Supreme Court sympathizes with insurer in bankruptcy proceeding

Print Friendly, PDF & Email

U.S. Supreme Court justices seemed receptive this week to an insurer’s claim that it should have a voice in a bankruptcy reorganization plan that it claims will leave it open to paying fraudulent asbestos exposure claims.

The oral argument in Truck Insurance Exchange v. Kaiser Gypsum Co. Inc. on March 19 focused on whether or not Truck Insurance has standing in Kaiser Gypsum’s bankruptcy reorganization plan considering that it will be liable for claims against the company.

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 in much of the world. The last asbestos mine in the United States closed in 2002, although 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 eventual 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 the 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 new hearing came in the wake of the Supreme Court’s refusal on Feb. 22 to halt the Boy Scouts of America’s $2.46 billion bankruptcy settlement after a group of alleged sex abuse victims asked the court to hold up the proceeding while they appealed the settlement. That case is Lujan Claimants v. Boy Scouts of America.

Justice Samuel Alito didn’t participate in the oral argument in Truck Insurance Exchange v. Kaiser Gypsum Co. Inc., which took place at the Supreme Court on March 19.

The appeal to the high court came after the U.S. Court of Appeals for the Fourth Circuit 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 is the “bankruptcy standing” doctrine, which, along with the associated “insurance neutrality” rule, prevents an insurer from participating in a 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. The companies filed for bankruptcy protection in 2016 with 14,000 claims still outstanding at that time and the possibility of future claims remaining, according to the Fourth Circuit.

Truck Insurance attorney Allyson N. Ho told the Supreme Court, “If anyone is a party in interest entitled to be heard in this Chapter 11 case, it’s the insurer, Truck, who will pay virtually every dollar the debtors owe the asbestos claimants.”

But the Fourth Circuit’s ruling, which prevents the insurer from being heard, “violates the text, context, and history of 1109(b),” she said.

Ms. Ho was referring to the Chapter 11 bankruptcy law, 11 U.S. Code Section 1109. Part (b) of the law, which states that “a party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.”

“[The circuit court ruling] defies the practical reality that Chapter 11 cases are, as this court has recognized, collaborative, working best when all stakeholders come together at the outset to hash things out,” she said.

“In silencing Truck, the Fourth Circuit violated those terms by limiting who a party in interest is and what issues they can raise.”

Justice Clarence Thomas asked at what point “do you determine the status of party in interest?”

“At the outset,” Ms. Ho replied.

“Section 1109(b)’s text refers to [the right to] be heard under any issue in this case.”

“How could you determine that … at the beginning of the proceedings?” Justice Thomas asked.

Justice Amy Coney Barrett questioned why the debtors were so insistent on not allowing the insurer to be heard in the bankruptcy proceeding.

“Why are you fighting this so hard?” she asked.

The attorney for the debtor respondents, C. Kevin Marshall, replied: “We have a deal with the creditors. We think it’s a valid deal and a good deal, and we want to be done with bankruptcy.

“[Truck Insurance] is coming in to try to blow up the deal that we have.”

Justice Sonia Sotomayor told Mr. Marshall: “So who’s protecting the insured? If … the insured can’t protect itself because you say it can’t go to the bankruptcy court, how is it being heard?”

Justice Elena Kagan told the attorney for the creditor respondents, David C. Frederick, that she understood his side’s argument that the insurer “was just looking to get a better deal now and to kind of take advantage of the bankruptcy.”

However, Justice Kagan said she wasn’t getting where he derived from the text “the idea that they’re not parties in interest because they have a material interest in what comes out of the bankruptcy proceeding, and they can improve their position materially in the bankruptcy proceeding.”

Justice Neil Gorsuch told Mr. Marshall: “The only question before us [is], can they be heard?

“I guess I’m struggling on that one.”

The Supreme Court is expected to rule on the case by the end of June.

This article by Matthew Vadum appeared March 19, 2024, in The Epoch Times. It was updated March 20, 2024.

Photo: Supreme Court Justice Amy Coney Barrett