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The Bottom Line
- The US Supreme Court has altered the litigation landscape when bankruptcy and insurers intersect.
- The court clarified the analysis for determining when insurers would have standing.
- Some types of insurers previously silenced in Chapter 11 hearings will now have more of a voice.
The US Supreme Court last year confirmed that insurers in Chapter 11 bankruptcy proceedings have broad standing to challenge plans of reorganization. In Truck Insurance Exchange v. Kaiser Gypsum Co., the court removed any doubt that an insurer with financial responsibility for a bankruptcy claim is a “party in interest” under Section 1109(b), the “capacious” text of which grants parties in interest the right “to ‘appear and be heard on any issue’ in a Chapter 11 proceeding.”
It even quoted the US Court of Appeals for the Third Circuit’s colorful rationale for conferring insurer standing, that where a proposed plan “allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully heard and to have their legitimate objections addressed.”
The effect of the Kaiser ruling continues to play out. Earlier this year, the Third Circuit relied on Kaiser to hold that appellant insurers established a likelihood of success as parties in interest in their motion to stay pending appeal of the plan confirmation order in In re The Diocese of Camden, New Jersey.
Even more recently, Judge Craig T. Goldblatt issued an opinion in a case before the US Bankruptcy Court for the District of Delaware, finding insurers had established party-in-interest standing under Section 1109(b) to be heard on objections to proposed solicitation procedures. The opinion highlights the extent to which Kaiser has reshaped the legal landscape on standing in Chapter 11 bankruptcy proceedings.
As Goldblatt explained, Kaiser has “abrogated the concept of ‘prudential standing’” or the idea that a court has the discretion to determine whether the party should be heard, and now “‘[p]rudential standing’ is no longer a thing.”
Insurers “Stand Alone”
Kaiser made the basis for standing clear: Insurers in mass tort bankruptcy cases “stand alone in carrying the financial burden,” as neither “Debtors nor the Claimants have an incentive to limit the postconfirmation cost of defending or paying claims.”
The Supreme Court held that insurers “with financial responsibility for bankruptcy claims are parties in interest,” and as such, Section 1109(b) grants them “a voice in the proceedings” to “appear and be heard on any issue” in the bankruptcy.
Insurer Standing
The bankruptcy plan in Kaiser was recognized as “insurance neutral[],” meaning the parties acknowledged (at least on paper) that insurers’ rights were fully preserved. The insurance-neutrality doctrine was rooted in case law relating to the “prudential” standing requirements. Pre‑Kaiser, the doctrine aimed to answer the question of “whether and how the particular proposed Plan affects [an insurer’s] prepetition and postpetition obligations and exposure.”
The Kaiser ruling changed how these requirements apply. Despite the insurance-neutrality finding, the Supreme Court unanimously held the insurer still had standing to object to the plan because the plan adversely affected insurers who had the “financial responsibility for bankruptcy claims.”
The Supreme Court characterized the insurance-neutrality doctrine as “conceptually wrong” and “too limited in its scope” because “[i]t zooms in on the insurer’s prepetition obligations and policy rights,” and “wrongly ignores all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers.”
The court instead focused on the unambiguous “capacious” text of Section 1109(b), which was aimed at allowing “a broad range of individual and minority interests” into Chapter 11 proceedings. Undue restrictions to that “expansive” definition “might enable dominant interests to control the restructuring process.”
The Supreme Court resolved that Section 1109(b) wasn’t dependent on “a plan-specific rule,” which is essentially what “prudential standing” limitations were designed to address. The court held the proper inquiry focuses on whether an insurer’s rights could be affected as a result of the bankruptcy case—not how a particular plan treated the insurer.
Thus, the court made the analysis for determining standing clearer for insurers when they “stand alone in carrying the financial burden,” while the debtor and other parties lack incentive to limit post-confirmation costs associated with the plan.
Bankruptcy Obligations
The Supreme Court recognized that a plan could affect insurers in multiple ways—it “can impair an insurer’s contractual right to control settlement or defend claims,” “abrogate an insurer’s right to contribution from other insurance carriers,” violate “the debtor’s duty to cooperate and assist,” or “impair the insurer’s financial interests by inviting fraudulent claims.” It held that “Insurers such as Truck with financial responsibility for claims” are parties in interest, entitling them to “a voice in bankruptcy proceedings.”
In the Supreme Court briefings in Kaiser, the respondents argued that insurers must meet issue-by-issue Article III/injury-in-fact standing requirements, as well as prudential requirements, to object to a plan’s confirmation.
The Supreme Court dispelled any risk of insurer-litigants raising another person’s legal rights—the primary concern for prudential standing under case law. The court noted the argument that a “parade of horribles” could follow if “peripheral parties” with an interest in the proceedings are allowed to derail a reorganization.
But the court found that such a concern wasn’t present for the insurers like Truck that have a significant financial stake in the proceedings and are essentially the only parties with any incentive to question improper plan provisions that may affect them directly.
