By Sarah Hertz Maisel, Alyssa Vranak and Jacob Baron
Truck Insurance Exchange v. Kaiser Gypsum Company, Inc.
The Truck Decision
On June 6, 2024, the U.S. Supreme Court issued its decision in Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., et al., No. 22-1079, holding that an insurer with financial responsibility for a bankruptcy claim qualifies as a “party in interest” under 11 U.S.C. § 1109(b). Section 1109(b) of the Bankruptcy Code addresses which stakeholders can participate in reorganization proceedings.
Petitioner Truck Insurance Exchange (“Truck”) insured companies that manufactured and sold products containing asbestos, two of which, namely Kaiser Gypsum Co. and Hanson Permanente Cement, Inc. (the “Debtors”), filed for Chapter 11 bankruptcy following the filing of thousands of asbestos-related lawsuits. The Debtors filed a proposed reorganization plan as a part of the bankruptcy process which created an Asbestos Personal Injury Trust for present and future asbestos-related claims (the “Plan”). Under the Plan, Truck would have been contractually obligated to defend all covered asbestos personal injury claims and indemnify the Debtors for up to $500,000 per claim.
Truck challenged the Plan under Section 1109(b) of the Bankruptcy Code, which permits any “party in interest” to “raise” and “be heard on any issue” in a Chapter 11 bankruptcy. Truck argued that the Plan exposed it to millions of dollars in fraudulent claims resulting from different disclosure and authorization requirements of insured and uninsured claims. Specifically, Truck sought to challenge the Plan’s application of anti-fraud provisions to uninsured claims. Truck argued that its liability was inflated without the inclusion of anti-fraud provisions for uninsured asbestos claims. Truck also argued that the Plan altered its rights under the insurance policies. The District Court confirmed the Plan, concluding, among other things, that Truck had limited standing to object to the Plan because the Plan was “insurance neutral,” i.e. it did not increase Truck’s prepetition obligations or impair its contractual rights under the policies. The Fourth Circuit affirmed, agreeing that Truck was not a “party in interest” under Section 1109(b) because the Plan was “insurance neutral.” Accordingly, the lower courts concluded that Truck had limited standing to object to the Plan.
The Supreme Court reversed and remanded, holding that an insurer with financial responsibility for bankruptcy claims is a “party in interest” under Section 1109(b) that “may raise and may appear and be heard on any issue” in a Chapter 11 case. The Court clarified that insurers, like Truck, with financial responsibility for bankruptcy claims are “parties in interest” because they have the potential to be directly and adversely impacted by reorganization plans. In its analysis, the Court focused on Section 1109(b)’s text, context and history to reach its conclusion. The Court explained that Section 1109(b)’s text provides an illustrative, but not exhaustive, list of “parties in interest,” all of which are directly affected by a reorganization plan. The Court observed that Congress uses the phrase “party in interest” in bankruptcy provisions when it intends the provisions to apply broadly, and this understanding aligns with the meaning of the terms “party” and “interest,” which together refer to entities that are potentially concerned with or affected by a proceeding. The Court further observed that Congress has consistently acted to promote greater participation in reorganization proceedings, and that broad participation promotes a fair and equitable reorganization process.
The Supreme Court rejected the “insurance neutrality” doctrine, finding that the doctrine “conflates the merits of an objection with the threshold party in interest inquiry,” and that the doctrine “is too limited in its scope” because it “wrongly ignores all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers and debtors.” The Court was not persuaded by the Debtor’s argument that allowing Truck to be heard would allow “peripheral parties” to derail the reorganization, stating that Section 1109(b) provides “parties in interest” only with an opportunity to be heard. The Supreme Court emphasized that this opportunity to be heard is “neither a vote nor a veto; it simply provides [insurers] a voice in the proceedings,” which is consistent with Section 1109(b)’s purpose of promoting fair and equitable reorganization.
Why This Is Important?
The Supreme Court has now definitively ruled that an insurer is a “party in interest” when it is potentially responsible for outstanding and existing liabilities of an insured that files for Chapter 11 bankruptcy protection. The Truck ruling provides insurers with an opportunity to be heard in bankruptcy proceedings involving their insureds, and allows them to participate in the resolution of its insured’s liabilities.
About Sarah Hertz Maisel
Sarah Hertz Maisel is a partner in the Professional Liability Practice Group and the Insurance Practice Group. She focuses her practice on a wide range of insurance coverage analyses and litigation. She represents insurance companies in complex coverage litigation pending throughout the country in both state and federal courts. These actions involve various coverage lines, including commercial general liability, professional liability, management liability, excess exposures and extracontractual liability. She also has significant experience in defending underlying claims including handling matters through mediation, arbitration and trial.
About Alyssa Vranak
Alyssa Vranak is an associate attorney in the Insurance Practice Group. She focuses her practice on insurance coverage analysis and litigation. Alyssa provides comprehensive coverage analysis and defense in matters involving a wide range of policies, including commercial general liability coverage and professional liability coverage.
About Jacob Baron
Jacob Baron is a law clerk working in the Professional Liability and Insurance Practice Groups. Jacob is currently a third-year student at the University of Illinois Chicago School of Law.