Rochelle's Daily Wire

The Supreme Court heard oral argument on March 19 in Truck Ins. Exch. v. Kaiser Gypsum Co., the third bankruptcy case of the term. To resolve a split of circuits, the high court will decide whether any creditor or “party in interest” 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?

As usual, the outcome is impossible to determine based on the justices’ questions from the bench. It appears to this writer that the justices were struggling with several questions:

(1) Are Article III standards for constitutional standing applicable in chapter 11 cases?

(2) In a bankruptcy case, is standing established on filing, or sometime later in the case?

(3) Can a creditor with standing at the outset lose standing later in the case?

(4) Is standing as defined in Section 1109(b) coterminous with constitutional standing?

(5) Can Section 1109(b) be unconstitutional as applied if the section grants standing to someone who does not have constitutional standing?

(6) Do creditors and other “parties in interest” under Section 1109(b) have standing throughout the case to object to anything, even issues that do not affect them financially?

The justices recognized that bankruptcy cases are different from ordinary civil litigation, where principles of constitutional standing were developed. When deciding whether an order from a bankruptcy court is final and appealable, the Court developed a flexible approach.

Will the justices adopt a similarly flexible approach in fashioning standing requirements for bankruptcy cases? Or, are bankruptcy cases inflexibly bound by traditional Article III “case or controversy” standards?

However the Court rules about standing in chapter 11 cases, will the same rules apply in cases under chapters 7, 12 and 13, where Section 1109(b) is not applicable?

The Chapter 11 Plan Was ‘Insurance Neutral’

For a more thorough discussion of the facts in Truck Insurance, click here to read the ABI story published when the Court granted certiorari.

Briefly, the debtor’s “asbestos” chapter 11 plan was “insurance neutral.” That is, the plan preserved all of the rights that the insurer, Truck Insurance, held under the insurance policies it had issued before bankruptcy. The insurance company nonetheless objected to confirmation because it wanted the plan to include additional protections warding off fraudulent claims.

The Fourth Circuit held that the insurer had standing to contest the finding of insurance neutrality. Once the appeals court decided that the plan indeed was insurance neutral, the Fourth Circuit decided that the insurer had no standing to object to other features of the plan because its contractual rights were not affected. Truck Insurance Exchange v. Kaiser Gypsum Co. (In re Kaiser Gypsum Co.), 60 F.4th 73 (4th Cir. Feb. 14, 2023), cert. granted sub nom. Truck Ins. Exch. v. Kaiser Gypsum Co., No. 22-1079 (Oct. 13, 2023). To read ABI’s report on the Fourth Circuit’s decision, click here.

To be handed down before the end of the term in late June, the decision by the Supreme Court revolves around Section 1109(b), which says:

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.]

Apart from Section 1109(b), a litigant typically establishes Article III or constitutional 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. In many chapter 11 cases with deeply insolvent debtors, shareholders or subordinated creditors might not be able to show Article III standing.

As a matter of statutory interpretation, did Congress mean that a “party in interest” in Section 1109(b) also must have constitutional standing? Did Congress intend by Section 1109(b) to broaden standing in chapter 11 cases beyond parties with constitutional standing? Does Congress have the right to expand standing in bankruptcy cases beyond that which Article III permits? Does constitutional standing even apply in bankruptcy cases?

Lastly, does a deeply subordinated creditor or a shareholder have standing when the debtor is so insolvent that nothing under the plan will go in the direction of shareholders or deeply subordinated creditors?

Oral Argument

Arguing first, the insurance company took the position that anyone at the outset of the case who falls within one of the categories in Section 1109(b) will have standing throughout. Several justices were skeptical, suggesting that someone not a “party in interest” at the outset might gain standing by occurrences taking place later.

Early in argument, Chief Justice John G. Roberts, Jr. asked how the insurance company could have an interest in who receives policy proceeds, when it was clear that the insurer would receive none of the proceeds. He also asked whether “party in interest” is “the same test for Article III?”

Justice Sonia Sotomayor was searching for a loophole to expand standing in chapter 11 cases beyond parties with constitutional standing. Because the bankruptcy court is an Article I court and a bankruptcy case is akin to an administrative proceeding, was Congress free to enact broader standing?

In contrast, Justice Ketanji Brown Jackson worried about an expansive notion of standing. She seemed concerned that one of a debtor’s competitors could have standing under a broad interpretation of standing, even though the competitor was not a creditor.

Justice Neil M. Gorsuch wondered whether Article III even applies in bankruptcy. In ordinary civil litigation, he said that the plaintiff alone must show standing. If creditors are similar to defendants who aren’t required to show standing, perhaps creditors always have standing.

Justices Sotomayor and Elena Kagan both questioned how the constitutional standard of “directly and adversely affected” applies to standing in bankruptcy cases. Justice Kagan seemed to think that a party might have interests in a bankruptcy case beyond its own pecuniary interests.

Even though the insurer’s contractual interests were not impaired by the plan, Justice Kagan seemed to believe that the insurer might have standing because the insurer wanted the plan to improve its financial situation. In a somewhat similar vein, Justice Gorsuch said he was “struggling” with the question of why the insurer could not be heard to object to the plan.