US Supreme Court backs insurers' right to speak up in bankruptcy
Adds comment from Truck Insurance attorney in paragraphs 9-10, revises paragraph 5
By Dietrich Knauth
June 6 (Reuters) -The U.S. Supreme Court on Thursday ruled that insurers have a broad right to weigh in on bankruptcies that may put them on the hook for paying claims, in a victory for an insurer challenging the restructuring plan of a manufacturer of asbestos-containing products.
The Supreme Court in an 8-0 opinion authored by Justice Sonia Sotomayor held that Truck Insurance Exchange should have been allowed to object to Kaiser Gypsum's proposed $50 million settlement of thousands of asbestos-related lawsuits through its Chapter 11 bankruptcy reorganization, because the deal would be funded largely by the company's insurance policies.
Truck has argued that the building materials company should modify its settlement to help weed out fraudulent claims and reduce the insurer's liability for lawsuits by people alleging that exposure to asbestos in Kaiser Gypsum products caused their cancer.
The 4th U.S. Circuit Court of Appeals had decided that Truck was not entitled to object to the bankruptcy plan, because the settlement did not change the insurer's pre-bankruptcy contracts requiring it to indemnify Kaiser Gypsum for asbestos liabilities.
But Sotomayor said the 4th Circuit erred by applying a doctrine of "insurance neutrality" that was "conceptually wrong and makes little practical sense."
She said it did not take into account the fact that the bankruptcy settlement eliminated both Kaiser Gypsum's liability and its incentives to defend or reduce costs on the asbestos claims.
"Truck may well be the only entity with an incentive to identify problems with the Plan," Sotomayor wrote.
Justice Samuel Alito did participate in the case.
"We're very pleased that the Supreme Court unanimously held that insurers have a direct and obvious interest in their insured's reorganization, and so have a broad right to be heard in bankruptcy cases," said Truck's attorney, Allyson Ho of Gibson, Dunn & Crutcher.
An attorney for Kaiser Gypsumdid not respondto a request for comment.
Legal experts have said the case could have implications for other mass tort bankruptcies involving large numbers of victims and settlements funded by insurance, such as the bankruptcies of the Boy Scouts of America and several Catholic dioceses.
The Supreme Court ruling means that insurance companies will have "a seat at the table" in future bankruptcy cases involving mass-tort liability, said Matthew Madden, an appellate lawyer with Kramer Levin Naftalis & Frankel.
Simply giving insurers a voice will provide helpful oversight in mass tort bankruptcies, which aim to aggregate and settle large numbers of claims quickly, said Tancred Schiavoni of O'Melveny & Myers, who represents insurers. The process leaves little time or incentive to investigate claims on their merits, he added.
"This could be the most consequential tort reform issue to be decided this year," Schiavoni said. "When there is nobody guarding the hen-house, you get a lot of foxes."
Anthony Casey, a professor of bankruptcy law at the University of Chicago Law School, said the decision will limit bad behavior that could arise when debtors strike a deal with other constituents and leave insurers holding the bag. But the decision does not give insurers much leverage beyond the right to raise complaints, he said.
"The dynamic of mass tort cases is not going to be dramatically changed," Casey said. "A judge can still say, 'I heard you, but you're overruled.'"
Several appeals courts have decided whether insurers can participate in bankruptcy by focusing on whether the bankruptcy alters insurers' existing contract rights or on-paper liability for certain types of claims.
"By focusing on the insurer's prepetition obligations and policy rights, the doctrine wrongly ignores all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers and debtors," Sotomayor wrote.
Kaiser Gypsum had argued that Truck's objections could "derail" and delay its bankruptcy reorganization. But the Supreme Court said that U.S. bankruptcy law provides a broad right for participants to be heard, without necessarily giving them a vote or a veto in the proceedings.
The case is Truck Insurance Exchange v. Kaiser Gypsum Company Inc., U.S. Supreme Court, No. 22-1079.
For Truck Insurance Exchange: Allyson Ho of Gibson, Dunn & Crutcher
For Kaiser Gypsum: Kevin Marshall of Jones Day
For the asbestos personal injury committee: David Frederick of Kellogg, Hansen, Todd, Figel & Frederick
For the U.S. Solicitor General: Anthony Yang of the U.S. Department of Justice
Read more:
US Supreme Court torn over Purdue Pharma bankruptcy settlement
US Supreme Court appears to back insurers' participation in bankruptcy
Supreme Court declines to hear two-step bankruptcy case that drew Senate attention
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