Summary:
Truck Insurance Exchange, the primary insurer for companies facing asbestos-related lawsuits, objected to the reorganization plan proposed by Kaiser Gypsum Co. and Hanson Permanente Cement, which had filed for Chapter 11 bankruptcy. The plan created an Asbestos Personal Injury Trust under 11 U.S.C. §524(g) to handle all asbestos-related claims. Truck, responsible for defending and indemnifying up to $500,000 per claim, argued that the plan exposed it to fraudulent claims due to inadequate disclosure requirements for insured claims.
The District Court confirmed the plan, deeming it "insurance neutral" and finding Truck had limited standing to object as it was not a party in interest. The Fourth Circuit affirmed, holding that Truck was not a party in interest because under the Doctrine of Insurance Neutrality the plan did not alter its prepetition obligations. The Supreme Court reversed the Fourth Circuit, holding that an insurer with financial responsibility for bankruptcy claims is a party in interest under §1109(b) and may be heard on any issue in Chapter 11 proceedings.
The Supreme Court gave a very broad Definition of a party in interest, including any entities potentially concerned with or affected by the reorganization proceedings, not limited to those whose pre-petition obligations are altered, citing the 3rd Circuit in holding that:
Where a proposed plan “allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully heard and to have their legitimate objections addressed.” In re Global Indus. Technologies, Inc., 645 F. 3d 201, 204 (CA3 2011).
This included insurers like Truck, who bear significant financial responsibility for claims, and have a direct interest in the reorganization process. The Court criticized the Doctrine of Insurance Neutrality for conflating the merits of an objection with the threshold inquiry of party in interest status, holding that being a party in interest grants allows insurers to voice objections but does not grant them a vote or veto in the proceedings.
Commentary:
The allowance in 11 U.S.C. §1109(b) of a party in interest "may raise and may appear and be heard on any issue" (emphasis added) in a Chapter 11 case, with the more limited allowance in 11 U.S.C. §1324(a) that a party in interest "may object to confirmation of the plan" in Chapter 13. Similarly, under §1307(c) a Chapter 13 case can be converted or dismissed "on request of a party in interest". Elsewhere, however, pursuant to §1329(a), only "the debtor, the trustee or holder of an allowed unsecured claim" can seek a modification of a confirmed plan. Narrower than the party in interest, that would exclude secured creditors, the U.S. Trustee, or more hypothetical or attenuated parties, such as Truck Insurance Service.
This might, however, mean that homeowner, car or other insurers for consumers have the right to object to Chapter 13 cases, requiring that they be notified of the bankruptcy filing and served with the proposed plan. I'm sure GEICO will be ecstatic about the flood of these pleadings.
As is usual for bankruptcy matters from the Supreme Court, this was a unanimous opinion, with the exception of Justice Alito who recused himself, probably because his wife's flags are made out of asbestos in order to keep them from being burned by their unpatriotic neighbors.
To read a copy of the transcript, please see:
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