Truck Insurance Exchange v. Kaiser Gypsum Company, Inc.

Issues

Does an insurance company whose underlying liability exposure under a proposed bankruptcy plan is no greater than prior to bankruptcy have standing to challenge a plan as a “party in interest” under § 1109(b) of the Bankruptcy Code?

Oral argument:

March 19, 2024

Court below:

United States Court of Appeals for the Fourth Circuit

This case asks the Court to resolve whether the prudential bankruptcy doctrine of “insurance neutrality” may be applied to exclude an insurance company from Section 1109(b)’s “party in interest” requirement. The insurance neutrality doctrine prohibits an insurance company from challenging a bankruptcy plan as a “party in interest” when that plan does not increase its liability exposure from pre-bankruptcy levels. This case arises from the Chapter 11 bankruptcy proceedings of Kaiser Gypsum Co. and Hanson Permanente Cement, who negotiated a plan to settle claims with asbestos tort claimants either through the tort system or via application to a special trust. The companies’ liability insurer, Truck Insurance Exchange, objected on the grounds that only the trust application process––not the tort-claim alternative––required significant disclosures from claimants to prevent duplicate or frivolous claims. Truck Insurance Exchange contends that “party in interest” encompasses any person materially affected by the bankruptcy plan. Kaiser Gypsum Company, Inc. and other co-respondents dispute that the fact that an insurer might have been better off under another plan constitutes an “interest” in the proceedings. The case has major implications for settlement of mass tort claims and fairness to creditors. The Court must balance interests in the speedy and consensual settlement of legitimate claims, a core function of bankruptcy proceedings, with the legitimate desire of creditors to prevent collusive suits between debtors and claimant parties.

Questions as Framed for the Court by the Parties

Whether an insurer with financial responsibility for a bankruptcy claim is a “party in interest” that may object to a plan of reorganization under Chapter 11 of the Bankruptcy Code.

Facts

Section 524(g) of the Bankruptcy Code permits debtors with significant asbestos liabilities to channel claims into a trust established pursuant to Chapter 11 reorganization (called a “channeling injunction”). Truck Insurance Exchange v. Kaiser Gypsum Co. at 3–4. Since this provision intends to balance future liability of bankrupt entities with claimants’ due process rights, the statute requires a trust plan meet certain obligations––namely that it be “fair and equitable” and receive three-fourths majority support from current claimants. Id.

In 2016, Kaiser Gypsum Co. and Hanson Permanente Cement sought Chapter 11 reorganization as mounting potential asbestos liabilities led them to seek a § 524(g) trust. Id. Interparty negotiations produced a trust shielding the companies from further asbestos liability, undergirded by an insurance policy between the debtor-companies and Truck Insurance Exchange (“Truck”). Id. The policy required Truck to defend the companies in Court for personal-injury claims arising from asbestos use, and to indemnify the companies up to $500,000 for each claim. Id. at 5. Trust funding derives from this policy and contributions from the debtor-companies and parent corporations. Id.

The § 524(g) plan divides treatment of asbestos personal-injury actions according to the policy’s coverage. Id. Covered claims proceed in court to collect on the policy, while non-covered claims advance to the trust for resolution. Id. Only the latter are required to meet disclosure requirements designed to screen out frivolous or duplicative claims. Id. at 6. Truck opposed the plan, since covered claims would not receive the same screening protections as uninsured claims. Id.

After the companies rejected Truck’s request to include disclosure requirements in covered claims, Truck objected to the plan, arguing it was “collusive” and transgressed the companies’ duties of good faith and assistance-and-cooperation. Id. at 8–9. The bankruptcy court rejected Truck’s challenge, finding it lacked standing under the “insurance neutrality” doctrine. Id. This doctrine prohibits insurers from challenging bankruptcy plans that do not increase the insurer’s liability exposure from prior to bankruptcy. Id. at 9–10. Consequently, the court found Truck lacked “party in interest” status under 11 U.S.C. § 1109(b), meaning it had no right to object to the plan. Id. at 10. This determination was adopted by the district court, and Truck appealed to the Fourth Circuit. Id. at 11.

