A recent unanimous ruling from the U.S. Supreme Court upended the status quo for insurers with financial responsibility in bankruptcy proceedings and established precedent that those insurers have the right to have their voice heard by the courts presiding over such proceedings.
On Thursday, Justice Sonya Sotomayor delivered the 8-0 opinion of the court that held Truck Insurance Exchange should have been allowed to voice its concerns about the terms of a proposed $50 million settlement of thousands of asbestos-related lawsuits because the insurer is a “party in interest” in the dispute. In the 18-page opinion, Justice Sotomayor took aim at the doctrine that had governed such disputes, the insurance neutrality doctrine, where courts have determined insurers are not parties in interest to Chapter 11 proceedings so long as the reorganization plan doesn’t “increase the insurer’s pre-petition obligations or impair the insurer’s pre-petition policy rights.”
“This doctrine is conceptually wrong and makes little practical sense,” Justice Sotomayor wrote. “Conceptually, the insurance neutrality doctrine conflates the merits of an objection with the threshold party in interest inquiry.”
“Practically, the insurance neutrality doctrine is too limited in its scope. It zooms in on the insurer’s prepetition obligations and policy rights. That wrongly ignores all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers.”
Justice Samuel Alito did not participate in the consideration or decision of the case.
Allyson Ho of Gibson, Dunn & Crutcher, who argued the case before the U.S. Supreme Court on behalf of Truck Insurance Exchange, said some commentators have called the ruling the most consequential tort reform issue to be decided this year.
“I think a big part of our argument that resonated with the court was that we focused on the text of the statute, which is inclusive and broad, and we sort of linked that text to Congress’ purpose in wanting Chapter 11 cases to be collaborative,” she told The Texas Lawbook in an interview Friday morning. “Congress made that policy choice and it imbedded that choice in broad, inclusive text believing that the best way to a good result for everyone is to bring everyone to the table and to give parties in interest a voice — not a veto — but a voice, in bankruptcy cases.”
The insurance neutrality doctrine was the basis of the Fourth Circuit’s ruling against Truck Insurance, which was issued on Valentine’s Day 2023.
Truck Insurance filed its petition for writ of certiorari with the U.S. Supreme Court on May 3, 2023.
The proceeding that spawned this ruling began in 2016, when Kaiser Gypsum Co. and its parent company, Hanson Permanente Cement, which manufactured and sold products containing asbestos, filed for Chapter 11 bankruptcy in the face of thousands of asbestos-related lawsuits.
Truck Insurance issued policies to those companies obligating it to pay as much as $500,000 per covered asbestos claim. Truck Insurance sought to object to the reorganization plan, arguing a lack of disclosure requirements for certain claimants could force it to pay millions in fraudulent claims.
The case received significant amicus attention at the Supreme Court, with the U.S. government, the American Property Casualty Insurance Association, the Complex Insurance Claims Litigation Association and a group of bankruptcy law professors weighing in in favor of Truck Insurance.
“At the very least, a ‘party in interest’ encompasses a person, such as petitioner, that is a party to a contract of the debtor that imposes ongoing rights or obligations and is property of the estate that may be interpreted, assigned, or otherwise affected by the Chapter 11 proceedings,” the federal government argued. “The insurance contracts in this case powerfully illustrate the significance of petitioner’s interest. They impose on petitioner the obligation to indemnify up to $500,000 for each of thousands of asbestos-injury claims against debtors for which the asbestos-injury trust will be liable under the proposed plan.”
On the other side, the following amici sided with Kaiser: United Policyholders, a group of bankruptcy experts including professors and former bankruptcy judges, the co-chairs of the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 and the American Association for Justice.
The bankruptcy experts told the court that Truck Insurance’s “broad definition” of party in interest is “inconsistent with the fundamental precept that a person or entity seeking to join litigation as a party must have a concrete stake in the litigation and a risk of injury.”
“Here, petitioner does not have the potential for a direct economic loss or any action that threatens its welfare,” the group argued. “As an ‘insurance neutral’ bankruptcy, it will have no financial effect on petitioner, who is bound to pay claims up to the insurance limits in any event.”
Ho cited the coalition of amicus support in favor of Truck Insurance as another key to achieving victory at the high court.
“We were asking the court to alter the status quo,” she said. “Having that coalition of amici, we were able to give the court comfort that if it went our way that the heavens weren’t going to fall… I think that was reflected in the fact that the amicus briefs in our support were brought up at oral argument and mentioned in the court’s opinion.”
She said another key was the bankruptcy expertise and knowledge that her colleagues Michael A. Rosenthal and Bob Krakow brought to the table.
“We were able to translate complicated issues and concepts in bankruptcy law in a way that resonated with the Supreme Court,” Ho said. “Both Michael and Bob were in the trenches of this case from the very beginning of the bankruptcy case, and laboring under the weight of this insurance neutrality doctrine that courts have adopted that kept concerns about the plan from being heard.”
“So it’s especially gratifying to have the Supreme Court unanimously say, ‘Yes, you are a party in interest. You have a seat at the table. Your voice should be heard.’”
Truck Insurance Exchange is also represented by Russ Falconer, Elizabeth Kiernan, Stephen Hammer, and Arjun Ogale of Gibson Dunn in Dallas.
Kaiser Gypsum Company is represented by Charles Marshall of Jones Day in Washington, D.C.
The Official Committee of Asbestos Personal Injury Claimants is represented by David C. Frederick of Kellogg, Hansen, Todd, Figel & Frederick and Kevin C. Maclay of Caplin and Drysdale in Washington, D.C.
The case number is 22-1079.