US Supreme Court Allows Broad Right to Be Heard in Bankruptcy

The US Supreme Court, by restoring insurers’ rights to participate in a bankruptcy proceeding, endorsed a view of the Chapter 11 system that welcomes a wide range of interests in a restructuring.

In Truck Insurance Exchange v. Kaiser Gypsum Co. Inc., the Supreme Court on Thursday held in an 8-0 decision that Truck, on the hook to pay out significant insurance liability for asbestos-related claims, could challenge Kaiser Gypsum’s bankruptcy plan. The insurer’s significant financial responsibility to cover Kaiser Gypsum’s asbestos liability makes it a “party in interest” under the US Bankruptcy Code, the court held.

“The court’s opinion emphasizes the broader participation that’s intended in the reorganization process, and it reads specifically the ‘party in interest’ definition to be expansive,” said Matthew Madden, deputy chair of Kramer Levin Naftalis & Frankel LLP’s Supreme Court and appellate litigation practice.

The justices rejected the US Court of Appeals for the Fourth Circuit’s finding that an insurer can object to a bankruptcy plan only if that plan alters its obligations or responsibilities. In doing so, the high court ensured that bankrupt entities relying on insurance policies to cover personal injury litigation—from Catholic dioceses facing sex abuse claims to companies mired in litigation over asbestos-containing products—must factor in the financial impact their settlements could have on their insurers.

If the court had sided with Kaiser Gypsum and determined that Truck didn’t have standing, it would have upended what some attorneys said was a widespread view of whose voice can be heard in a company’s bankruptcy proceeding.

“Broad participation promotes a fair and equitable reorganization process,” Justice Sonia Sotomayor wrote for the high court. Justice Samuel Alito didn’t participate in the case.

The US Bankruptcy Court for the Western District of North Carolina approved wallboard manufacturer Kaiser Gypsum’s bankruptcy plan in 2021. The plan requires Truck to cover many of the roughly 14,000 insured claims Kaiser faced at up to $500,000 per claim. Truck had sought to object to the plan, saying it didn’t include measures to weed out fraudulent claims. The case will now be revisited in the lower courts.

Neither Kaiser Gypsum nor its creditors had an incentive to weed out fraudulent claims, leaving Truck as the only party to object to what it said were lax anti-fraud measures, the court said. Attorneys said the ruling will better position insurers to keep out bad claims in future bankruptcies.

Interpreting a Broad Statute

The statute at interest in the Truck case, section 1109(b) of the bankruptcy code, defines a “party in interest.” Those parties can move to appoint trustees, object to plans, and in some cases file their own plans for a debtor.

The Fourth Circuit last year ruled that Truck couldn’t challenge Kaiser’s plan because the plan didn’t change the insurer’s rights or responsibilities.

But the Supreme Court on Thursday said the “party in interest” standard should be applied broadly.

“Congress consistently has acted to promote greater participation in reorganization proceedings,” the court held.

The ruling is a return to how many in the bankruptcy world interpreted 1109(b) before the Fourth Circuit took a narrower view of the statute’s application, Emory University bankruptcy professor Lindsey Simon said.

“The Fourth Circuit really altered what I think most people in the industry understood about who has the right to be heard,” Simon said.

The court rejected Kaiser’s arguments that allowing insurers standing would open the floodgates to more outside parties looking to advance their own interests through another entity’s bankruptcy. Future cases may have to determine what kind of party is on the periphery, but that wasn’t necessary for Truck. The insurer’s financial responsibility clearly makes it a party in interest, the court said.

Christopher Hampson, a bankruptcy professor at the University of Florida Levin College of Law, said he teaches his students that the “party in interest” statute is “incredibly broad.”

“The Supreme Court did not today articulate an outer limit to it,” Hampson said.

Insurers Claim Victory

Insurance attorneys said the ruling gives them more leverage and could incentivize debtors and creditors to bring insurers into bankruptcy negotiations sooner.

“It does change the dynamic,” Tancred Schiavoni, co-chair of O’Melveny & Myers’ insurance practice, said.

Insurers have had to constantly fight to be heard by bankruptcy judges, meaning a 20-page motion can include seven pages devoted entirely to standing, he said.

It could be beneficial to have insurers involved in a bankruptcy sooner, which would allow a debtor to avoid late objections and the lengthy appeals process Truck and Kaiser just endured, Schiavoni said.

“Yeah, you’re going to deal with insurers earlier on, but maybe you reach the actual result sooner,” he said.

With a louder voice, insurers could push for the kind of protections against potentially fraudulent personal injury claims Truck wanted in Kaiser’s bankruptcy plan. Truck argued that Kaiser colluded with plaintiffs to propel a plan that vetted uninsured claims but didn’t vet insured claims.

That meant Truck could be on the hook to pay out bad claims, it argued.

Insurers have raised concerns about fraudulent claims in many mass tort bankruptcies of late, notably in the Boy Scouts of America’s 2020 case, where carriers banded together to push for tougher rules to ferret out potentially fraudulent survivor claims.

Cases with the lowest levels of anti-fraud measures could see the earliest impact from the ruling, Schiavoni said.

“These cases where anything gets approved, that stuff will start to fall aside right away,” he said.

Simon, at Emory, rejected the idea that insurers were being left out in bankruptcy negotiations. Insurers often have to weigh in on settlement and trust procedures, she said.

“Insurers are already involved in the process, so this opinion does little more than keep their seat at the table open,” she said.

Truck Exchange is represented by Gibson, Dunn & Crutcher LLP. Kaiser Gypsum is represented by Jones Day.

The case is Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., U.S., No. 22-1079, 6/6/24.