The Fourth Circuit affirmed the finding that the plan was “insurance neutral” and that Truck lacked standing to contest it. Id. at 22. It explained that the debtor-companies did not violate their duty to “assist and cooperate” by failing to help Truck reduce its liability under the plan, since this duty only required the companies to assist Truck in defending companies against claims under their policy. Id. at 20–21. The Court also rejected the argument that the plan encouraged collection of fraudulent claims in court. Id. at 21. Noting that the policy required Truck to defend the companies regardless of the underlying claim’s merits, the Court explained that refusing to further limit Truck’s liability does not impugn the plan’s “insurance neutrality.” Id. The Court rejected an alternative standing theory on the grounds that the statutory grant to “a creditor” to be heard on “any issue” is subject to the Article III standing requirement that litigants can only sue in federal court to remedy a concrete injury to their interests. Id. at 22–23. Consequently, Truck could not claim to be a “party in interest” to the proceedings and thus lacked standing to challenge the plan. Id. at 22.

Truck filed a petition for certiorari on May 3, 2023, which the United States Supreme Court granted on October 13, 2023. Brief for Petitioner, Truck Insurance Exchange at 1.

Analysis

SCOPE OF SECTION 1109(b)

Truck argues that Section 1109(b) of the bankruptcy code, which provides that “[a] party in interest . . . may appear and be heard on any issue” arising under a Chapter 11 bankruptcy, is co-extensive with standing requirements under Article III of the U.S. Constitution. Brief for Petitioner, Truck Insurance Co. at 16, 21. Truck maintains that this understanding of Section 1109(b) is found in the statute’s text. Id. at 20. First, Truck argues Section 1109(b)’s list of “parties in interest” is non-exhaustive. Id. at 21. Truck directs attention to Congress’ use of the word “including” immediately prior to the list to support the proposition that, under the Bankruptcy Code’s rules of statutory construction, the list is merely illustrative rather than limiting. Id. at 21-22. Furthermore, Truck argues that the ordinary meaning of “party in interest” supports their statutory interpretation. Id. at 22. Truck, since “party in interest” is not a phrase defined within the Bankruptcy Code itself, applies dictionary definitions to the terms within the phrase, concluding that “a party in interest” could otherwise be read as applying to “a person that is concerned or affected by the proceeding at hand.” Id. at 22.

The Official Committee of Asbestos Personal Injury Claimants and Future Claimants’ Representative and Debtor-Side Respondents, dispute Plaintiff’s interpretation of Section 1109(b)’s scope. Brief for Respondent, Debtor-Side Respondents (“Debtors”) at 27; Brief for Respondent, Official Committee of Asbestos Personal Injury Claimants et al. (“Personal-Injury Claimants”) at 21. Debtors dispute that a list preceded by the word “including” must necessarily indicate an illustrative rather than exhaustive list. Brief for Respondents, Debtors at 37. To illustrate their reading, they provide the example clause, “any American automobile, including any truck or minivan,” where a restrictive category, “American automobile,” precedes the word “including,” such that the subsequent categories of “truck or minivan” cannot be read to expand the restrictive category. Id. Debtors, accordingly, conclude that Truck’s reading of “including” in Section 1209(b) does not necessarily indicate that “party in interest” is broader than the list of examples it provides. Id. Similarly, the Personal-Injury Claimants dispute Truck’s methodology in interpreting Section 1209(b), offering alternative dictionary definitions to construct a definition narrower than what is suggested by the Petitioner. Brief for Respondents, Personal-Injury Claimants at 23.

Truck argues that precedent supports their reading of Section 1109(b) as being co-extensive with Article III. Brief for Petitioner at 23. Truck points to early Supreme Court decisions that predate the drafting of Section 1109(b) and interpret the phrase “party in interest” as it was applied in other statutes. Id. at 23-25. Truck reads its lead case, Western Pacific California Railroad Co. v. Southern Pacific Co., as holding that “party of interest” as applied in The Transportation Act of 1920 was construed broadly to include any individual who may be materially affected by an unlawful action. Id. at 25. Accordingly, Truck maintains that Congress was aware of this broad construction and was capable of drafting more narrow language but instead decided to incorporate a broader “party in interest” into Section 1109(b). Id. at 27. Lastly, Truck argues that the statutory history of the bankruptcy code supports its construction of Section 1109(b). Id. at 28. Truck seeks to demonstrate that over the course of the twentieth century Congress shifted away from a “limited-participation framework,” restricting the number of parties that could intervene in a bankruptcy type proceeding, to a more expansive and open-ended framework, providing more participatory rights. Id. at 29-31. Truck argues that the capstone to this expansion was when Congress enacted the current version of Section 1109(b), moving away from an exhaustive, limited list of possible bankruptcy participants to the illustrative, open-ended list they interpret as being included in 1109(b).

