Who Is A “Party in Interest”: Broad v. Narrow Construction (Truck v. Kaiser at U.S. Supreme Court)

When a federal court approves a [bankruptcy] plan allowing someone to put its hands into another person’s pockets, the person with the pockets is entitled to be fully heard and to have legitimate objections addressed.[Fn. 1]

Pop Quiz Question:

Does Insurer, in the following facts, have standing to object to Debtor’s Chapter 11 plan?

Debtor is in bankruptcy because of asbestos lawsuits.

Debtor proposes a Chapter 11 plan that is supported by all constituencies—except one:

100% of the asbestos personal-injury claimants vote to approve Debtor’s plan;
all but one of the other parties give unanimous support for Debtor’s plan; but
the sole hold-out is Insurer, whose policies cover some of the asbestos claims.

Insurer objects to confirmation of Debtor’s Chapter 11 plan, alleging that the plan:

provides “anti-fraud” protections for uninsured claims;
does not provide “anti-fraud” protections for claims against Insurer’s policy; and
allows for perpetration of fraudulent claims against Insurer.

Pop Quiz Answer:

Although the facts above are from a real case, there is no correct answer . . . yet.

I’ll try to explain.

Rulings & Petition for Certiorari

Insurer is not allowed by the Bankruptcy Court to present its objection to Debtor’s plan. The reason is § 1109(b), which says: “A party in interest . . . may raise and may appear and be heard on any issue in a case under this chapter.”

Insisting that it is a “party in interest” under § 1109(b), Insurer appeals. Both the U.S. District Court and the U.S. Fourth Circuit Court of Appeals disagree with Insurer, declaring:

Insurer “is not a party in interest under § 1109(b) with standing to challenge the Plan.”

So, Insurer files a Petition for writ of certiorari with the U.S. Supreme Court, which is docketed as Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., Case No. 22-1079.

Two Surprises

The three federal court rulings against Insurer are a surprise to me—how can a debtor’s insurer, claiming disparate treatment under a plan, not qualify as a “party in interest” under § 1109(b)?

And here’s another surprise—a circuit split exists. One view is that § 1109(b) is a broad expression of the usual standing rule (i.e., Article III standing). The other is that § 1109(b) places a limit on the usual Article III standing rule.

Here’s how the two competing views are expressed:

“Article III standing and standing under [§ 1109(b)] are effectively co-extensive. . . . Interpreting the ‘party in interest’ requirement as an additional obstacle to bankruptcy standing would frustrate the purpose of § 1109(b), which was intended to ‘confer broad standing at the trial level.’” In re Global Indus. Techs., 645 F.3d 201, 211 (3rd Cir. 2011).
“[A]n entity ‘that may suffer collateral damage’ but does not have a legally protected interest does not have standing under § 1109(b).” A broader reading “would effectively collapse the § 1109(b) requirements into Article III standing requirements.” Article III standing and § 1109(b) are not “effectively co-extensive” because “we must give some effect to Congress’s words.” In re Tower Park Props., LLC, 803 F.3d 450, 457 & fn. 6 (9th Cir. 2015).

Question Presented

The Question Presented to the U.S. Supreme Court is this:

“Whether an insurer with financial responsibility for a bankruptcy claim is a ‘party in interest’ that may object to a Chapter 11 plan of reorganization.”

Amici Curiae Brief of Law Professors

A group of law professors have filed an Amici Curiae Brief.

What follows is a summary of their perspective on the § 1109(b) “party in interest” question.

–Summary

The Fourth Circuit’s ruling:

disregards the plain meaning of § 1109(b);
limits access to bankruptcy proceedings under the “insurance neutrality” rule; and
holds that Insurer cannot object to Debtor’s plan unless the plan “materially alters the quantum of liability that the insurer would be called to absorb.”

This approach is wrong. It has both technical and practical deficiencies.

–Technical Deficiencies

A court cannot apply its independent judgment on what is “prudent” to reject clear statutory language.

For starters, § 1109(b)’s text mandates broad access to bankruptcy proceedings:

it grants a participation opportunity on any bankruptcy issue to anyone with a direct financial stake in the outcome;
it demonstrates a broad intent by providing an illustrative list of parties in interest, using the word “including”; and
it must be construed to mean what it says.

A broad access intent is also apparent from historical developments behind § 1109(b):

the revisions-over-time to predecessors of § 1109(b) reveal an intent to broaden access and to prevent control over bankruptcy proceedings by insider groups;
§ 1109(b) continues the tradition of expanding access to bankruptcy proceedings by including every “party in interest”; and
so, anyone with a sufficient stake in the proceeding has a right to be heard.

By denying Insurer the right to be heard on confirmation of a plan that substantially affects Insurer’s interest, the Fourth Circuit elevates a judge-made doctrine above—and at the expense of—the statutory text.

–Practical Deficiencies

Global settlements are often impossible without widespread participation.

Restricted access is an impediment. So, applying the prudential “insurance neutrality” doctrine to prevent Insurer from objecting to Debtor’s plan has this practical effect:

it impedes Insurer’s access to bankruptcy proceedings; and
impairs the bankruptcy role of a collective forum for resolving multiparty disputes—including Insurer’s dispute.

By layering a prudential requirement over the statute’s text, the Fourth Circuit’s decision:

thwarts Congress’s goal of utilizing bankruptcy to facilitate global resolutions; and
opens the door for collusion and fraud against excluded parties—which is precisely what Insurer contends in this case.

When Insurer faces millions of dollars in financial liability, common sense and fundamental bankruptcy policy dictate that it be a party in interest under § 1109(b).

By construing § 1109(b) narrowly, the Fourth Circuit:

has transformed § 1109(b) from a provision intended to confer broad access—into an additional obstacle to bankruptcy standing; and
frustrates the purpose both § 1109(b) and the Bankruptcy Code itself.

Conclusion

Here’s how the Amici Curiae Brief concludes.

“To ensure that bankruptcy proceedings can effectively facilitate global settlements, judges cannot pick and choose which interested parties get to participate based on atextual doctrines that serve to further restrict access.”

“Rather, judges must apply § 1109(b) as written, allowing any party with an Article III stake in the proceedings to be heard ‘on any issue.’ 11 U.S.C. § 1109(b).”

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Footnote 1. This quote is from the Amici Curiae Brief linked above, at 12.

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