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Supreme Court Puts End to Prudential Barriers In Chapter 11 Appeals
For decades, insurers seeking to object in their insured's Chapter 11 reorganizations were blocked by the "insurance neutrality" doctrine, a prudential limitation that stopped courts from considering objections on the merits unless the insurer could show a confirmed plan "impair[ed] the insurer's pre-petition policy rights" or "'alter[ed] the quantum of liability'" it faced. But in Truck Insurance Exchange v. Kaiser Gypsum, the U.S. Supreme Court unanimously rejected this judge-made limitation as "conceptually wrong and mak[ing] little practical sense." That ruling also indicates tension between the court's statutory approach and that of lower courts which apply other doctrines to end bankruptcy appeals on prudential grounds with no consideration of the merits.
Truck addressed the scope of the right to participate in bankruptcy proceedings created by Section 1109(b) of the Bankruptcy Code. Truck Insurance Exchange is the liability insurer of the debtor, which faces thousands of asbestos tort claims. Notwithstanding Truck's obligation to pay virtually every dollar of those claims, each lower court had applied the insurance-neutrality doctrine to hold that Truck had no right to be heard. The Supreme Court disagreed. The court recognized that in Section 1109(b), Congress used "capacious" language "to promote greater participation in reorganization proceedings" and conditioned a party's right to be heard only on "whether the reorganization proceedings might affect a prospective party, not how a particular reorganization plan actually affects that party." In holding that insurers like Truck "with financial responsibility for a bankruptcy claim" are "'part[ies] in interest' that can raise objections" because the reorganization can affect their interests in "myriad ways," the court refused to allow prudential considerations unmoored from the Code to trump congressionally enacted language.
This holding ensures that insurers who have long been silenced in Chapter 11 proceedings will now be heard. It is also a shot across the bow for two other judge-made, atextual doctrines that bar consideration of the merits in Chapter 11 appeals.
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