OPINION ANALYSIS
By Ronald Mann on June 7, 2024, at 8:29 am
!The busts on the front of the Supreme Court building
The justices ruled in Truck Insurance Exchange v. Kaiser Gypsum Co. on Thursday. (Thomas Hawk via Flickr)
In another instance of the Supreme Court tackling seemingly minor disputes under the Bankruptcy Code, the case of Truck Insurance Exchange v. Kaiser Gypsum Co. addressed a nuanced issue regarding when an entity qualifies as a “party in interest” under the statute, which grants the right to “be heard on any issue” in Chapter 11 proceedings.
This case involves a conflict between a defunct asbestos company and its main insurer. The debtor will exit bankruptcy without future asbestos claim liabilities, while the insurer will bear most of these claims. The contention lies in whether the reorganization plan should include “anti-fraud” provisions to prevent claimants from filing duplicate claims against multiple asbestos companies.
Section 1109 of the Bankruptcy Code states that any “party in interest” can raise issues and be heard in Chapter 11 cases. Although the statute lists examples such as the debtor, trustee, and creditors’ committees, it lacks a comprehensive definition. Despite this, lower courts ruled that the insurance company could not challenge the plan’s terms because it was not directly harmed by it.
Justice Sonia Sotomayor dismissed this view, arguing that the “text, context, and history [of the statute] confirm that an insurer … with financial responsibility for a bankruptcy claim is a ‘party in interest’ because it may be directly and adversely affected by the reorganization plan.” She described the statute as “capacious,” noting that all listed parties share a common trait: they could be directly impacted by a reorganization plan due to their financial interest in the estate’s assets or their representation of affected parties. For Sotomayor, the term “party in interest” plainly refers to entities potentially concerned with or affected by a proceeding.
Sotomayor highlighted Congress’s historical trend towards promoting broader participation in reorganization proceedings, evolving from limited involvement under the Bankruptcy Act of 1898 to more inclusive provisions in subsequent legislative updates. She emphasized that broad participation is crucial for a fair and equitable reorganization process, allowing diverse interests to intervene and preventing dominant interests from monopolizing the restructuring process.
Given this context, Sotomayor found it clear that reorganization proceedings could significantly impact an insurer’s interests, potentially impairing contractual rights or inviting fraudulent claims. She argued that allowing insurers to voice concerns about such issues aligns with the statute’s purpose. She noted that neither debtors nor claimants have incentives to limit post-confirmation costs, leaving insurers as potentially the only entities motivated to identify problems with the plan.
Sotomayor criticized lower courts for adopting an “insurance neutrality” doctrine, which denies party-in-interest status to insurers whose pre-bankruptcy rights remain unimpaired. She argued that this doctrine is fundamentally flawed because it conflates the merits of an objection with the initial inquiry into party-in-interest status. According to Sotomayor, the correct standard assesses whether proceedings might affect a prospective party, not how a specific reorganization plan actually impacts that party. The insurance neutrality doctrine wrongly ignores other ways bankruptcy proceedings can impose obligations on insurers.
Addressing concerns that a broad interpretation of “party in interest” might enable peripheral parties to disrupt reorganizations, Sotomayor pointed out that the statute only grants an opportunity to be heard, not a vote or veto power. She dismissed these concerns as exaggerated and insufficient to override the statute’s plain language. While acknowledging potential challenges in evaluating truly peripheral parties, she concluded that this case did not present such difficulties.
Ultimately, like many of the court’s bankruptcy rulings, this decision is unlikely to be widely noted or have lasting significance outside lower courts dealing with the “insurance neutrality doctrine.” Since it does not address whether courts should or can include the insurer’s requested provisions, its practical impact remains limited. Attention now turns to Harrington v. Purdue Pharma, expected later this month, which may offer more substantial insights into the Bankruptcy Code’s operation.