The Supreme Court ruled unanimously on June 6 that an insurance company has standing to challenge a bankruptcy reorganization plan that it claims will leave it open to paying fraudulent asbestos exposure claims.
Asbestos is a fire-resistant mineral whose fibers used to be commonly employed in construction and other industries. Although it had been used for thousands of years and was once called a “miracle mineral,” it was later discovered that it can cause lung cancer, mesothelioma, and asbestosis.
Over time, regulators cracked down on asbestos, and its use is now banned in many industries around the world.
While the last asbestos mine in the United States closed in 2002, Russia continues to mine the fibrous mineral.
Billions of dollars of claims related to asbestos-caused injuries are filed each year in the United States.
The Supreme Court’s decision in the case could affect mass tort bankruptcies in which organizations such as the Boy Scouts of America and various Roman Catholic dioceses use bankruptcy courts to deal with liabilities arising out of personal injury claims. The parties who are sued often look to insurers to cover their costs.
The oral argument on March 19 focused on whether Truck Insurance has legal standing in Kaiser Gypsum’s Chapter 11 bankruptcy reorganization plan, considering that it will be liable for claims against the company.
The plan would compel the insurer to cover many of the 14,000 or so claims made against Kaiser for as much as $500,000 per claim.
The appeal was from a decision by the U.S. Court of Appeals for the Fourth Circuit, which held that the petitioner, Truck Insurance, lacked legal standing to object to Kaiser Gypsum’s Chapter 11 reorganization blueprint.
Truck Insurance had objected to Kaiser’s bankruptcy plan because it failed to provide anti-fraud protections regarding the insured claims, which could mean that the insurer would be responsible for invalid claims.
The Fourth Circuit previously affirmed the ruling of the U.S. Bankruptcy Court for the Western District of North Carolina, which held in 2020 that the insurer didn’t have standing to contest the plan because it wasn’t a “party in interest,” according to bankruptcy law.
At issue was the “bankruptcy standing” doctrine, which, along with the associated “insurance neutrality” rule, prevents an insurer from participating in bankruptcy unless the insurer can show that the plan formally alters the “quantum of liability” under the insurer’s contracts.
The insurance neutrality rule prevents the insurer from objecting to a reorganization plan even when, as in this case, the insurer bears near-exclusive financial responsibility for the claims under the plan, according to the insurer’s petition filed with the Supreme Court.
The two related companies, the respondents, Kaiser Gypsum and Hanson Permanente Cement Inc., manufactured construction materials containing asbestos.
Truck Insurance was their primary insurer.
Since 1978, the two companies have been named in more than 38,000 asbestos-related lawsuits nationwide.
In the new opinion, Justice Sotomayor wrote that the Bankruptcy Code permits any “party in interest” to “raise” and “be heard on any issue” in a Chapter 11 bankruptcy proceeding.
“The question in this case is whether an insurer with financial responsibility for a bankruptcy claim is a ‘party in interest.’”
Truck Insurance is the primary insurer for companies that made and marketed products containing asbestos. The companies petitioned for Chapter 11 bankruptcy after facing thousands of asbestos-related lawsuits. Truck Insurance was looking at as much as $500,000 in liability for each claim it covered under insurance policies issued to the companies, she wrote.
Truck Insurance objected to the bankruptcy reorganization plan primarily because the plan didn’t have disclosure requirements it believed might save it from having to pay millions of dollars in fraudulent claims.
The Fourth Circuit decided that Truck Insurance was not a “party in interest” because the reorganization plan was “insurance neutral.” In other words, the plan neither increased the insurer’s “prepetition obligations nor impaired its rights under the insurance contracts.”
“This Court disagrees,” Justice Sotomayor wrote.
“The insurance neutrality doctrine conflates the merits of an insurer’s objection with the threshold ... question of who qualifies as a ‘party in interest.’”
The Bankruptcy Code asks “whether the reorganization proceedings might directly affect a prospective party, not how a particular reorganization plan actually affects that party.”
That means Truck Insurance is a “party in interest,” within the meaning of the Bankruptcy Code.
Justice Sotomayor wrote that an insurer with financial responsibility for a bankruptcy claim “is sufficiently concerned with, or affected by, the proceedings to be a ‘party in interest’ that can raise objections to a reorganization plan.”
The Bankruptcy Code “grants insurers neither a vote nor a veto; it simply provides them a voice in the proceedings,” she wrote.
