Restructuring

This morning, the Supreme Court decided Truck Insurance Exchange v. Kaiser Gypsum Co., which clarifies that any party with a “direct financial stake in the outcome” of a reorganization has standing as a “party in interest” to object to a Chapter 11 plan. 11 U.S.C. § 1109(b). Writing for a unanimous Court, Justice Sotomayor held that the debtor’s insurer has standing to object even if the plan purports to preserve the insurer’s legal rights and thus is said to be “insurance neutral.”

Truck is the primary insurer for Kaiser Gypsum, a company that manufactured asbestos-containing products and that had filed for Chapter 11 bankruptcy. Kaiser’s plan proposed to create a personal injury trust to pay individual tort claims, many of which Truck was obligated to insure. The plan included “insurance neutrality” language providing that the plan did not alter Truck’s legal obligations, but Truck sought to object on the ground that the plan lacked adequate protections against the filing of fraudulent claims.

The Fourth Circuit held that Truck was not a “party in interest” in the bankruptcy and therefore lacked standing to object under 11 U.S.C. § 1109(b). The Fourth Circuit reasoned that Truck lacked an interest in the plan because the plan did not alter any of Truck’s pre-existing legal obligations or impair any of its pre-existing legal rights.

The Supreme Court reversed. The Court concluded that a “party in interest” includes any party with a “direct financial stake in the outcome” of a reorganization. This broader interpretation, the Court held, coheres with the purposes of the Bankruptcy Code and the “party in interest” provision, which promote both “greater participation in reorganization proceedings” and a “fair and equitable reorganization process.”

The Supreme Court further held that Truck was a party in interest because it was “[a]n insurer with financial responsibility for bankruptcy claims.” The Court explained that insurers can have a direct financial stake in the outcome of a reorganization because the reorganization can “affect an insurer’s interests in myriad ways,” including by leaving the insurer as the only party with the responsibility to cover many claims. The Court further explained that the Fourth Circuit’s narrower approach, which focused on whether the plan impaired Truck’s pre-existing rights or obligations, wrongly conflated the merits of Truck’s objection—whether Truck should be entitled to the additional protections it sought—with Truck’s standing to raise the objection in the first place.

The Supreme Court’s decision establishes that “insurance neutrality” language will not deprive an insurer of standing to object to a bankruptcy plan. By putting an end to that common practice, the Court strengthened insurers’ ability to have their rights and interests fully considered in Chapter 11. More broadly, the Court also made clear that statutory standing under Chapter 11 should be understood to reach any party with a financial interest in the overall outcome of a reorganization.