Insurer With Financial Responsibility Has Standing to Object to Kaiser Ch. 11 Reorganization Plan

Kaiser Gypsum Co. and its parent, Hanson Permanente Cement, filed a Chapter 11 bankruptcy and submitted a Section 524(g) Reorganization Plan which would channel all present and future asbestos claims into a trust. 

The debtors proposed plan treated insured and uninsured claims differently. Under the proposed plan, uninsured claims were to be pursued only within the trust. However, the proposed plan provided that insured claims were to be pursued in the regular tort system with the insurer defending these lawsuits, and if the claimant obtains a favorable judgment, the Trust pays the deductible and the insurer pays up to $500,000 per claim.  Truck Insurance Exchange, Kaiser’s primary insurer, objected to the proposed plan because while claimants with uninsured claims were required to disclose information regarding all other related claims and recoveries from other asbestos trusts, the insured claims had no such disclosure requirements. The disclosure requirements are intended to reduce fraudulent and duplicate claims.  

Under Section 1109(b) of the Bankruptcy Code, a “party in interest” is permitted to “appear and be heard on any issue” in a Chapter 11 proceeding. Truck asserted that it was a party in interest and objected to the plan as not proposed in good faith as it didn’t require the same disclosures and authorizations for insured and uninsured claims—disparate treatment that would expose Truck to millions of dollars in fraudulent tort claims. 

The District Court and the Fourth Circuit Court of Appeals ruled that Truck was not a “party in interest” and did not have standing to object to the plan holding that it was “insurance neutral” as it did not alter Truck’s pre-bankruptcy rights or obligations. 

The U.S. Supreme Court reversed in a unanimous 8-0 opinion holding that an insurer which is “potentially concerned with or affected” by a proposed reorganization plan is a “party at interest” proceeding. The court noted that Congress has made clear that Section 1109(b) was intended “to promote greater participation in reorganization proceedings” in order to ensure fairness.  

The U.S. Supreme Court described that the “insurance neutrality doctrine” was “conceptually wrong and makes little practical sense.” The net result of this opinion is that insurers no longer need to prove that a proposed reorganization plan alters its pre-petition obligations in order to object in Chapter 11. Instead, they need only show that they have a financial responsibility in order to have standing to object to a proposed plan. Truck Insurance Exchange v. Kaiser Gypsum Co., 144 S. Ct. 1414 (June 6, 2024).