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Supreme Court Receptive To Allowing a Debtor’s Insurer To Weigh in on Proposed Chapter 11 Reorganization Plans


By Julie B. Teicher

The Bankruptcy Code provides that any “party in interest” in a Chapter 11 proceeding “may raise and may appear and be heard on any issue” in the case. Reading the tea leaves from recent oral arguments before the U.S. Supreme Court, such parties may include a debtor’s insurer when a reorganization plan provides for the settlement of mass tort claims. 

Depending on the nature and scope of the Court’s ultimate decision in Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., debtors, trustees, and creditors may face more vocal participation and objections by insurers to part or all of a proposed reorganization, especially in bankruptcies involving large numbers of mass tort victims and insurance-funded settlements.

The case before the Court involves a plan that included a settlement creating a $50 million trust for people suing the debtor Kaiser Gypsum for cancer-causing asbestos exposure. Kaiser’s insurance policies would primarily fund the trust, including one issued by Truck. Truck objected to the proposed settlement because it lacked provisions Truck believed would help identify fraudulent claims and reduce its potential liability.

Both the trial and appellate courts had ruled that Truck’s objection could not block the reorganization plan because the settlement did not alter any of its rights under the policies it issued to Kaiser. But Chief Justice John Roberts, along with Justices Amy Coney Barrett, Neal Gorsuch, Elena Kagan, Brett Kavanaugh, and Sonia Sotomayor, all expressed skepticism about Kaiser’s objections to Truck’s ability to weigh in on the plan.  

Specifically, they noted the distinction between the right to vote on or object to a plan and the right “to be heard” about the wisdom or propriety of such a plan. As Justice Gorsuch noted, “They may not have a vote, but they can be heard on any issue.”

Similarly, Justice Kavanaugh said it was “just common sense that an insurer … is going to have an interest in this.” Echoing this sentiment when addressing Kaiser’s attorney, Justice Kagan said, “What I think everybody is saying to you is, well, they do have an interest in these anti-fraud provisions. Not just a concern, they have an interest, a material interest.”

Kaiser’s attorney argued that Truck should not be allowed to intervene because the plan included the debtor’s promise to fully comply with the policy’s terms, including paying all deductibles, thus protecting the insurer from any harm. Kagan responded, “I don’t know why that should be the test. If I look at the language, that’s not the test. … If I think about the ordinary meaning of being a ‘party’ who’s ‘interest[ed],’ that’s not the test.”

A decision in the case will be forthcoming in the next several months, and we will provide an update accordingly. In the interim, if you have any questions or would like to discuss the possible implications of this matter, please contact one of Maddin Hauser’s experienced bankruptcy, restructuring, and debtor-creditor rights attorneys.