To resolve a split of circuits, the Supreme Court agreed on Friday to hear a third bankruptcy case in the term that began this month. The justices will decide whether any creditor may object to confirmation of a chapter 11 plan, even if the creditor has no financial stake underpinning the objection. In other words, may creditors object to provisions in plans that do not affect them?
The Supreme Court will expound on the meaning of Section 1109(b). The subsection provides that:
A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter. [Emphasis added.]
The insurance company taking the appeal to the Supreme Court from the Fourth Circuit is aiming for the justices to rule that the “party in interest” standard in Section 1109(b) for conferring standing in bankruptcy cases is equivalent to Article III standing, also known as constitutional standing. Typically, a litigant establishes Article III standing by showing (1) an injury in fact that is concrete, particularized and actual or imminent; (2) an injury fairly traceable to the defendant’s conduct; and (3) an injury that can be addressed by a favorable decision. Ordinarily, the pivotal requirement is injury in fact. In this case, however, the issue may be whether the alleged injury was due to the debtor’s conduct.
In the Supreme Court, the insurance company-petitioner wants the justices to rule that anyone who is a creditor in any capacity has the statutory right under Section 1109(b) to object to any aspect of a chapter 11 plan. Some courts have adopted a so-called prudential standard limiting objections to creditors affected by an allegedly offending feature of a plan.
Conceivably, the justices might side with the Fourth Circuit by holding that the insurance company didn’t have Article III standing. If the Court finds Article III standing, the justices presumably will decide whether Section 1109(b) has a different and higher standard blocking objections except from creditors who are directly affected.
Conversely, if the Supreme Court concludes there was no Article III standing, the justices presumably will decide whether Section 1109(b) permissibly announces a lower standard permitting any creditor to object to anything in a plan.
Another way of looking at the case is to say that the Supreme Court is being asked to decide whether a creditor, to have standing in a bankruptcy case, must also be a “party in interest” with respect to the substance of the objection.
The Asbestos Plan
Faced with 14,000 pending lawsuits, the corporate debtor proposed a chapter 11 plan under Section 524(g) to create a trust dealing with present and future asbestos claims. All asbestos claims were to be channeled to the trust.
The principal asset for the trust was the debtor’s primary insurance policy, which had a $5,000 deductible per claim and a coverage limit of $500,000 per claim. The insurer was obliged by the policy to defend and indemnify the debtor, even if the claim was false or fraudulent. The policy had no maximum aggregate limit, and it was non-eroding, meaning that defense costs were not counted against the policy limit for each claim.
The plan divided asbestos claims into two classes: (1) those covered by the policy; and (2) those not covered by the policy. Uninsured claims were to be paid entirely by the trust. According to the insurance company, there were no uninsured claims.
Claims covered by insurance were to be litigated in the tort system, nominally against the debtor but subject to the coverage limit for each claim. The trust would pay the $5,000 deductible for each claim.
The claims covered by insurance remained subject to the insurer’s prepetition coverage defenses.
The uninsured claims were subject to antifraud provisions under the plan to protect the trust by requiring the claimants to provide disclosures designed to avoid fraudulent and duplicate claims. The plan had no antifraud provisions for insured claims.
Unsecured creditors were to be paid in full.
The asbestos claimants, the only class impaired by the plan, voted unanimously in favor of the plan. The only confirmation objection came from the insurer.
The insurer contended that the plan was not proposed in good faith because the anti-fraud provisions didn’t apply to insured claims. The insurer also objected, contending that the plan was not insurance-neutral. The bankruptcy court wrote an opinion recommending that the district court approve the plan, finding that it was insurance-neutral and filed in good faith. Because the plan was insurance-neutral, the bankruptcy court concluded that the insurer was not a party in interest under Section 1109(b) and thus lacked standing to challenge the plan.
The district court confirmed the plan and adopted the bankruptcy court’s findings in toto after de novo review.
The insurer appealed to the circuit.
The Fourth Circuit Affirmance
In February, the Fourth Circuit affirmed, in an opinion by Circuit Judge G. Steven Agee. Truck Insurance Exchange v. Kaiser Gypsum Co. (In re Kaiser Gypsum Co.), 60 F.4th 73 (4th Cir. Feb. 14, 2023). To read ABI’s report, click here.
