Supreme Court Hands Rights to Insurance Companies

A technical, and quite frankly somewhat boring, case, Truck Insurance Exchange v. Kaiser Gypsum Co. solved the question about when an entity is a “party in interest” under the statute, which gives it a right to “be heard on any issue” in a Chapter 11 proceeding.

The case presents a dispute between a failed asbestos company and its principal insurer. The debtor will leave the bankruptcy proceeding with no obligation to pay asbestos claims that arise in the future; the insurer will pay the bulk of those claims. They disagree about whether the plan should include “anti-fraud” provisions that would make it harder for claimants to make duplicative claims against multiple asbestos companies.

The Bankruptcy Code includes a provision (Section 1109) stating that any “party in interest” “may raise and may appear and be heard on any issue in a case under [Chapter 11 of the Bankruptcy Code].”

Writing for the majority, Justice Sonia Sotomayor held that the “text, context, and history [of the statute] confirm that an insurer … with financial responsibility for a bankruptcy claim is a ‘party in interest’ because it may be directly and adversely affected by the reorganization plan.” She characterized the statute as “capacious” and pointed to “[a] common thread uniting the seven listed parties … that each may be directly affected by a reorganization plan either because they have a financial interest in the estate’s assets … or because they represent parties that do.” For Sotomayor, the “plain meaning” of the phrase describes “entities that are potentially concerned with or affected by a proceeding.”

Bankruptcy’s Automatic Stay, which applies in business Chapter 11 and consumer Chapter 7 and Chapter 13 bankruptcies, stops most adverse actions, including civil lawsuits. Civil actions can only resume before discharge (the end of a case) if the bankruptcy judge grants special permission. Good luck with that.

The Automatic Stay incentivizes many distressed debtors, be they individuals or large corporations, to file bankruptcy and obtain some breathing room. Chapter 11 bankruptcy has an additional advantage for large companies.

Technically, the company that emerges from bankruptcy is not the same entity that filed for bankruptcy. This issue came up when General Motors filed for bankruptcy shortly after the 2008 financial crisis. At the same time, GM was already in court, answering lawsuits about defective ignition switches that had caused many accidents, injuries, and deaths.

Corporate lawyers later argued that the “new” GM was not legally responsible for the “old” GM’s negligence. The Supreme Court agreed, to an extent, limiting post-Chapter 11 injury lawsuit liability to gross negligence or recklessness situations.

Asbestos providers typically cannot use this loophole to avoid asbestos exposure liability. The decades-long asbestos cover-up is clear evidence of recklessness. However, these companies can use another bankruptcy loophole known as the Texas Two-Step.

To avoid liability lawsuits, XYZ transfers troubled assets into a shell company which then files bankruptcy and ceases operations. The Supreme Court has yet to rule on this issue, so for now, the questionable tactic is at least semi-legal.

These complicated legal issues usually do not substantially affect an asbestos exposure lawyer’s claim for damages. This issue was resolved in the 1980s, during the first wave of asbestos exposure litigation.

Johns-Mansville and other huge asbestos providers tried to take the easy way out and file bankruptcy so they did not have to deal with liability lawsuits. Federal judges allowed these bankruptcies if these companies transferred substantial assets into victim compensation funds. So, the company still paid for the injuries it caused, albeit indirectly.

Other companies, like the Grace Mining Company, added money to these funds when they subsequently declared bankruptcy. Today, these funds contain some $30 billion. Usually, these claims are easy to start and difficult to resolve.

Since the responsible defendant is bankrupt, no adverse lawyer challenges an asbestos exposure lawyer’s evidence. Therefore, a bankruptcy VCF claim is essentially an uncontested claim.

Now for the bad news. Fund Administrators are notorious stingy negotiators, mostly because there’s no duty to negotiate in good faith. As a result, an asbestos exposure lawyer must be a very good negotiator to obtain a reasonable settlement. In other cases, the victim must usually settle for less.

Mesothelioma victims need and deserve significant compensation. For a free consultation with an experienced nationwide mesothelioma lawyer, contact the Throneberry Law Group. We handle these matters on a nationwide basis.