Insurers Have Standing to Object to Reorganization Plans

(Excerpt) Section 1109 of title 11 of the United States Code (the "Bankruptcy Code") allows any "party in interest" to raise, appear, and be heard on any issue in a chapter 11 bankruptcy case. The term party in interest is not otherwise defined in the Bankruptcy Code. The United States Supreme Court has interpreted the phrase to describe a party that has a sufficient stake in the outcome of the bankruptcy reorganization. Importantly, Section 1128(b) of the Bankruptcy Code explicitly provides that a party in interest "may object to confirmation of a plan" in a chapter 11 case. The United States Supreme Court has held that an insurer with a significant financial stake is a party in interest with the right to object to a proposed chapter 11 reorganization plan. The significance of the insurers’ financial stake and thus bankruptcy standing to object to the plan are usually dependent on if the reorganization plan is defined as "insurance neutral." A plan is insurance neutral if it does not increase the reorganizing debtor’s insurance provider’s financial obligations or risks. If a reorganization plan is insurance neutral, an insurer will not have bankruptcy standing; if it is not insurance neutral, the insurer will have bankruptcy standing. This article analyzes why insurers, in chapter 11 bankruptcy cases, have standing under the Bankruptcy Code as parties in interest, allowing for their objections to the confirmation of a chapter 11 debtor’s plan. Part I will describe the traditional understanding of a legal party in interest. Part II will discuss the decision In re Thorpe Insulation Co., highlighting the facts, reasoning and holding of what becomes almost a precursor to the holding in Truck Ins. Exch., combining the previous definitions of a party in interest as well as an introduction to insurance neutral plans with asbestos liability claims specifically. Part III then explains Section 524(g) trusts created in response to asbestos liability claims, and finds, using case law, that in these specific cases, it is rare that insurers will be found lack standing. Next, in Part IV, the article will move to a detailed discussion of the analysis of Truck Ins. Exch. alone, providing an overview of the facts of the case, the influences for the Court’s analysis in defining Section 1109(b), and the logic behind the conclusion that the insurers had standing. Finally, the article will conclude in Section V with a summary of the modern case law analyzed in the article, and a concise rule of law as it relates to the specific issues considered in the other sections.