New York, NY – A case coming before the U.S. Supreme Court this term may have far-reaching consequences for the nation’s mass tort lawsuits. The issue at hand is whether insurers should be allowed to participate in bankruptcies where tort claims are involved. Currently, debtors and creditors have the right to participate, but insurers are often left out. The question is whether insurers, who play a role in defending tort cases, should be considered “party-in-interest” and have a say in the bankruptcy process. The Supreme Court will weigh in on this issue in the case of Truck Insurance Exchange v. Kaiser Gypsum Co. Inc.
Bankruptcy courts have had different interpretations of this issue in the past, leading to inconsistent rulings. In some cases, bankruptcy plans of reorganization can be structured in a way that increases the number and size of potential claims against a debtor, with the assumption that payment will come from insurers. This can result in a flood of questionable tort claims with no scrutiny. The case before the Supreme Court involves a bankruptcy plan proposed by Kaiser Gypsum, a construction materials manufacturer facing thousands of asbestos-related litigation claims.
Truck Insurance Exchange, one of the company’s insurers, objected to the bankruptcy plan, arguing that it would expose them to unchecked fraudulent claims. However, the 4th U.S. Circuit Court of Appeals rejected the insurer’s argument, stating that the plan would not materially alter the insurer’s obligations. Truck Insurance Exchange has appealed to the Supreme Court, arguing that different circuit courts have conflicting views on who should be considered a “party-in-interest.”
In contrast, the 3rd U.S Circuit Court of Appeals has ruled that insurers have standing to participate in bankruptcies when they can show an injury under the U.S. Constitution and are a “party-in-interest” under the Bankruptcy Code. This broad interpretation of standing gives insurers the opportunity to challenge bankruptcy plans that encourage meritless claims or questionable processes.
The outcome of this case has significant implications for the U.S. tort system. If the Supreme Court adopts a narrow definition of standing, it could prevent efforts to eliminate fraud and encourage collusion and fraud among participating parties. On the other hand, if the Court applies the standing requirement as written by Congress, it could give those with a stake in mass tort cases the ability to combat meritless claims.
With the increasing number of questionable mass tort lawsuits, the Supreme Court’s decision in this case could determine whether the U.S. economy will be flooded with even more lawsuits that push companies and charities into bankruptcy without scrutiny. The implications of this case extend beyond bankruptcy law and have implications for the integrity of the U.S. legal system as a whole.
[Tancred Schiavoni is a partner at O’Melveny & Myers LLP in New York and co-chair of the firm’s insurance practice. He can be reached at [email protected]. Adam Haberkorn is counsel at the firm. He can be reached at [email protected].]