Personal-Injury Claimants criticize Truck’s construction of “party in interest” as too broad and describe Truck’s reading of precedent and history as mistakenly promoting a “hypothetical benefit test” not found in the statute. Brief for Respondents, Personal-Injury Claimants at 26. Personal-Injury Claimants instead contend that cases like Western Pacific demonstrate that a “party in interest” is a person or entity whose rights are materially affected by a bankruptcy proceeding. Id. at 27. Likewise, Debtors argue that it is unlikely that Congress would create a statutory scheme with such expansive rights; rather, Congress intended for parties engaged in bankruptcy proceedings to be those whose interests are aligned with the zone of interest the statutory scheme sought to cover. Brief for Respondents, Debtor-Side Respondents at 23.

“INSURANCE NEUTRALITY” DOCTRINE

Truck asserts that the Fourth Circuit erred in applying, as Truck describes, the “insurance neutrality doctrine.” Brief for Petitioner at 39. Truck argues that the insurance neutrality doctrine reflects an improper, judicially imposed constraint that conflicts directly with the requirements of Section 1109(b). Id. Truck first argues that it is improper for judges to impose constraints on standing, since Congress is typically tasked with setting the outer limits of standing, restrained only by the requirements of Article III. Id. at 40. According to Truck, without any express limits set by Congress, it is improper for judges to graft prudential standing requirements onto Section 1109(b). Id. at 41.

Both Debtors and Personal-Injury Claimants dispute Truck’s characterization of “insurance neutrality” as “a judge-made standing limitation” which departs from the requirements of Section 1109(b). Brief for Respondents, Debtors at 44; Brief for Respondents, Personal-Injury Claimants at 24. Debtors interpret the Fourth Circuit’s analysis as an inquiry into whether Truck, as an insurer, had been adversely affected by the approved plan. Brief for Respondents, Debtors at 44. Debtors argue this analysis is consistent with the zone of interest test, which proscribes standing where a party’s claims are not consistent with the interests of the statutory scheme. Id. at 45. Additionally, Personal Injury Claimants argue that “insurance neutrality” is consistent with bankruptcy’s history and statutory scheme. Brief for Respondents, Personal-Injury Claimants at 25. First, Personal-Injury Claimants indicate that no court has rejected insurance neutrality since first announced by the Seventh Circuit Court of Appeals in Matter of James Wilson Associates in 1992. Id. at 24. Second, Personal-Injury Claimants stress that regulation of the insurance industries typically occurs at the state level, and therefore, it would be improper of insurer to use an insured’s bankruptcy proceeding to demand relief. Id. at 25.

WHETHER TRUCK INSURANCE EXCHANGE IS A “PARTY IN INTEREST”

Truck maintains that under their reading of Section 1109(b), it qualifies as a “party in interest” who “may appear and be heard on any issue.” Brief for Petitioner at 31. Truck asserts that its financial obligations to pay potentially fraudulent claims under the proposed bankruptcy plan constitutes a classic “pocket-book harm” sufficient to establish Article III standing. Id. at 31. Truck stresses further that these pocket-book harms are traceable to the bankruptcy plan’s failure to comply with the good-faith requirements of Section 524(g). Id. at 33. Specifically, Truck emphasizes that the plan results in increased insurance obligations both as a result of the plan only enjoining suits against the insured, Kaiser Gypsum Trucking, and not Truck as their insurer and also because the insured plan does not receive the same fraud prevention measures as uninsured plans. Id at 33-34. Petitioner additionally asserts that its position as a creditor to Kaiser Gypsum Trucking is a traditional, well-accepted basis for being a “party in interest” in bankruptcy proceedings. Id. at 37. Truck argues that the Fourth Circuit impermissibly restricted its standing to claims linked to the credit interest, rather than allowing Truck to be heard on “any issue” as required by the text of Section 1109(b). Id. at 35.

Debtors and Personal-Injury Claimants, while not admitting that Article III governs standing in this case, nonetheless argue that Truck fails to articulate a basis for Article III standing, and therefore, fails to establish that it is a “party in interest”. Brief for Respondents, Personal-Injury Claimants at 35; Brief for Respondents, Debtors at 43. Debtors allege that Truck’s claims of potential fraud can only be correctly characterized as the type of hypothetical, speculative harms which are inapposite to the Article III standing doctrine. Brief for Respondents, Debtors at 43. Similarly, Personal-Injury Claimants reiterate that the Fourth Circuit’s “insurance neutrality” analysis demonstrates that, since the approved plan allegedly leaves Truck in the same position it was before the bankruptcy petition, Truck cannot demonstrate a harm even for the purposes of Article III standing. Brief for Respondents, Personal-Injury Claimants at 39. Additionally, both Debtors and Personal-Injury Claimants rebut Truck’s claim that its status as a creditor is sufficient under Section 1109(b) because the insured has agreed to pay its liabilities in full under the bankruptcy plan. Id. at 42; Brief for Respondents, Debtors at 46.

