The Supreme Court on Tuesday will hear oral arguments in a dispute with significant implications for thousands of tort victims and hundreds of millions of dollars proposed settlements across several cases.
In Truck Insurance Exchange v. Kaiser Gypsum Co., the court will consider if insurers have a big enough stake in bankruptcy plans to challenge them. Insurers in many bankruptcies are kept at arm’s length, barred from objecting to a reorganization plan unless they are specifically affected by it.
Truck Insurance Exchange, which lost appeals at the district and circuit levels, says it should be allowed to object to Kaiser Gypsum’s reorganization plan because Truck is on the hook to pay thousands of personal injury claimants who say they contracted asbestos-related illnesses from the company’s wallboard manufacturing business.
The Supreme Court’s ultimate decision has the potential to add a fresh dynamic to the growing world of mass tort bankruptcies, as organizations like Catholic dioceses and the Boy Scouts of America use bankruptcy to settle liability through court-approved plans that are often funded with the help of insurance policies.
One of the most high-profile mass liability bankruptcies, Purdue Pharma, has garnered major attention for its own Supreme Court case. Like Purdue, Tuesday’s arguments in Kaiser’s case could lead to cascading effects through the bankruptcy and mass tort systems. The Supreme Court’s decisions for this term could come by the end of June.
“This one is sort of flying under the radar, but in mass torts, it’s a big deal,” Tancred Schiavoni, co-chair of O’Melveny & Myers insurance practice, said.
Truck’s backers, like Schiavoni, say insurance companies should have standing to challenge bankruptcy plans because they have a significant financial stake and can help root out fraud. Because insurers are often asked to cover the cost of tort claims, they have a financial incentive to make sure they’re not paying out fraudulent claims. In many mass tort cases, insurers fight for more stringent standards to evaluate claims.
Opponents say the fraud concerns are overblown. Allowing an insurer to object will open bankruptcies to disruption from anyone adversely affected by a plan, they say.
“What this potentially does is further complicate the ability of people to get compensation,” Robert Peck, president of the Center for Constitutional Litigation, said. Peck wrote an amicus brief on behalf of the American Association for Justice, a plaintiff lawyer group.
An Insurer’s Interest
The US Bankruptcy Court for the Western District of North Carolina in 2020 approved Kaiser Gypsum’s Chapter 11 plan. The plan established a trust to pay personal injury claims, but it didn’t include anti-fraud measures for insured claims.
Truck accused Kaiser of colluding with asbestos claimant representatives to include anti-fraud measures only for uninsured claims, leaving the insurer without fraud protection for 14,000 insured claims, for which it now “bears the financial burden.”
Truck objected to Kaiser’s plan on those grounds, but the bankruptcy court determined the insurer didn’t have standing to challenge the plan because it was not a “party in interest.” A district court rejected an appeal from Kaiser, and the US Court of Appeals for the Fourth Circuit affirmed, ruling Truck didn’t have standing because the bankruptcy plan didn’t change its rights or responsibilities. In other words, the plan was “insurance neutral.”
Truck asked the Supreme Court to determine if an insurer’s financial responsibility for a bankruptcy claim gives it standing under the US Bankruptcy Code. A bankruptcy plan doesn’t need to change an insurer’s responsibilities in order for it to be a party in interest, Truck says.
“As the party who must pay, it seems reasonable to conclude that the insurer does have standing, that it is a ‘party in interest,’ and that it should be afforded a meaningful opportunity to be heard,” Scott Seaman, a partner at Hinshaw & Culbertson LLP, said in an email.
Even though the bankruptcy plan didn’t change Truck’s responsibilities, the insurer is still affected by the plan, it says.
“Only two outcomes were possible: a plan with fraud-prevention measures or a plan without them,” Truck said in a brief. “That choice directly and adversely affects Truck.”
Insurers are a central component of bankruptcy plans, their policies frequently providing a source of victim compensation, Schiavoni said. “The entire plans are basically vehicles to exhaust the policies and coverage,” he said.
‘Cornucopia of Characters’
Kaiser and asbestos claimants say the insurer is trying to rewrite bankruptcy law and is overplaying fraud concerns without evidence.
Allowing insurers with interests like Truck to object to plans would open bankruptcies to disruption from a wide range of parties, Kaiser said.
“As this Court has explained, the focus of Chapter 11 is aiding debtors and their creditors, not the cornucopia of characters that may fear a collateral injury from a reorganization plan,” Kaiser said in a Supreme Court filing.
Fraud is rare and Truck hasn’t backed up its collusion allegations, Kaiser said. Courts have processes for weeding out fraud, and companies themselves have incentives to push against fraudulent claims, not needing an insurer to bring them to their attention, Peck said.
“Companies are constantly afraid of liability,” he said. “They’re not anxious to see that fraudulent claims are made so that they could potentially be made in the future against them.”
Truck Exchange is represented by Gibson, Dunn & Crutcher LLP. Kaiser Gypsum is represented by Jones Day.
The case is Truck Insurance Exchange v. Kaiser Gypsum Co., U.S., No. 22-1079, 3/19/24.
