Breaking Barriers: Advocating for State Attorneys in Ch. 11 Proceedings

By Candice L. Kline

State attorneys sometimes face obstacles when appearing in chapter 11 cases, ranging from the cold shoulder to opposition from debtor and creditor constituencies. Financial stakeholders have played offense and leveraged bankruptcy as a sword against public-interest stakeholders.

State attorneys acting in the public interest are important voices on consumer protection and law enforcement issues. As federal agencies such as the U.S. Trustee’s Office and the Consumer Financial Protection Bureau face challenges, state attorneys should lead on public-interest positions. Ensuring their participation is important for public confidence and improved bankruptcy case outcomes.

States Have a Valuable Impact on Key Cases

State attorneys play a key role in improving plan outcomes while also enforcing state law and the public interest. Two current chapter 11 cases show the value and necessity of state involvement: 23andMe and Purdue Pharma.

In 23andMe, 27 states and the District of Columbia, as well as the U.S. Trustee’s Office, engaged on the protection of sensitive DNA genetic data in the context of its sale.1 Genetic data is as extensive as it is intensely personal, implicating genetic, health and personal traits information for millions of consumers (and their relatives).2 According to the state of Texas, “[t]he need for heightened protection in this case is not hypothetical, and the importance of safeguarding such highly sensitive [personally identifiable information] cannot be overstated.”3 Detailing a prior severe data breach and related state investigations, and violations of state privacy laws, several states insisted on the appointment of a consumer privacy ombudsman (CPO) under §§ 332 and 363(b) of the Bankruptcy Code.4

The debtors proposed a nonstatutory “Independent Customer Data Representative,” but given the sensitive data involved, a statutory CPO was essential.5 On DNA testing data, it seems hard to imagine proceeding without a statutory CPO. The CPO’s appointment, urged by the states, occurred through stipulation and agreed order,6 and an 117-page examination report was issued.7

The states also sought no sale of sensitive genetic data without “express informed consent” by each consumer.8 Their interests go beyond financial outcomes to protect consumer interests in their genetic data, and compliance with applicable state law. The debtors opposed more consent as unwarranted and impractical with 13 million consumers.9 Several states, under reservation of rights, agreed not to oppose the sale to TTAM Research Institute, the winning bidder controlled by 23andMe’s founder and chief executive officer Anne Wojcicki, provided that certain notice, procedures and regulatory safeguards are in place, including perpetual consumer genetic data-deletion rights.10 The bankruptcy court approved the sale of substantially all of 23andMe’s assets to TTAM Research Institute, which closed on July 14, 2025, on the basis that the transfer of customer data did not violate privacy laws and other protections were in place.11 State oversight kept consumer protection front and center throughout the bankruptcy sale process.

In Purdue Pharma, state opposition to the Sackler releases and the original bargain struck in the bankruptcy case drew attention to the Sackler settlement. When the original settlement was $4.3 billion, an attorney for the opposing states argued that “the breadth of the releases provided for the Sacklers — given what we believe they’ve done leading up to this bankruptcy — does not seem right to us.... That belief is based on the recognition that if the plan is confirmed they will have gotten every bit of protection and more than they would have received in their own bankruptcy.”12 Years later, the U.S. Supreme Court echoed this argument when reversing plan confirmation.13

Objecting states on appeal at the district court improved the settlement “by more than $1 billion in order to secure the consent of the eight objecting States. If past is prologue ... there may be a better deal on the horizon.”14 During the renewed mediation following the Supreme Court’s decision, state leadership contributed to achieving the new $7.4 billion settlement. Plan confirmation now enjoys support from 55 state attorneys general or equivalent authorities.15 The debtors, having made renewed strides toward a consensual and confirmable plan, seek a confirmation hearing beginning this November.16 These examples show the critical role that state attorneys play in safeguarding public interests in high-stakes bankruptcy proceedings.

Opening the Gates: Statutory Standing and Appearances

The question then becomes one of how to help with and make sure state attorneys have a voice in chapter 11 cases and face fewer obstacles. My interest in solidifying state public interest representation in chapter 11 began while representing the Ohio Consumers’ Counsel (OCC), a state consumer protection agency, in In re FirstEnergy Solutions.17 Throughout the case, the debtors opposed the OCC’s right to be heard or object. For example, on an issue affecting the public interest, the debtors reserved their rights to object to OCC’s standing, arguing that “[a]s neither a creditor nor debtor, the OCC is not a party entitled to enforce obligations under the Bankruptcy Code.”18 The standing threat persisted until the Sixth Circuit required consideration of the public interest in a FERC-regulated energy contract rejection dispute.19 Since then, the Supreme Court has decided Truck Insurance Exchange v. Kaiser Gypsum Co.,20 in which the “insurance neutrality” doctrine was rejected.21 When applied, the doctrine had left insurers without standing if a plan did not change the insurer’s pre-petition obligations or contractual rights.22

