 11 proceedings.” (Internal quotation and citation omitted). “Courts must determine on a case-by-case basis whether a prospective party has a sufficient stake in reorganization proceedings to be a party in interest.” The Supreme Court did not opine on the merits of Truck’s Plan objections and remanded the case for further proceedings.
While the Supreme Court did not “opine on the out bounds of § 1109,” the Supreme Court’s decision in Truck Insurance Exchange v. Kaiser Gypsum Co. Inc. confirms that insurers in mass tort bankruptcies (such as opioid, Boys Scouts, and dioceses bankruptcy cases) are “parties in interest” under § 1109, and virtually eliminates the debtors’ reliance on the “insurance neutrality” doctrine in these instances. In confirming a chapter 11 plan where an insurer is responsible for paying settlement funds, debtors, committees, and other major constituents will now likely face additional challenges and scrutiny from insurers, who have the power to, among other things, raise objections to the plan, delay emergence by continued litigation, increase administrative expenses, and force unfavorable settlements between the debtors and creditors/claimants. The Supreme Court’s decision will have implications in chapter 11 bankruptcies involving mass tort claims as insurers will likely push for a larger seat at the table. Ramifications of the Supreme Court’s decision will be seen in the near future as mass tort bankruptcies continue to be litigated.
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