Bankruptcy Is A Valuable And Desirable Venue for Resolving Mass Tort Cases (Truck v Kaiser)

By: Donald L Swanson

“Bankruptcy provides a valuable and desirable venue for the resolution of [mass tort] disputes” by:

• “ensuring equitable recovery for all tort claimants”; and
• “preventing many of the inefficiencies that otherwise result from races to the courthouse.”

This quotation is from the Amicus Brief of Law Professors[fn.1] filed on December 14, 2023, with U.S. Supreme Court in Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., Case No. 22-1079.

It’s a statement of truth.

Unfortunately, it’s a truth that many don’t like—because many see bankruptcy as an evil, instead of the essential tool for our market economy that it actually is.

Specific Issue

The specific issue in Truck v. Kaiser, a mass tort bankruptcy case, is whether Debtor’s insurer can participate and be heard as a party in interest in the Chapter 11 bankruptcy.  The Fourth Circuit Court of Appeals held that the insurer could not—based on a prudential doctrine of “insurance neutrality.”

The Law Professors argue for reversal and broad participation under § 1109[fn. 2].  That broad participation includes a debtor’s insurer in mass tort cases. 

What follows is a summary of the Law Professors’ argument on the specific issue—and also on the broader issue of the role of bankruptcy in resolving mass tort cases.

–Statutory Text and Purpose

The Fourth Circuit’s denial of insurer’s participation disregards the plain meaning of § 1109(b) and adopts a narrow reading that limits access to bankruptcy proceedings.

Under the prudential doctrine of insurance neutrality, the Fourth Circuit holds that a debtor’s insurer is not a “party in interest” under § 1109(b) unless the reorganization plan “materially alters the quantum of liability that the insurer would be called to absorb.”

But that’s taking “prudence” too far, the Law Professors argue.  The role of a prudential doctrine must be consistent with the Bankruptcy Code’s (i) statutory text, and (ii) overarching purpose.  And the Fourth Circuit’s insurance neutrality ruling contradicts both.

–§ 1109(b)’s Text Mandates Broad Access to Bankruptcy Proceedings.

The text of § 1109(b) is clear: “A party in interest . . . may raise and may appear and be heard on any issue in a case under [Chapter 11].”

This unambiguous language broadly grants anyone with a direct financial stake an opportunity to participate on any issue that may affect that stake—including the insurer in this case.

–Restricting Access to Bankruptcy Proceedings Impedes Global Settlements.

Reading insurance neutrality into § 1109(b) impedes access to bankruptcy proceedings, which in turn impairs a core purpose of the Bankruptcy Code: i.e., providing a single forum where parties can coordinate to resolve multiparty disputes involving distressed businesses.

Section 1109(b) is central to such a purpose: by ensuring, encouraging and promoting broad participation in reorganization cases.

Significance for Mass Tort Cases

In many if not most mass tort cases, global resolution is not possible without widespread participation.

And layering a prudential limitation onto such participation:

• thwarts Congress’s goal of facilitating global resolutions through bankruptcy; and
• enables collusion and fraud against excluded parties—which is precisely what the insurer in this case finds objectionable.

A party affected by a reorganization must have the chance to be heard on any issue to ensure that the plan is productive, efficient, and the result of a good faith negotiation process.

That’s particularly important in the context of a reorganization plan. As one court explains:

• when a court approves a plan that allows a party to put its hands into other people’s pockets,
• the ones with the pockets are entitled to be heard and their legitimate objections addressed.

So, an insurer facing millions of dollars in financial liability—like the one here—must be considered a “party in interest” under § 1109(b).

By construing § 1109(b) narrowly, the Fourth Circuit below transforms a broad-access provision into an obstacle to bankruptcy standing and frustrates the purpose of § 1109(b) and the Bankruptcy Code itself.

–Jeopardizing the Fair, Efficient, and Global Resolution of Mass Tort Bankruptcies

The Fourth Circuit’s § 1109(b) ruling, if allowed to stand, will have detrimental and far-reaching consequences—particularly in mass tort bankruptcy cases, which almost always involve liability insurers.

When a debtor faces mass tort liability, Chapter 11 provides a valuable alternative to the otherwise-inevitable race to the courthouse, which often creates huge disparities in claimant recoveries and imperils the economic viability of debtor firms.

Bankruptcy proceedings reduce inequities among tort claimants by:

• ensuring that similarly situated claimants receive similar compensation; and
• also reducing economic inefficiencies that arise when a company has no way of escaping its debts.

But to curtail the potential for abuse while facilitating a fair and global resolution, all interested parties must be given access to the proceedings.

Given the growing prevalence of Chapter 11 proceedings involving mass tort liability, the need for insurer access to such proceedings is critical.

–Request for Relief

So, the Law Professors argue, the U.S. Supreme Court should reverse the Fourth Circuit’s decision below to:

• safeguard the broad access that Congress granted insurers like petitioner and all “parties of interest” in § 1109(b); and
• thereby, assure that Chapter 11 proceedings may continue to provide for the fair, efficient, and global resolution of mass tort disputes.

Conclusion

Bankruptcy is not a necessary evil.  Instead, it is an essential legal tool for our market economy.

One of the things bankruptcy is good at is this: managing mass tort cases.  Examples include asbestos cases, diocese cases, and even the Purdue Pharma case with its 97% approval vote from mass tort claimants. And that good should not be imperiled!

Here’s a “Thank you” to the Law Professors for advancing their argument for a continued and effective role of Chapter 11 for resolving mass tort cases.

_________________________

Footnote 1.  The law professors are, Anthony J. Casey of University of Chicago Law School, Laura Coordes of Arizona State University College of Law, Diane Lourdes Dick of University of Iowa College of Law, Brook E. Gotberg of Brigham Young University Law School, Joshua C. Macey of University of Chicago Law School, and Robert K. Rasmussen of University of Southern California School of Law.  And the quoted language is at page 3 of their brief.

Footnote 2. 11 U.S.C. § 1109(b) provides: “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.”

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