Reply Brief — Truck Insurance Exchange, Petitioner v. Kaiser Gypsum Company, Inc., et al.

No. 22-1079

IN THE

Supreme Court of the United States

___________________

TRUCK INSURANCE EXCHANGE,

Petitioner,

v.

KAISER GYPSUM COMPANY, INC., ET AL.,

Respondents.

___________________

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Fourth Circuit

___________________

REPLY BRIEF FOR PETITIONER

___________________

ALLYSON N. HO

Counsel of Record

ROBERT B. KRAKOW

RUSSELL H. FALCONER

ELIZABETH A. KIERNAN

STEPHEN J. HAMMER

MICHAEL A. ZARIAN

DAVID W. CASAZZA

GIBSON, DUNN & CRUTCHER LLP

ADDISON W. BENNETT

GIBSON, DUNN & CRUTCHER LLP 2001 Ross Avenue, Suite 2100

1050 Connecticut Avenue, N.W. Dallas, TX 75201

(214) 698-3100

Washington, D.C. 20036

AHo@gibsondunn.com

(202) 955-8500

MICHAEL A. ROSENTHAL

GIBSON, DUNN & CRUTCHER LLP

200 Park Avenue

New York, NY 10166

(212) 351-4000

Counsel for Petitioner

RULE 29.6 STATEMENT

The disclosure statement included in the petition

remains accurate.

ii

TABLE OF CONTENTS

Page

Reply Brief For Petitioner........................................... 1

I.

The Decision Below Exacerbates The Conflict

Among The Circuits ................................................ 3

II. The Decision Below Is Wrong ................................ 7

III. This Case Is An Ideal Vehicle To Address An

Important And Recurring Issue ............................. 9

A. The question is cleanly presented ................... 9

B. The question presented is important ............ 11

iii

TABLE OF AUTHORITIES

Page(s)

Cases

BNSF Railway Co. v. Tyrrell,

581 U.S. 402 (2017) .............................................. 11

Brownback v. King,

141 S. Ct. 740 (2021) ............................................ 11

In re C.P. Hall Co.,

750 F.3d 659 (7th Cir. 2014) .............................. 5, 6

In re Capital Contracting Co.,

924 F.3d 890 (6th Cir. 2019) .................................. 2

In re Clark,

927 F.2d 793 (4th Cir. 1991) ................................ 10

In re Congoleum Corp.,

426 F.3d 675 (3d Cir. 2005) ................................... 4

In re Continental Airlines,

91 F.3d 553 (3d Cir. 1996) ................................... 10

Czyzewski v. Jevic Holding Corp.,

580 U.S. 451 (2017) ................................................ 9

In re Diocese of Camden, New Jersey,

— B.R. —, 2023 WL 5605156

(Bankr. D.N.J. Aug. 29, 2023) ............................... 8

In re Global Industrial Technologies, Inc.,

645 F.3d 201 (3d Cir. 2011) ........... 1, 2, 3, 4, 5, 6, 8

Lexmark International, Inc. v.

Static Control Components, Inc.,

572 U.S. 118 (2014) .............................................. 10

In re Ray,

597 F.3d 871 (7th Cir. 2010) ................................ 10

iv

In re Thorpe Insulation Co.,

677 F.3d 869 (9th Cir. 2012) .................................. 5

In re Tower Park Properties, LLC,

803 F.3d 450 (9th Cir. 2015) .............................. 2, 5

United States v. Stitt,

139 S. Ct. 399 (2018) ............................................ 11

In re VeroBlue Farms USA, Inc.,

6 F.4th 880 (8th Cir. 2021) .................................. 10

Statutes

11 U.S.C. § 67 (1976) ................................................. 10

11 U.S.C. § 362 ............................................................ 8

11 U.S.C. § 524 ........................................................ 4, 8

11 U.S.C. § 1109 ...................................................... 1, 7

11 U.S.C. § 1128 .......................................................... 1

Other Authority

Antonin Scalia & Bryan A. Garner,

Reading Law: The Interpretation of

Legal Texts (2012) ................................................ 10

REPLY BRIEF FOR PETITIONER

The decision below exacerbates a conflict among

the circuits and defies the straightforward text of the

Bankruptcy Code. A “party in interest” has the right

to “raise and * * * appear and be heard on any issue”

in a Chapter 11 reorganization. 11 U.S.C. § 1109(b).

This expressly includes the right to “object to confirmation of a plan.” Id. § 1128(b). Under this plain text,

a debtor’s insurer may object to confirmation where,

as here, that insurer will pay the vast majority of

claims and so has a direct financial stake in the bankruptcy.