Mass Tort Plans
As the Third Circuit Court held in In re Global Indus., Article III and party-in-interest standing “are effectively coextensive,” so that satisfying party-in-interest status means that Article III “injury in fact” has been met.
An insurer has shown “injury in fact” if the plan could impair its contractual rights or monetary interests. Claims allowance and valuation procedures adversely affect insurers by subjecting them to inflated liability for claims, which imposes an “entirely new set of administrative costs, including the investigative burden of finding any meritorious suits in the haystack of potentially fraudulent ones.”
As the Third Circuit found, the ancillary financial burden “will be enormous, even if [Insurers] never pay a single dollar of indemnity,” and the injury is “hardly too speculative” to afford party-in-interest status.
The Supreme Court in Kaiser recognized the various forms of impairments that insurers suffer in almost every mass tort bankruptcy to grant them party-in-interest status. The court found the financial effect a bankruptcy proceeding has on insurers is more than enough to confer Article III standing.
Standing Concerns
The Supreme Court resolved any prudential standing concerns because insurers have party‑in‑interest standing under Section 1109(b). By its terms, Section 1109(b) specifies that any “party in interest” in a Chapter 11 case “may raise and may appear and be heard on any issue.” And where, as here, “Congress has expressly conferred standing by statute, prudential standing concerns are superseded.”
Prudential standing would be met for the same reasons insurers satisfy the Section 1109(b) standard. As in Kaiser, insurers carry a significant financial burden for the claims and have a practical stake in whether a plan is confirmed, whereas neither the “Debtor[] nor the Claimants have an incentive to limit the post confirmation cost of defending or paying claims.”
The lack of incentive for non-insurer parties to challenge inflated costs, awards, or the plan in general underscores why standing for insurers is appropriate. Because “no one [else] has an incentive to pursue” a challenge to the plan “other than the insurers slated to provide coverage,” the insurers have a practical stake and are directly affected by the plan.
Any suggestion that “Insurers are not ‘persons aggrieved’ to whom appellate standing extends” also withers under Kaiser and Third Circuit precedent. The Third Circuit has explained that “person aggrieved” appellate standing is “standing to appeal the substance of the bankruptcy court’s decision”—which is “distinct from standing to appeal the bankruptcy court’s decision regarding bankruptcy standing.”
Even “in the bankruptcy context,” the court “resolv[es] bankruptcy standing issues on appeal without reaching the question of bankruptcy appellate standing.” Thus, when insurers are denied standing to “sue, or to intervene, or to object,” they “may obviously appeal such a determination.”
Insurers who satisfy standing under Kaiser meet the persons aggrieved standard, too. Not only are their contractual rights diminished by plan impairments, but a plan, as the Supreme Court recognized in Kaiser, also can “impair the insurer’s financial interests by inviting fraudulent claims,” and insurers “stand alone in carrying the financial burden.”
Given insurers’ practical stake in bankruptcy proceedings, courts have also conferred on insurers broad party-in-interest standing (akin to the Kaiser decision) to uphold the integrity or fairness of the entirety of the proceedings.
For example, in In re Congoleum, the court held that insurers have parties-in-interest standing to challenge the general fairness of the plan under Section 1129(a), as they “have [a] practical stake in the fundamental fairness of the [p]lan as a whole,” including “interrelated issues of good faith, classification, § 524(g), and feasibility.”
Similarly, the Third Circuit extended insurers’ standing to even challenge a debtor’s choice of insurance counsel to preserve the integrity of the proceedings.
And in In re Congoleum Corp., having dealt with challenges to insurers’ standing to object to a plan multiple times, the court upheld insurers’ rights and stated it was the seventh time a court had “found that the insurers have standing to challenge the Plan due to their fundamental stake in the outcome of the bankruptcy proceedings.” The Kaiser decision essentially follows a long line of courts’ conferring standing on insurers in mass tort bankruptcy proceedings.
Key Takeaways
The Supreme Court addressed “prudential” standing in mass tort bankruptcy cases head-on and emphatically rejected it as a barrier to insurer participation.
In Kaiser, the court unanimously rejected the “insurance neutrality” doctrine—the prudential limitation that lower courts have used to prevent any consideration of insurers’ objections to bankruptcy plans.
Instead, it relied on the Bankruptcy Code’s “capacious” language and conferred on insurers broad and greater participation in reorganization proceedings because they bear the financial responsibility for bankruptcy claims. This holding ensures that insurers like Truck, previously silenced in Chapter 11 proceedings, will now have a “voice” to be heard in these proceedings on the merits.
The case is Truck Insurance Exchange v. Kaiser Gypsum Co., U.S., 22-1079, decided 6/6/24.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Samantha Indelicato and Redwan Saleh are counsel at O’Melveny & Myers in New York. Both have extensive experience litigating, trying, and briefing the appeals of contested mass tort bankruptcies.
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