ARGUMENT ANALYSIS

Justices appear sympathetic to insurance company in asbestos bankruptcy

Tuesday’s argument in Truck Insurance Exchange v. Kaiser Gypsum Co. considered a technical question under the Bankruptcy Code, how to decide when an entity is a “party in interest” under the statute, which gives it a right to “be heard on any issue” in a Chapter 11 proceeding. The debtor, a failed asbestos company, claims that it will perform its insurance contracts in full: It will pay all the deductibles it owes, 100 cents on the dollar. Accordingly, it argues, the insurance company cannot be heard in the bankruptcy court on the question of whether the exclusion of anti-fraud provisions from the plan makes it a plan “proposed in bad faith” and thus improper.

Much of Allyson Ho’s time arguing for the insurance company was spent responding to difficult hypothetical questions about whether an entity could be a party in interest if it had no material reason to think that the plan would affect it in any way. Some of the justices (including Chief Justice John Roberts) would worry in that case about transgressing the bounds of Article III, though others (Justices Sonia Sotomayor and Neil Gorsuch) seemed to think there were easy ways to avoid that problem.

But when it came time for Kevin Marshall’s argument for the asbestos company, the justices’ lack of sympathy was quite clear. For Justice Brett Kavanaugh it was “just common sense that an insurer … is going to have an interest in this.” He pointed, among other things, to fraud prevention provisions – which would benefit only the insurance company – that the debtor refused to include in the plan.

For Sotomayor, the key point was the apparent conflict of interest, as the debtor included the fraud prevention provisions for the portion of the claims it would pay and excluded those protections only for claims presented to the insurance company: “So who’s protecting the insurer? … [W]hat you’re suggesting to us is that they don’t have a right to say the plan is violating a bunch of other provisions of the Code … I’ve just never heard of parsing standing in that way.”

For Justice Elena Kagan, it was just the text: “Mr. Marshall, what I think everybody is saying to you is, well, they do have an interest in these anti-fraud provisions. Not just a concern, they have an interest, a material interest.” In response to Marshall’s suggestion that the debtor’s compliance with its contract protected the insurance company from any harm, Kagan retorted: “I don’t know why that should be the test. If I look at the language, that’s not the test. … If I think about the ordinary meaning of being a ‘party’ who’s ‘interest[ed],’ that’s not the test.”

For Roberts, it was the simple point that the statute mandates inclusion of all “creditors” as parties in interest, and the insurance company’s contract with the debtor plainly makes it a creditor. Justice Clarence Thomas seemed to share the same straightforward view.

One of the oddest parts of the argument was the lack of engagement with the relevant statute. Marshall kept returning to the point that the statute says that unimpaired creditors (like the insurance company) are treated as having accepted the plan. For that reason, they cannot vote for or against the plan. Marshall leaped from the voting point to the conclusion that the insurance company can’t object to the plan at all. But that ignores the structure of the statute. All “parties in interest” have an explicit right to “be heard on any issue” in a Chapter 11 proceeding. Making a creditor unimpaired is certainly important, but it has specific defined statutory consequences – the creditor is treated as voting for the plan and so when it comes to counting votes, the creditor cannot vote against the plan even if it hates it (like the insurance company here). But voting for the plan does not mean that creditors are no longer parties in interest. And most of the findings that a court has to make to confirm a plan have nothing to do with whether particular creditors do or do not support the plan. They involve things like whether the plan is feasible, proposed in “good faith,” and the like. The structure of the statute suggests that unimpaired status leaves the creditors as parties in interest, entitled to be heard; it just means that they (and their classes) cannot defeat the plan by voting against it.

We’ll see what the justices have to say, likely in a few months.