As the Third Circuit holds, “when a federal court

gives its approval to a plan that allows a party to put

its hands into other people’s pockets, the ones with the

pockets are entitled to be fully heard and to have their

legitimate objections addressed.” In re Global Industrial Technologies, Inc., 645 F.3d 201, 204 (3d Cir.

2011) (en banc).

Rejecting this plain text (and common sense)

reading of Section 1109(b), the Fourth Circuit joined

the Seventh (and some decisions of the Ninth). These

courts impose an additional prudential hurdle with no

basis in the Code’s text—prohibiting an insurer from

being heard if the plan is “insurance neutral.”

Respondents deny this split and attempt to frame

“a circuit consensus on who can be a party-in-interest.” Kaiser Opp. 12; Claimants Opp. 7. But there’s

no papering over that three courts of appeals disagree

and have acknowledged the conflict. The Fourth Circuit below “recognize[d] that courts are split on the interplay of Article III and § 1109(b).” Pet. App. 25a

n.10. The Ninth Circuit, too, has expressly noted the

2

different rule followed in the Third Circuit and declined to adopt it. In re Tower Park Properties, LLC,

803 F.3d 450, 457 n.6 (9th Cir. 2015) (rejecting Third

Circuit’s approach treating Section 1109(b) and Article III as “effectively coextensive”). The Sixth Circuit,

without taking a side, has observed that circuits are

divided on “whether this party-in-interest language

demands only Article III standing,” as Global holds,

“or a more direct interest,” as Tower Park requires. In

re Capital Contracting Co., 924 F.3d 890, 895 (6th Cir.

2019).

This conflict has real consequences. Kaiser, protected by insurance without aggregate caps, collaborated with asbestos claimants to craft a plan with no

fraud protection for insured claims—all of the 14,000

known asbestos bankruptcy claims. Pet. 9. Evidence

from landmark asbestos bankruptcies—and expert reports in this case—confirm that a substantial portion

of these may be fraudulently inflated. Pet. 7-8.

Under a proper reading of Section 1109(b), like

that adopted by the Third Circuit in Global, Truck’s

objection would be heard. Here, it wasn’t. As more

and more mass tort debtors end up in bankruptcy, see

Professors Amici Br. 13-14, hearing all interested parties—including insurers—will become ever more important. Often, as here, it is “highly unlikely that any

of the parties other than the insurers would raise”

critical issues like fraud prevention. Global, 645 F.3d

at 214 (quotation marks omitted). That makes it all

the more crucial that this Court restore the broad participatory rights Congress enacted in Section 1109(b)’s

text.

3

I.

The Decision Below Exacerbates The Conflict

Among The Circuits

The courts of appeals are all over the map on the

interpretation of Section 1109(b), giving rise to untenable confusion. This conflict is not simply, as respondents suggest, fact-based. Claimants Opp. 7; Kaiser

Opp. 12-14. It is a difference in legal standards.

These cases apply different, outcome-determinative

tests even while using similar language and, at times,

purporting to agree about some aspects of an “insurance neutrality” test. That makes this Court’s review

to resolve the conflict and clarify the proper legal

standard even more important.

In Global, the Third Circuit considered a plan to

resolve the debtors’ asbestos and silica-related mass

tort debts. Insurers with exposure to the silica liabilities objected, arguing the claims-processing system

failed to prevent fraudulent claims. The Third Circuit

explicitly held that an insurer who claimed collusion

between the debtors and creditors had “bankruptcy

standing”—that is, Section 1109(b) standing—to object because the insurers were the “funding sources

who will have to address” the debtor’s “liabilities,” and

those liabilities are affected by the plan. 645 F.3d at

210-13; see also Pet. 13-14.

Truck occupies the same position here, yet the decision below found it irrelevant that Truck was the

funding source for these liabilities—instead, it embarked on an inquiry limited solely to whether the

“quantum” of liability was changed under the plan.1

1

While Global used the same term—“quantum of liability”—its

use of the phrase reflects the insurers’ expectations about the

impact of fraud facilitated by the plan. 645 F.3d at 212-14. The

4

The Fourth Circuit ultimately held that Truck wasn’t

affected because the plan “expressly preserved

Truck’s coverage defenses and the Debtors’ assistance-and-cooperation obligations under the policies.”

Pet. App. 16a. That is exactly the policy-oriented reasoning adopted by the en banc dissent in Global,

which stressed that “the contractual relationship between the insurers and insured emerge[d] post-reorganization unchanged” because of the preservation of

coverage defenses. 645 F.3d at 217 (Nygaard, J., dissenting). While both courts purport to measure “legally protected interests,” the two circuits are employing entirely different standards.