Discussion

MASS TORT DISPUTES AND GLOBAL SETTLEMENT

Professors Anthony J. Casey et al. (“Professors”), in support of Truck, dispute the applicability of the “insurance neutrality” doctrine to the “party in interest” requirement, contending that excluding insurers from access to bankruptcy proceedings in this way frustrates congressional intent to maximize participation and thereby encourage “global” claim resolution. Brief of Amici Curiae Professors Anthony J. Casey et al., in Support of Petitioner at 11. Arguing that the neutrality doctrine frustrates the deliberately broad grant of statutory jurisdiction embodied in § 1109(b), Professors contend that the doctrine insulates plans from meaningful participation by liability insurers and hinders acceptable settlements. Id. at 8–9. Professors further claim that Chapter 11 restructurings to settle mass tort claims present particularly dire consequences, with often thousands of claims; and, exclusion of insurers based on “prudential” standing requirements like the insurance neutrality doctrine fail to bring parties towards an amicable resolution. Id. at 7–9. Professors argue that encouraging such outcomes is only possible when bankruptcy judges are forbidden to prudentially distinguish between economic stakes based on “atextual doctrines that serve to further restrict access.” Id. at 9.

Bankruptcy Experts, in support of Debtors and Personal-Injury Claimants, counter that failing to apply the “insurance neutrality” doctrine amounts to a “[w]atering [d]own” of the bankruptcy system which would itself undermine the bankruptcy settlement process. Brief of Amicus Curiae Bankruptcy Experts, in Support of Respondents at 12. Noting that creditors are empowered to, inter alia, object to claims and file reorganization plans, Bankruptcy Experts contends that further solicitude towards insurers will impede the goal of “speedy and efficient reorganization” and claim settlement central to bankruptcy. Id. at 13. Such goals are of particular concern in asbestos litigation, where often gravely-ill plaintiffs depend on a quick payout to settle their underlying claim. Id. at 12. Bankruptcy Experts argue that subjecting a plan with otherwise unanimous support –– including from other insurers –– to delay on these grounds would fundamentally undermine the settlement, as well as discourage future settlements. Id. at 14–15.

FAIRNESS TO INSURERS IN CHAPTER 11 RESTRUCTURING

The American Property Casualty Insurance Association and the Complex Insurance Claims Litigation Association (“APCIA/CICLA”), in support of Truck, argue the understanding of “insurance neutrality” advanced by Truck resolves the potential misalignment of incentives which may arise between the insurer and insured. Brief of Amici Curiae APCIA/CICLA, in Support of Petitioner at 22. APCIA/CICLA contends that claimants and debtors alike share a desire to quickly agree to an approved plan, discharging the debtor from further liability for claims while permitting a quick payout. Id. at 15. In such proceedings, both parties are opposed to the interests of insurers, who seek to limit their incidence of liability by closely scrutinizing the legitimacy of claims. Id. at 15. By holding that an insurer cannot claim to be a “party in interest” under these circumstances, the bankruptcy code institutionally disenfranchises insurers from challenging potentially collusive plans between the insured and claimants. Id. at 15–16.

United Policyholders, in support of Debtors and Personal-Injury Claimants, counters that the Fourth Circuit’s understanding of the insurance neutrality doctrine tracks the underlying policy concerns of the bankruptcy system––proceedings which are fair to both debtor and creditor parties. Brief of Amicus Curiae United Policyholders, in Support of Respondents at 22. United Policyholders argues that the “broad participatory right” advanced by Truck will permit insurance companies to challenge any plan which does not afford maximum liability protection to insurer-creditors. Id. at 2. They argue that the Fourth Circuit’s view of “insurance neutrality,” by contrast, preserves the right of companies to challenge concrete injuries resulting from the bankruptcy process while limiting frivolous delays in the disbursement of the bankruptcy estate––both core purposes of the bankruptcy system. Id. at 22. United Policyholders contends that congressional amendments to the Bankruptcy Code sought to combat creditors’ attempts to delay bankruptcy proceedings by “us[ing] obstructive tactics... [to] exact for themselves undue advantages from the other stockholders[.]” Id. Adopting Truck’s interpretation would permit not only such impermissible tactics, but enable creditors to bargain for improved contractual terms from those agreed to by the parties. Id.