Confusingly, the Fourth Circuit held that a creditor found by the bankruptcy court to have no standing does have standing to appeal the denial of standing to object to confirmation of the chapter 11 plan.
On the other hand, the Fourth Circuit found the plan to have been “insurance-neutral,” thereby giving the insurance company no standing in the bankruptcy court or on appeal to object to the merits of the plan pertaining to any other aspects of the plan. In a footnote, the appeals court also said that the insurer had Article III, or constitutional, standing to challenge the finding of insurance neutrality.
The insurer argued that it also had standing on appeal to challenge other provisions of the plan, such as good faith, because it also was a creditor on account of unpaid deductibles. The Fourth Circuit held that the insurer, as a creditor, was subject to the strictures of Article III standing, also known as constitutional standing.
As a creditor, the insurer was unimpaired and had no objections to its treatment as a creditor. Thus, Judge Agee said, the insurer alleged no injury in fact as a creditor. Consequently, the insurer had no Article III standing “to object to aspects of a reorganization plan that in no way relate to its status as a creditor but instead implicate only the rights of third parties (who actually support the Plan).” [Emphasis in original.] Id., 60 F.4th at 88.
The Fourth Circuit affirmed the district court’s judgment because (1) insurance neutrality left the insurer bereft of bankruptcy standing under Section 1109(b), and (2) the insurer had no Article III standing as a creditor to object to other aspects of the plan.
The ‘Grant’ of ‘Cert’
The insurer filed a petition for certiorari in early May. In July, the justices requested a response from the debtor. The Court granted certiorari on October 13, with Justice Alito taking no part in considering the petition and thus suggesting that he will not participate in the ruling on the merits.
The insurer urged the Court to grant certiorari to resolve a split of circuits. According to the insurer, “the Third Circuit has held that Section 1109(b), by its plain text, simply codifies the right of any party with Article III standing to appear and be heard in Chapter 11 proceedings.”
On the other hand, the insurer says that the “Fourth and Seventh Circuits have taken the opposite view . . . . [T]he Seventh Circuit held that Section 1109(b) silently preserved certain ‘other’ pre-Code “imitations on standing, such as that the claimant be within the class of intended beneficiaries of the statute that he is relying on for his claim.’”
The Ninth Circuit, according to the insurer, “has a foot in each camp.”
The insurer summed up the grounds for having Article III standing and status as a party in interest by alluding to its “responsibility to pay claims against the debtor [that] makes confirmation of the plan a concrete, traceable, and redressable injury.”
The Other Bankruptcy Cases this Term
There are already two bankruptcy cases on the Supreme Court’s calendar for the term that began this month. In August, the Supreme Court granted certiorari in Harrington v. Purdue Pharma LP, 23-124 (Sup. Ct.), to decide whether chapter 11 plans can confer so-called nonconsensual, nondebtor, third-party releases. Purdue will be argued on December 4.
On September 29, the U.S. Supreme Court granted the U.S. Solicitor General’s petition for a writ of certiorari in Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 22-1238 (Sup. Ct.), to decide whether chapter 11 debtors are entitled to refunds for overpayment of fees for the U.S. Trustee System.
In Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022), the Court unanimously held that the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee System was unconstitutional because it was not immediately applicable in the two states with Bankruptcy Administrators rather than U.S. Trustees. The Court in Siegel explicitly left open the question of remedy. No date has been set yet for argument in Hammons Fall.
To resolve a split of circuits, the Supreme Court agreed on Friday to hear a third bankruptcy case in the term that began this month. The justices will decide whether any creditor may object to confirmation of a chapter 11 plan, even if the creditor has no financial stake underpinning the objection. In other words, may creditors object to provisions in plans that do not affect them?
The Supreme Court will expound on the meaning of Section 1109(b). The subsection provides that:
A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter. [Emphasis added.]
The insurance company taking the appeal to the Supreme Court from the Fourth Circuit is aiming for the justices to rule that the “party in interest” standard in Section 1109(b) for conferring standing in bankruptcy cases is equivalent to Article III standing, also known as constitutional standing. Typically, a litigant establishes Article III standing by showing (1) an injury in fact that is concrete, particularized and actual or imminent; (2) an injury fairly traceable to the defendant’s conduct; and (3) an injury that can be addressed by a favorable decision. Ordinarily, the pivotal requirement is injury in fact. In this case, however, the issue may be whether the alleged injury was due to the debtor’s conduct.