Nor are respondents correct to chalk the opposing

holdings down to factual differences. Kaiser Opp. 1-2,

10. Insurers play a vital role when it’s “highly unlikely that any of the parties other than the insurers”

would raise an issue—like fraud—that doesn’t affect

them. Global, 645 F.3d at 214. Here, Truck is the

only party with a financial interest in preventing

fraudulent bankruptcy claims.2 It presented unrebutted expert evidence showing that the same fraudulent

scheme uncovered in Garlock had been deployed

against Kaiser. C.A. J.A. 5187-5195. That’s the same

type of evidence offered in Global, where the insurers

used findings uncovered in the Johns-Manville and

insurers’ contractual coverage obligations didn’t change at all, id.

at 218 (Nygaard, J., dissenting), but that’s what the Fourth Circuit demanded Truck show.

2

Section 524(g) plans require support from a super-majority of

claimants not demanded for other Chapter 11 plans. See 11

U.S.C. § 524(g)(2)(B)(ii)(IV)(bb). So asbestos debtors and claimants will often be aligned, making the involvement of interested

third parties—including insurers—all the more important. See

In re Congoleum Corp., 426 F.3d 675, 687 (3d Cir. 2005).

5

silica multi-district-litigation proceedings to assess

the frequency of fraud among Global’s claimants. 645

F.3d at 207. So the same comparative evidence—evidence identifying bad actors and statistical findings of

known fraud in prior similar cases—that satisfied the

Third Circuit’s standard didn’t satisfy the Fourth Circuit’s standard here.

Decisions from other circuits highlight the widespread confusion about Section 1109(b). The Ninth

Circuit acknowledged that “at least one circuit” (the

Third) adopted a “broader reading” of Section 1109(b)

that treats it as “effectively coextensive” with Article

III standing. Tower Park, 803 F.3d at 457 n.6. But

the Ninth Circuit expressly rejected this approach, instead insisting that Section 1109(b) demands more

than Article III. Ibid.3 Even though all three courts—

the Third, Fourth, and Ninth Circuits—use the same

“legally protected interest” terminology to describe

their standard, these courts recognize that they are,

in fact, applying different (and conflicting) standards.4

The Seventh Circuit, for its part, downplayed the

extent of the split by noting, as respondents do, the

cross-citation among decisions. In re C.P. Hall Co.,

750 F.3d 659, 662 (7th Cir. 2014). But Hall itself

makes clear its conflict with Global. It holds that an

insurer wasn’t a party in interest even though its alleged harm was of the kind that “suffices for Article

3

In another opinion in tension with Tower Park, the Ninth Circuit recognized that an insurer can be a party-in-interest even

under a plan that purports to be insurance neutral—echoing

Global. In re Thorpe Insulation Co., 677 F.3d 869, 884-85 (9th

Cir. 2012).

4

To quote Inigo Montoya from The Princess Bride, “You keep using that word. I do not think it means what you think it means.”

6

III standing.” Id. at 660; see also id. at 663 (“Pecuniary interest is a necessary rather than a sufficient

condition”). In the Third Circuit, that injury would

have made the insurer a party in interest. Global, 645

F.3d at 211 (“Article III standing and standing under

the Bankruptcy Code are effectively coextensive.”).

This conflict is squarely implicated in the decision

below. While the Fourth Circuit purported not to

“choose a side,” Pet. App. 25a n.10, it did. It concluded

that Truck wasn’t a “party in interest” under Section

1109(b) based solely on the same analysis adopted by

the Global dissenters. Pet. App. 24a. Only after concluding that Truck’s status as an insurer didn’t make

it a party in interest did the Fourth Circuit, in a new

subsection of its opinion, address Truck’s Article III

standing as a creditor. Pet. App. 25a. And there, it

simply held that Truck’s status as a creditor didn’t

give it Article III standing to object to confirmation.

Ibid. The Fourth Circuit’s interpretation of Section

1109(b)—not its Article III analysis—was the sole basis for rejecting Truck’s insurance-based arguments.

Kaiser also suggests (at 31) that the split was “not

addressed below” because Truck didn’t preserve it.

That’s wrong. Truck argued at every stage—citing

Global and Thorpe—that it’s a party in interest because it has near-exclusive financial responsibility for

the asbestos claims in the bankruptcy, including the

fraudulent claims enabled by the plan’s design. See,

e.g., C.A. Dkt. 55 at 29, 31-33. In the passage Kaiser

misleadingly quotes (at 31), Truck was refuting Kaiser’s argument that the principle about Article III

standing not being “dispensed in gross” should be imported to Section 1109(b) without any textual hook.

