Supreme Court Favors Insurers’ Chapter 11 Rights

The Supreme Court has ruled that any party with a “direct financial stake in the outcome” of a reorganization has standing as a “party in interest” to object to a Chapter 11 bankruptcy plan, the Weil firm writes in a recent report. The decision provides a boost to insurers’ Chapter 11 rights.

On June 6, the Court unanimously reversed the Fourth Circuit decision in Truck Insurance Exchange v. Kaiser Gypsum Co. Kaiser manufactured asbestos-containing products. It filed for Chapter 11, with a plan that proposed a personal injury trust to pay individual tort claims. Truck, its primary insurer, was obligated to insure the plan and pay many of the claims.

The plan included “insurance neutrality” language providing that the plan did not alter Truck’s legal obligations. Truck wanted to object in court on the ground that the plan lacked adequate protections against filing fraudulent claims. Kaiser challenged its standing.

The Fourth Circuit agreed with Kaiser, holding that Truck was not a “party in interest” in the bankruptcy and therefore lacked standing to object under 11. It reasoned that because the plan didn’t change Truck’s pre-existing legal obligations or undermine its pre-existing legal rights, Truck lacked an interest in the plan.

The Supreme Court said its broader interpretation is more consistent with the purposes of the Bankruptcy Code and its party in interest provision. Justice Sonia Sotomayor, writing for the Court, said that insurers have a direct financial stake in reorganization because their interests are affected in many ways, not the least of which is by leaving them as the only party with the responsibility to cover many claims.

The Weil authors write that the decision strengthens insurers’ ability to have their rights and interests fully considered in Chapter 11, and more broadly, clarifies that statutory standing under Chapter 11 should be understood to reach any party with a financial interest in the overall outcome of a reorganization.