US Supreme Court Holds Insurer With Financial Interest In Bankruptcy Has Right To Be Heard On Any Issue

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On June 6, 2024, the United States Supreme Court, in Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., No. 22-1079, unanimously held that an insurer with financial responsibility ...
United States Insolvency/Bankruptcy/Re-Structuring
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On June 6, 2024, the United States Supreme Court, in Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., No. 22-1079, unanimously held that an insurer with financial responsibility for bankruptcy claims is a "party in interest" in a Chapter 11 bankruptcy. The Court held the "insurance neutrality doctrine" applied by the courts below was too limited to determine insurer standing. While "insurance neutrality" – preserving insurer rights and defenses under insurance contracts – is important, the doctrine overlooks the myriad ways bankruptcy proceedings and reorganization plans can alter and impair insurer interests.

Justice Sotomayor delivered the opinion of the Court, in which all other members joined except Justice Alito, who did not participate in the consideration or decision of the case. In reaching its decision, the Court relied on an amicus brief Crowell filed on behalf of clients American Property Casualty Insurance Association ("APCIA") and Complex Insurance Claims Litigation Association ("CICLA").

Truck Insurance Exchange ("Truck") is the primary insurer for Kaiser Gypsum Co. ("Kaiser"), which manufactured and sold asbestos products for years. Facing tens of thousands of asbestos-related lawsuits, Kaiser and its parent company Hanson Permanente Cement, Inc. ("Debtors") filed for Chapter 11 bankruptcy to resolve their liabilities. The Debtors, representatives for current and future asbestos claimants, various creditors and government agencies, and certain insurers (other than Truck) agreed on a proposed reorganization plan ("the Plan"). Truck opposed the Plan, arguing the Plan was a collusive agreement between the Debtors and claimant representatives, exposed it to millions of dollars in fraudulent claims because it did not require the same disclosures and authorizations for insured and uninsured claims, and would alter Truck's rights under the insurance policies.

The District Court confirmed the Plan. Relying on the "insurance neutrality" doctrine, it held Truck was not a party in interest under 11 U.S.C. § 1109(b) and lacked standing to object because the Plan "neither increase[d] Truck's obligations nor impair[ed] its prepetition contractual rights under the Policies." The Fourth Circuit affirmed, adopting the same analysis. The Supreme Court granted certiorari and reversed.

The Supreme Court concluded that the text, context and history of Section 1109(b) confirms that an insurer with financial responsibility for a bankruptcy claim is a "party in interest" because it may be directly and adversely affected by the reorganization plan. The Court reasoned that Congress uses the phrase "party in interest" to apply broadly, and that the purpose of Section 1109(b) is to promote a fair and equitable reorganization process.

Citing the APCIA/CICLA amicus brief, the Court observed that bankruptcy reorganization proceedings can affect an insurer's interests in many ways. It noted a reorganization plan can impair an insurer's contractual right to control settlement or defend claims, abrogate an insurer's ability to obtain contribution from other insurance companies, or may be collusive, in violation of a debtor's duty to cooperate and assist, and impair an insurer's financial interest by inviting fraudulent claims.

The Court further observed that, here, neither Claimants, nor the Debtors, whose liability is extinguished by the Plan, had incentive to limit the post-confirmation cost of defending or paying claims, making the Debtors' insurer potentially the only entity with an incentive to identify problems with the Plan. The Court quoted the APCIA/CICLA brief: "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 Court went on to expressly reject the "insurance neutrality doctrine" as "too limited," "conceptually wrong" and making "little practical sense." The doctrine conflates the merits of an objection with the threshold question under Section 1109(b) of whether the insurer is a "party in interest." It focuses only on the insurer's prepetition obligations and policy rights, and ignores the many other ways in which bankruptcy proceedings and reorganization plans can harm insurers' interests.

Finally, the Court rejected the Debtors' concerns that a broad reading of "party in interest" would allow "peripheral parties" to derail a reorganization, noting that Section 1109(b) provides parties an opportunity to be heard – not a vote or veto in the proceedings. In rejecting the Debtors' "parade of horribles" argument, the Court emphasized that insurers with financial responsibility for claims are not "peripheral parties."

A Crowell & Moring legal team, led by Laura A. Foggan, filed the amicus brief for American Property Casualty Insurance Association and the Complex Insurance Claims Litigation Association.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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