C.A. Dkt. 64 at 8. Section 1109(b) allows a party in

7

interest to be heard on “any issue,” 11 U.S.C. § 1109(b)

(emphasis added), so the statutory inquiry doesn’t implicate the constitutional doctrine about standing in

gross. That question is an entirely different one than

the question presented here—whether Section

1109(b) imposes a higher threshold than Article III.

See Pet. 17.

II. The Decision Below Is Wrong

This case is also an appropriate vehicle because

the decision below is wrong.

In Section 1109(b), Congress enacted text granting a broad right for any party in interest to raise and

be heard on any issue. Congress used expansive language to allow a party in interest to be heard on “any

issue.” Its use of “including” shows that the list isn’t

exclusive and the type of parties in the list—“a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee”—shows that “party in interest” must be

read expansively to include any party with a financial

stake in the reorganization. Pet. 17-21. Truck is just

such a party.

There are more than 14,000 active asbestos

claims against Kaiser in this bankruptcy. Pet. App.

42a. As Kaiser’s liability insurer, other than a small

deductible, Truck will pay all of these claims, up to

$500,000 per claim. Ibid. So Truck is the only party

with any interest in avoiding fraudulently inflated

claims—and, indeed, the only party with any meaningful pecuniary interest in the bankruptcy court’s

handling of the 14,000 claims.5 See Global, 645 F.3d

5

Contrary to claimants (at 20-21), Truck doesn’t seek an improper intrusion on state courts. Every claim affected is a federal

8

at 214. Truck—as the party with by far the greatest

financial stake in the bankruptcy court’s handling of

the overwhelming majority of claims against Kaiser—

is plainly a party in interest under Section 1109(b)

(properly construed).

Respondents suggest that the decision below was

correct because Truck wasn’t affected by the bankruptcy. Kaiser Opp. 24; Claimants Opp. 12. That is

wrong. Truck is financially impacted by confirmation

because the plan is the only meaningful opportunity

Truck will have to reduce its exposure to rampant

fraud. Minimal protection against fraudulent claims

is hardly a “windfall,” as Kaiser would have it (at 16).

It’s the least a litigant should expect in a plan of reorganization ordered by a federal court. After all, the

anti-fraud protections Truck seeks here have been included in every asbestos trust created under Section

524(g) in the past decade. Pet. 8. Those protections

even apply in this case to any uninsured claims. Pet.

9.6

bankruptcy claim. That claims may be adjudicated through a

trust process or in state court “does not mean that th[e bankruptcy court] does not have jurisdiction over these claims, nor

that it can allow facially invalid or fraudulent claims to be paid

out” without adequate safeguards. In re Diocese of Camden, New

Jersey, — B.R. —, 2023 WL 5605156, at *33 (Bankr. D.N.J. Aug.

29, 2023); see also 11 U.S.C. § 362 (automatic stay); id. § 524 (discharge bars state court litigation).

6

Kaiser also concedes (at 7) that the district court made a coverage determination that is “preclusive.” At the very least, this

binding coverage determination has a direct impact on Truck.

9

III. This Case Is An Ideal Vehicle To Address An

Important And Recurring Issue

A.

The question is cleanly presented

Respondents argue that Truck lacks Article III

standing.7 Kaiser Opp. 32-33; Claimants Opp. 15-17.

Not so. The bankruptcy proceeding offered a one-time

opportunity to prevent fraudulent claims through

claims procedures that are standard in other plans.

Had the bankruptcy court ordered those procedures

for all claims, whether insured or not, they would have

reduced Truck’s liability by hundreds of millions of

dollars. Victory on appeal could result in an amended

plan that includes anti-fraud protections for all

claims, significantly reducing Truck’s exposure. This

Court has already held that a party has Article III

standing to challenge confirmation when that party

“lost a chance to obtain” more favorable treatment under a different plan. Czyzewski v. Jevic Holding Corp.,

580 U.S. 451, 464 (2017). That puts to rest any question of Truck’s Article III standing.

Kaiser resorts to two further prudential doctrines

(bringing the grand total up to three, including insurance neutrality) to bar any appellate consideration of

the plan. That so many barriers to appellate review

of Chapter 11 plans exist—none with a basis in the

Code—further highlights the need for this Court’s intervention. Pet. 24. Kaiser concedes none of these

barriers is jurisdictional. Opp. 33. And none is a barrier to this Court’s review.

