The Third Circuit Broadly Interprets Section 1128(b)s Party in Interest Standing Requirement

By: Michael A. Battema

St. John’s University Law Student

American Bankruptcy Institute Law Review Staff

The Third Circuit, in In re Global Industrial Technologies, Inc.,[1] recently held that insurance companies had standing to challenge the terms of the debtors’ proposed plan of reorganization (the “Plan”) because they had legally protected interests therein.[2]  In 2002, Global Industrial Technologies (“GIT”) and its subsidiary company, A.P. Green Industries, Inc., (“APG” and collectively the “debtors”), filed for chapter 11 protection in response to thousands of separate asbestos and silica-related personal injury claims filed against APG.[3]  In the Plan, the debtors sought to create two separate trusts that would assess and resolve the various claims against APG.[4]  Under the Plan’s terms, the trusts were to be funded by the proceeds of certain assigned insurance policies, which the debtors believed would fully cover all liabilities.[5]  Hartford Accident and Indemnity Company, First State Insurance Company, Twin City Fire Insurance Company, Century Indemnity Company, and Westchester Fire Insurance Company (collectively the “Insurers”) were among the insurers whose polices were assigned to the debtors’ silica-related trust.[6]  On November 14, 2007, the bankruptcy court confirmed the debtors’ Plan over the Insurers’ objections because the court determined that the Insurers lacked standing to object to the Plan.[7]

 Standing to object the confirmation of a bankruptcy plan is governed by section 1128(b) of the Bankruptcy Code (the “Code”),[8] which provides that “part[ies] in interest may object to confirmation of a [reorganization] plan.”[9]  Traditionally, parties before the bankruptcy courts have been required to meet the “injury in fact” standing requirement that litigants face in all federal cases under Article III of the Constitution.[10]  Departing from the traditional “injury in fact”[11] standard, In re Global Industrial Technologies, Inc. requires only that a party demonstrate that it had “personal stake[s] in the outcome of [the] litigation,”[12] a more limited standard.  The Third Circuit determined that the Insurers met this more limited standard because their coverage obligations could be implicated if the APG silica trust incurred liability beyond the Insurers’ coverage defenses.[13]  Essentially, the Third Circuit’s holding established that a contingent injury is sufficient to allow a party standing to object to a plan of reorganization.[14] 

Because the Third Circuit’s decision does not require that parties to a reorganization plan suffer actual injury under the terms of that plan, more parties affected by reorganization plans are likely to allege injury in order to contest a plan’s terms.  Bankruptcy practitioners must be wary that they will have to consider the rights of even fairly attenuated parties, as the Third Circuit’s broad interpretation of “party in interest”[15] means that even those parties at least have the right to be heard in bankruptcy court.  Although the Third Circuit’s decision may be beneficial to those parties listed in a debtor’s reorganization plan, this precedent—and the potential it creates to open the floodgates for parties to object—may prove to be unduly burdensome to bankruptcy courts.[16]