The U.S. Supreme Court has agreed to hear an appeal of a Fourth Circuit ruling involving an issue prevalent in many mass tort cases as to whether an insurer has standing to object to a Chapter 11 Plan when the insurer’s interests are not affected. Herein, the Fourth Circuit ruled that the insurer did not have such standing. See Truck Insurance Exchange vs. Kaiser Gypsum Company, Inc., U.S. No. 22-1079. See also In re Kaiser Gypsum Co., 60 F. 4^th 73 (4^th Cir. 2023).

The Plan proposed by the Debtor, Kaiser Gypsum, channeled all current and future uninsured asbestos and environmental claims into a bankruptcy trust (the “Trust”) per 11 USC Section 524 (g) and required these claimants to make disclosures of claims they may have made against other asbestos trusts which in turn would allow the Trust to audit such other claims to prevent fraud or duplication. The Bankruptcy Trust had a $49 million fund. The Plan then channeled claims covered by insurance to the tort system to collect per the insurance coverage without the concomitant disclosures. The Bankruptcy Court confirmed the Plan which ruling was affirmed by the District Court. The primary insurer appealed this ruling to the Fourth Circuit.

The Insurer filed an appeal asserting, inter alia, that: (1) the Plan altered its rights by barring it from raising in future cases that Debtor’s conduct violated its duties under the insurance contracts, and that (2) the Plan encouraged fraud as it did not impose on any future tort suits the insurer’s desired fraud prevention measures or disclosure requirements. These objections also rested on the premise that the Plan violated Debtor’s policies and that Debtor failed to act in good faith when they proposed a “two tier” standard based upon whether the claim was insured or not, thus resulting in disparate monitoring of claims. The Fourth Circuit rejected all of these arguments and opined that any “cooperation clause” was not applicable in the Plan process and found that the Plan was “insurance neutral” (and therefore the insurer lacked statutory authority or standing under the Bankruptcy Code to challenge the merits of the Plan). Put another way, the Fourth Circuit felt that the Plan did not take away any of the Insurer’s rights to defend itself against a claim (even if groundless or fraudulent) in the ordinary course of its business. 

In light of the many asbestos and tort bankruptcies which involve insurance issues, the decision here is highly anticipated and will resolve the split in the Circuits (note that the Third Circuit allows the insurer such standing to object).

To discuss the issues raises here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.