Law Review (Note): Daniels, Haley- Insurers Have Standing to Object to Reorganization Plans

Available at:   https://scholarship.law.stjohns.edu/bankruptcy_research_library/372/

Abstract:

Section 1109 of title 11 of the United States Code (the "Bankruptcy Code") allows any "party in interest" to raise, appear, and be heard on any issue in a chapter 11 bankruptcy case. The term party in interest is not otherwise defined in the Bankruptcy Code. The United States Supreme Court has interpreted the phrase to describe a party that has a sufficient stake in the outcome of the bankruptcy reorganization. Importantly, Section 1128(b) of the Bankruptcy Code explicitly provides that a party in interest "may object to confirmation of a plan" in a chapter 11 case.

The United States Supreme Court has held that an insurer with a significant financial stake is a party in interest with the right to object to a proposed chapter 11 reorganization plan. The significance of the insurers’ financial stake and thus bankruptcy standing to object to the plan are usually dependent on if the reorganization plan is defined as "insurance neutral." A plan is insurance neutral if it does not increase the reorganizing debtor’s insurance provider’s financial obligations or risks. If a reorganization plan is insurance neutral, an insurer will not have bankruptcy standing; if it is not insurance neutral, the insurer will have bankruptcy standing.

This article analyzes why insurers, in chapter 11 bankruptcy cases, have standing under the Bankruptcy Code as parties in interest, allowing for their objections to the confirmation of a chapter 11 debtor’s plan. Part I will describe the traditional understanding of a legal party in interest. Part II will discuss the decision In re Thorpe Insulation Co., highlighting the facts, reasoning and holding of what becomes almost a precursor to the holding in Truck Ins. Exch., combining the previous definitions of a party in interest as well as an introduction to insurance neutral plans with asbestos liability claims specifically. Part III then explains Section 524(g) trusts created in response to asbestos liability claims, and finds, using case law, that in these specific cases, it is rare that insurers will be found lack standing. Next, in Part IV, the article will move to a detailed discussion of the analysis of Truck Ins. Exch. alone, providing an overview of the facts of the case, the influences for the Court’s analysis in defining Section 1109(b), and the logic behind the conclusion that the insurers had standing. Finally, the article will conclude in Section V with a summary of the modern case law analyzed in the article, and a concise rule of law as it relates to the specific issues considered in the other sections.

Commentary:

The lesson from Truck Ins. Exch. is that “insurance neutrality” is the dividing line. In the consumer Chapter 13 context, most insurance issues—like routine continuation of coverage—are neutral and give the insurer no real stake in the case. But when the bankruptcy plan or orders dictate how claim proceeds are used, release the debtor’s liability in ways that impair the insurer’s defenses, or alter the timing or manner of payments, insurers could be treated as parties in interest with standing to object. That said, in consumer cases, courts tend to be cautious about opening the door to every tangentially interested insurer, so a clear showing of direct, non-incidental financial impact would be needed to avoid having such objections dismissed as beyond the scope of § 1324.  

Chapter 13 does not have § 1109(b)’s broad party-in-interest language (it instead using  a mishmash of "creditors" and  and without a listing of potential types of "parties in interest" under § 1324 and § 1302/§ 1307 for who may object), but courts often borrow standing principles across chapters when interpreting “party in interest” in § 1324(a). The Truck Ins. Exch. rationale could allow various insurers—life, health, auto, homeowners—to participate in a Chapter 13 if the plan, motions, or adversary proceedings materially alter their obligations.
Examples could include:

• Car insurers if the plan proposes to treat a pending total-loss claim in a way that affects subrogation rights or the insurer’s payout obligations.

• Homeowners’ insurers if a motion to approve repairs or settle claims from a property loss affects lien priorities or distribution of insurance proceeds.

• Health insurers if the plan addresses pending personal injury claims in which the insurer has a contractual reimbursement/subrogation right.

• Life insurers in rare cases where a policy’s cash surrender value is pledged or surrendered as part of the plan, directly impacting policy obligations.

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