This asbestos-related chapter 11 case prompted the Court to interpret § 1109(b) of the Bankruptcy Code and consider the contours for party-in-interest standing. Titled, “Right to be heard,” § 1109(b) provides a nonexhaustive list of parties that adhere to common roles in chapter 11, such as the debtor, a creditor, the trustee and appointed committees.23 Each role corresponds to a recognizable financial interest in the case.24 The financial lens remained salient in Truck. The Court granted certiorari on “whether an insurer with financial responsibility for a bankruptcy claim is a ‘party-in-interest’ under § 1109(b).”25

While interpreting § 1109(b)’s party-in-interest text as “capacious” and intended to be applied “broadly,” the Court still required a financial stake.26 The provision applies to entities “potentially concerned with or affected by a proceeding.”27 Although acknowledging a desire for breadth and fair and equitable proceedings, the Court’s holding is narrow: “[I]nsurers such as Truck with financial responsibility for bankruptcy claims are not peripheral parties,” and are thus parties-in-interest.28 The Court left the determination of who qualifies as a party-in-interest to the equitable discretion of the presiding court, citing § 105(a).29

Truck helps public-interest stakeholders with a financial stake. Although the Court has recognized entities with financial responsibility for bankruptcy claims as parties-in-interest, questions may arise when states enforce laws or interests that lack a clear financial stake. What about situations where the state is enforcing a law or interest without a financial hook as obvious as insurers left holding the bag?

Recall FirstEnergy Solutions: As the OCC was neither a debtor nor a creditor, the debtors argued that the OCC lacked standing to be heard in the chapter 11 case. This position is too sharp. As recognized in Collier on Bankruptcy, although not included in the party-in-interest list, “regulatory agenc[ies] with supervisory responsibilities over the debtor’s business or financial affairs” have been parties-in-interest.30

Evolving case law post-Truck may help states. In In re AIO US Inc., Hon. Craig Goldblatt concluded that “constitutional and prudential standing ... concepts are no longer applicable,”31 and limits party-in-interest standing § 1109(b) to “parties with a stake in the dispute.”32 Even under this opinion, are consumer privacy interests enough?

To establish bankruptcy as the preferred forum for public-interest cases, it is imperative to address state attorney participation explicitly in § 1109(b). Leaving this critical issue to a court’s discretion and the adversarial process undermines efficiency and predictability. Streamlining state participation provides certainty and efficiency and ensures a voice for the public interest. A statutory fix expanding subsection (b) to include state attorneys and regulatory agencies seems justified.33

Removing Additional Barriers in Bankruptcy and Local Rules

Expanding state roles requires corresponding updates to the Federal Rules of Bankruptcy Procedure. For example, Bankruptcy Rule 2018(b) restricts state attorneys to intervening roles on behalf of “consumer creditors” under court-determined public interest, which seems outdated. This framework insufficiently addresses the broader regulatory concerns states face in modern bankruptcy proceedings.

For example, Rule 2018(b) limits a state attorney appearing as an intervening party (as opposed to a party-in-interest) to act on behalf of “consumer creditors if the court determines that an appearance is in the public interest.” The rule bans appeals.

Intervention is less useful for state regulators than party-in-interest standing. This framework insufficiently addresses states’ broader regulatory concerns. State laws today extend well beyond traditional creditor notions tied to product liability. For example, 23andMe implicates privacy and genetic-testing laws. This rule seems poorly suited for a rapidly changing society.

State attorneys, unlike their federal counterparts, also face such inconsistent procedural hurdles as hiring local counsel or obtaining pro hac vice admission, sometimes at significant cost.34 In the Southern District of Texas, federal attorneys receive fee exemptions, but non-Texas state attorneys do not.35 In Delaware, the local bankruptcy rule on attorney admissions exempts government-employed attorneys (including federal, state and local attorneys) from the local counsel affiliation requirement.36 The Southern District of New York’s local rules provide some admission exemptions for federal attorneys, but not for state attorneys.37

The inconsistency and burdens on state attorneys under local rules has not gone unnoticed. The venue reform bill has long included a requirement for rulemaking on out-of-state admission for government attorneys. Under the proposed rule, any attorney representing a governmental unit could appear without meeting any local court rule on attorney appearances and use of local counsel.38 Reducing barriers and promoting uniformity for state attorneys in all bankruptcy courts makes sense.

Conclusion

Given states’ important contributions in chapter 11 cases to safeguard the public interest, policymakers and practitioners should make it easier for state attorneys to appear and be heard. If chapter 11 truly is a mass tort and innovative legal rights forum, ensuring participation by state attorneys best serves the public interest and builds confidence in bankruptcy as a preferred forum for complex chapter 11 cases.

Candice Kline is an assistant professor at the University of Toledo College of Law, teaching bankruptcy and corporate law courses. She is also a former partner and is now Of Counsel with Saul Ewing LLP in Chicago.