The Supreme Court recently reversed and remanded a decision from the Fourth Circuit Court of Appeals and held that an insurer with financial responsibility for bankruptcy claims qualifies as a “party in interest” under §1109(b) of the Bankruptcy Code and can therefore object to a plan of reorganization in a chapter 11 case. Truck Ins. Exchange v. Kaiser Gypsum Co. Inc., 602 U.S. ___ (2024). In the unanimous 8-0 decision authored by Justice Sotomayor, the Supreme Court found that insurers such as Truck Insurance Exchange (“Truck”), which have financial responsibility for claims, are not “peripheral parties” and, accordingly, have standing to object to a reorganization plan. 

Case Background

Truck served as the primary insurer for two companies, Kaiser Gypsum Co. and Hanson Permanente Cement (the “Debtors”), that sold asbestos-containing products. The Debtors filed for bankruptcy after facing thousands of lawsuits related to asbestos liability. The Debtors filed a chapter 11 plan which proposed a 11 U.S.C. § 524(g) channeling injunction and the establishment of an asbestos personal injury trust, by which significant asbestos-related liabilities would have been funded largely by Truck.

Pursuant to the insurance policies, Truck was contractually required to defend each covered asbestos personal injury claim and indemnify the Debtors for up to $500,000, per claim. The Debtors, in return, were required to pay a $5,000 deductible per claim and cooperate with Truck in defending these claims. The plan distinguished between insured and uninsured claims, mandating that insured claims be processed through the tort system while uninsured claims were submitted to the trust for resolution.

Truck objected to the plan, arguing that the plan (i) was not proposed in good faith under § 1129(a)(3) because it provided disparate treatment to insured and uninsured claims, exposing Truck to millions of dollars in fraudulent claims because the plan did not require the same disclosures and authorizations for insured and uninsured claims, (ii) impermissibly altered Truck’s contractual rights under the insurance policies by barring Truck from raising the Debtors’ bankruptcy conduct in future coverage disputes, and (iii) failed to comply with the requirement of § 524(g) to deal equitably with claims and future demands.

Lower Court Decisions

The District Court, following the Bankruptcy Court’s recommendation, confirmed the plan over Truck’s objection. The District Court found that Truck had limited standing and could only object on the grounds that the plan was not “insurance neutral.”

The Fourth Circuit agreed with the District Court and concluded that Truck was not a party in interest because the plan did not increase Truck’s prepetition obligations or impair its prepetition contractual rights under its insurance policies. The Fourth Circuit found that the plan was “insurance neutral” because it did not alter Truck’s pre-bankruptcy “quantum of liability,” leaving Truck without standing to the plan.

Supreme Court Decision

In reversing, the Supreme Court found that insurers like Truck, who have financial responsibility for bankruptcy claims, are considered parties in interest. These insurers can be directly and adversely affected by reorganization plans. Among other things, the Supreme Court noted that a reorganization plan may impair an insurer’s contractual right to control settlement or defend claims, abrogate an insurer’s right to contribution from other carriers, violate the duty of cooperation or impair the insurer’s financial interests by inviting fraudulent claims. The Supreme Court also based its decision on 11 U.S.C. § 1109(b)’s broad language, historical context, and underlying purpose of promoting participation in reorganization proceedings. 

Rejecting the Fourth Circuit’s application of the insurance neutrality doctrine, the Supreme Court noted that the Fourth Circuit improperly focused on whether the plan altered Truck’s contract rights or it “quantum of liability.” The Supreme Court explained that the insurance neutrality doctrine “is conceptually wrong and makes little practical sense.” Justice Sotomayor further explained:

Conceptually, the insurance neutrality doctrine conflates the merits of an objection with the threshold party in interest inquiry. The §1109(b) inquiry asks whether the reorganization proceedings might affect a prospective party, not how a particular reorganization plan actually affects that party. . . . Practically, the insurance neutrality doctrine is too limited in its scope. It zooms in on the insurer’s prepetition obligations and policy rights. That wrongly ignores all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers.

Instead, the correct inquiry to determine if a party is a “party in interest” is whether that party’s financial exposure may be directly and adversely affected by a plan of reorganization, rather than how a particular plan actually affects the party’s obligations and exposure.  

In her opinion, Justice Sotomayor drew certain boundaries, noting that “the Court today does not opine on the outer bounds of §1109.” Specifically, “Section 1109(b) grants insurers neither a vote nor a veto; it simply provides them a voice in the proceedings.” She further observed that a party in interest does not “include literally every conceivable entity that may be involved in or affected” by a bankruptcy case, and that there may be “difficult cases that require courts to evaluate whether truly peripheral parties have a sufficiently direct interest.” But, she noted, “[t]his case is not one of them.” The Supreme Court’s decision makes clear that an insurer who has financial responsibility for claims in a bankruptcy case will have standing to assert its objections to the plan of reorganization as a party in interest.