The Supreme Court held last term in Truck Insurance that a broadly defined party in interest under Section 1109(b) has the right to appear and be heard in a chapter 11 case. Bankruptcy Judge Wendy A. Kinsella of Syracuse, N.Y., interpreted the decision to mean that a Section 1109(b) party in interest will not have standing in a chapter 11 case without also satisfying the demands of prudential standing and Article III constitutional standing.

Like Truck Insurance, the case before Judge Kinsella involved insurance companies. Specifically, the debtor was a Catholic diocese dealing with sexual abuse claims in a chapter 11 reorganization.

With a plan on the table, insurers sought discovery, but the debtor contended that the insurance companies lacked standing because they have “not acknowledged or been found to be financially responsible for the survivors’ claims,” Judge Kinsella said in her December 9 opinion.

According to Judge Kinsella, the plan proponents contended that the insurers had no standing to undertake discovery without demonstrating that they would “suffer a concrete and particularized injury in fact that is actual and imminent, not speculative, as a result of plan confirmation.” The plan proponents also took the position that the insurers “cannot object to confirmation on the ground that a plan infringes upon the rights of another non-objecting party.”

Of course, the outcome would turn mostly, if not entirely, on Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., 602 U.S. 268 (June 6, 2024). To read ABI’s report, click here.

Standing Under Truck Insurance

To rule on the insurers’ standing to take discovery, Judge Kinsella first analyzed whether the insurance companies were “parties in interest” under the Supreme Court’s interpretation of Section 1109(b) in Truck Insurance. The subsection gives standing in a chapter 11 case to 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.”

Quoting the Supreme Court, Judge Kinsella said, “The inquiry of whether an entity is a party in interest is ‘whether the reorganization proceedings might affect a prospective party, not how a particular reorganization plan actually affects that party.’” Id. at 283.

Although the insurers had not admitted liability, Judge Kinsella pointed out that the debtor had asserted that the insurance companies had financial responsibility, had filed an adversary proceeding claiming breach of contract, and had banked on assigning the insurance policies to the trust to be created under the plan.

Finding “that liability does not need to be acknowledged or adjudicated before the teachings of Truck apply,” Judge Kinsella held that Truck Insurance was “directly on point [and that the insurers] are parties in interest in this case under § 1109(b) and Truck.”

Constitutional and Prudential Standing Survived

Finding the insurers to be parties in interest “does not end the analysis,” Judge Kinsella said. She went on to say,

[N]either § 1109(b) nor the Truck holding satisfies or replaces constitutional and prudential standing requirements. In bankruptcy court, a party must satisfy (1) Article III Constitutional standing; (2) federal court prudential standing; and (3) the party in interest standing under § 1109(b).

The failure of the Supreme Court to discuss constitutional or prudential standing was not “an implicit rejection of these requirements,” Judge Kinsella said. Believing that stare decisis applied because Truck Insurance was “void of any reference to Article III and prudential standing,” the judge found herself required to “follow the existing Second Circuit precedent which not only requires party in interest standing, but constitutional and prudential standing as well.”

Citing bankruptcy court decisions predating Truck Insurance, Judge Kinsella said that the Court’s new pronouncement did “not overturn well established precedent recognizing that while ‘[a] party in interest may object to confirmation of a plan, 11 U.S.C. § 1128(b), it cannot challenge portions of the plan that do not affect its direct interests.’”

Acknowledging that she was citing precedent that “predates Truck,” Judge Kinsella said that the authorities were “consistent with the Supreme Court’s stated intention to allow the [insurers] a full and fair opportunity to be heard without allowing them to derail the confirmation process.”

Constitutional and Prudential Standing Sometimes Satisfied

Having established that the concepts of constitutional and prudential standing still apply, Judge Kinsella turned to the question of whether the insurers met those standards.

Constitutional standing, or Article III standing, Judge Kinsella said, is “very generous” and requires only a “trifle” of injury. Generally, she said, a party in interest will also have constitutional standing.

In the diocese case, the insurers were alleging that the plan would alter their rights in “many specific ways.” Finding “potential injuries,” Judge Kinsella decided that the insurers had “constitutional standing to obtain certain discovery in connection with the Plan.” [Emphasis added.]

Addressing prudential standing, “a judicially crafted doctrine,” Judge Kinsella cited courts in the Second Circuit for having said “that ‘[p]rudential limitations on standing are especially important in bankruptcy proceedings which often involve numerous parties who may seek to assert the rights of third parties for their own benefit.’”

On prudential standing, the debtor and the insurers differed. The insurers took the position that they were entitled to discovery on all aspects of the plan, while the debtor contended that the insurers were not entitled to discovery that would only involve the survivors’ treatment under the plan.

Generally, Judge Kinsella said, “most” of the insurers’ discovery requests were relevant to confirmation issues that “may directly impact them.” On the other hand, she said that the insurers had no standing to take discovery “where only the third-party survivors’ rights are implicated.”

Applying Rules 26 and 34 alongside the principles laid out in her opinion, Judge Kinsella granted or denied discovery requests in the final 48 pages of her opinion.

Observations

Interpreting Truck Insurance, Judge Kinsella is on the right track. She is correct that the Court’s unanimous opinion does not mention Article III or constitutional standing.

Standing is a jurisdictional requirement arising from Article III of the Constitution. Common law or even a statute cannot confer standing that would give rise to jurisdiction beyond Article III. Understanding that Section 1109(b) cannot confer standing more than the Constitution allows, this writer interprets Truck Insurance as having recognized a presumption of standing under Section 1109(b).

A presumption of standing makes good sense in chapter 11. With thousands of parties sometimes involved in one case, a presumption of standing obviates the possibility of arguments over standing repeatedly in the reorganization.

Like any other, a presumption of standing can be overcome. It stands to reason, therefore, that a party in interest might lack constitutional standing in particular circumstances, just like Judge Kinsella said.

There is a point in Judge Kinsella’s opinion where reasonable parties may disagree. She found no standing for the insurers regarding issues that affect only abuse survivors.

Understandably, the insurers would wish to kill any plan the diocese might offer. It would therefore be in their interest to defeat the plan by showing that any feature is impermissible under Section 1129.

Officious intermeddling can be ethically obnoxious, but when interjection would foster a party’s justifiable ends, perhaps the Constitution grants standing.

The survival of prudential standing has been in doubt, even before Truck Insurance. In Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014), the Supreme Court decried the use of “prudential standing” and more recently said that federal courts have a “virtually unflagging obligation” to exercise Article III jurisdiction. See, e.g., Colorado River Water Conservation Dist. v. U.S., 424 U.S. 800, 817 (1976); and FBI v. Fikre, 601 U.S. 234, 240 (March 19, 2024).

If the issue were to reach the Supreme Court, the justices might decide that prudential standing in bankruptcy cases is a dead letter.

One final point. Truck Insurance only dealt with the peculiarities of Section 1109(b) in chapter 11 cases. The concept of a presumption of standing may not apply in chapters 7, 12, 13 and 15.

The opinions are of the writer, not ABI.