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Supreme Court Rules Debtors Must Anticipate Insurer Objections in Mass Tort Bankruptcies

August 20, 2024 – For years, debtors and creditors in Chapter 11 proceedings have been able to navigate around objections and confirmation hurdles raised by insurance companies by creating an „insurance neutral“ plan. This approach allowed them to avoid insurer interference and expedite the confirmation of a reorganization plan. However, a recent Supreme Court decision has changed the landscape of bankruptcy proceedings by ruling that insurance companies are considered „parties in interest“ and have the right to participate in Chapter 11 cases.

The case of Truck Insurance Exchange v. Kaiser Gypsum brought this issue to the forefront. In this case, Truck Insurance was the primary insurer for two companies facing bankruptcy due to asbestos-related lawsuits. The companies sought to confirm a reorganization plan that included an asbestos personal injury trust funded by Truck. Truck objected to the plan, arguing that it exposed them to fraudulent claims and altered their contractual rights. The lower courts initially rejected Truck’s objections, stating that the plan was „insurance neutral“ and did not impact Truck’s prepetition obligations or rights.

However, the Supreme Court’s unanimous decision in Truck Insurance Exchange v. Kaiser Gypsum changed the game. The Court ruled that insurance companies are indeed „parties in interest“ under the Bankruptcy Code and have the right to raise objections and be heard in Chapter 11 cases. This decision eliminated the concept of „insurance neutrality“ as a shield against insurer interference during bankruptcy proceedings.

The implications of this decision are significant for debtors facing mass tort bankruptcies. Insurance companies now have the ability to actively participate in the bankruptcy process, potentially leading to increased costs and delays. While debtors and creditors aim to negotiate a plan quickly to pay off creditors and exit bankruptcy, insurance companies may have conflicting interests in prolonging the process to delay payment and avoid litigation costs.

Dealing with insurer objections post-Truck requires a strategic approach. Debtors must engage with insurance companies and demonstrate good faith in negotiations to address objections effectively. Understanding the applicable insurance law and its intersection with the Bankruptcy Code is crucial for debtors to preserve and maximize insurance assets. Each bankruptcy case is unique, and debtors must navigate the complexities of insurance law to mitigate insurer objections and reach a consensual agreement.

In conclusion, the Supreme Court’s decision in Truck Insurance Exchange v. Kaiser Gypsum has shifted the dynamics of Chapter 11 proceedings involving insurance companies. Debtors and creditors must adapt to the new reality of insurer participation and develop strategies to handle objections effectively. By engaging with insurance companies and demonstrating good faith in negotiations, debtors can navigate the complexities of mass tort bankruptcies and work towards a successful reorganization plan.

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