First, the doctrine of so-called bankruptcy appellate standing is “a form of prudential standing which

7

The Fourth Circuit didn’t examine Truck’s Article III standing

as an insurer—its Article III holding was limited to Truck’s

standing as a creditor. Pet. App. 25a.

10

is more confined than Article III standing” and permits only a “person aggrieved” to appeal. In re Ray,

597 F.3d 871, 875 (7th Cir. 2010). The Bankruptcy

Act expressly limited appellate rights to “persons aggrieved by an order of a referee.” 11 U.S.C. § 67(c)

(1976). But Congress “abandoned” that limitation by

“repeal[ing] that section” when it enacted the Bankruptcy Code. In re Clark, 927 F.2d 793, 795 (4th Cir.

1991). The Code now has no language limiting appeals to “persons aggrieved.” That is dispositive, and

the doctrine should have no place in bankruptcy law.

See Lexmark International, Inc. v. Static Control

Components, Inc., 572 U.S. 118, 128 (2014); Antonin

Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts § 40, at 256 (2012) (“If a legislature amends or reenacts a provision * * * a significant change in language is presumed to entail a

change in meaning”). In any event, Truck is a “person

aggrieved” because the plan leaves it with sole financial responsibility for fraudulent claims and precludes

it from raising coverage defenses. Pet. 2.

Second, the appeal isn’t “equitably moot.” Respondents don’t suggest the appeal is moot in the Article III sense—only that it is “equitably moot.” Kaiser Opp. 34. Under that doctrine, appellate courts

“refuse to entertain the merits of live bankruptcy appeals over which they indisputably possess statutory

jurisdiction and in which they can plainly provide relief.” In re Continental Airlines, 91 F.3d 553, 567 (3d

Cir. 1996) (en banc) (Alito, J., dissenting). The doctrine’s scope is sharply contested, see In re VeroBlue

Farms USA, Inc., 6 F.4th 880, 891 (8th Cir. 2021), but

it doesn’t apply here regardless. Truck’s appeal challenges only the terms of the asbestos trust procedures.

Modifying or vacating those terms is indisputably

within the power of the court. The relief Truck seeks

11

wouldn’t require any clawbacks or modifications from

Kaiser’s other non-asbestos creditors.

Finally, Kaiser suggests that Truck’s arguments

fail on the merits. Opp. 35. That is wrong and irrelevant. No appellate court has considered these arguments. If this Court reverses on the antecedent question of Section 1109(b), it can simply follow its

ordinary practice and remand for the Fourth Circuit

to consider Truck’s merits arguments in the first instance. See, e.g., Brownback v. King, 141 S. Ct. 740,

748 n.4 (2021); United States v. Stitt, 139 S. Ct. 399,

407-08 (2018); BNSF Railway Co. v. Tyrrell, 581 U.S.

402, 415 (2017).

B. The question presented is important

If left to stand, the circuit split on Section 1109(b)

will have stark consequences. Mass tort claims increasingly drive Chapter 11 reorganizations because

the Chapter 11 system can both “reduce inequities

among tort claimants by ensuring that similarly situated claimants receive similar compensation” and also

minimize “economic inefficiencies that arise when a

company has no way of escaping its debts.” Professors

Amici Br. 13. But the conflict exacerbated by the decision below creates a “race to the courthouse” that

would allow sophisticated creditors or debtors to force

the inclusion or exclusion of others—like insurers.

Professors Amici Br. 6-7, 13.

Insurers are often the only party with a financial

stake in preventing fraudulent claims—their full participation in bankruptcy proceedings is vital. Imposing judicially created barriers with no basis in the

Bankruptcy Code’s text to thwart that crucial participation serves no one well.

*****

12

The petition for a writ of certiorari should be

granted.

Respectfully submitted,

ALLYSON N. HO

Counsel of Record

ROBERT B. KRAKOW

RUSSELL H. FALCONER

ELIZABETH A. KIERNAN

STEPHEN J. HAMMER

MICHAEL A. ZARIAN

DAVID W. CASAZZA

GIBSON, DUNN & CRUTCHER LLP

ADDISON W. BENNETT

GIBSON, DUNN & CRUTCHER LLP 2001 Ross Avenue, Suite 2100

1050 Connecticut Avenue, N.W. Dallas, TX 75201

(214) 698-3100

Washington, D.C. 20036

AHo@gibsondunn.com

(202) 955-8500

MICHAEL A. ROSENTHAL

GIBSON, DUNN & CRUTCHER LLP

200 Park Avenue

New York, NY 10166

(212) 351-4000

Counsel for Petitioner

September 19, 2023