Third Circuit Adopts a Broad Test for Determining a Party's Standing to Object to a Chapter 11 Plan of Reorganization
In the recent Third Circuit decision, In re Global Industrial Technologies, Inc., 2011 WL 1662792 (3d Cir. May 4, 2011), the Third Circuit was faced with the issue of standing to object to a plan of reorganization. More specifically, the issue was whether third party insurers had standing to object to the confirmation of the Global Industrial Technologies, Inc. ("GIT") plan of reorganization under which the insurers were required to fund a trust pursuant to prepetition insurance contracts for the purpose of addressing silica related claims against GIT. The Bankruptcy Court and the District Court held that the insurers lacked standing to object to the plan on the grounds that any potential harm arising from the assignment of the insurance policies to the Silica Trust was speculative, and that the insurers remained able to assert their coverage defenses and contractual rights. In a majority decision, the Court of Appeals sitting en banc reversed and remanded, holding that the insurers had legally protected interests with respect to the policies to be transferred to the Silica Trust and that their interests were affected by the GIT plan of reorganization such that they should be afforded an opportunity to object to the plan.
In its analysis, the majority set forth the general rule with respect to Article III standing that a party "must demonstrate an injury in fact that is concrete, distinct and palpable, and actual or imminent," that the "contours of the injury-in-fact requirement…are very generous," and that the standard is met so long as a party alleges a "specific, identifiable trifle of injury."1 Under § 1109(b) of the Bankruptcy Code, a party in interest has standing to appear and be heard on any issue in a case under chapter 11. The Third Circuit Court adopted the Seventh Circuit test setting forth that a party in interest is "anyone who has a legally protected interest that could be affected by a bankruptcy proceeding."2 The majority held that section 1109(b) must be construed broadly to permit parties affected by chapter 11 proceedings to appear and be heard, which encourages and promotes greater participation in reorganization cases. Finally, the majority held that Article III standing and standing under the Bankruptcy Code are "effectively coextensive," and that the party in interest standard should not be an additional obstacle to bankruptcy standing.3
In sum, to acquire standing to object to the plan, the insurers in the GIT bankruptcy were required to demonstrate that they had "legally protected interests that could be affected by the GIT Plan." The Court ultimately found that, notwithstanding the contingent nature of the claims at issue, the GIT Plan's effective increase in filed silica claims by a factor of 27 times coupled with the resulting administrative costs served as sufficient harm to establish the insurers' standing to object to the plan.4 The Court's concern with the expansion in the number of filed claims is troubling in the bankruptcy context. It is in the debtor's interest to give broad notice to potential creditors and to have all potential creditors file claims so that the potential claims are subject to the discharge. The Court's concern with the expansion of the number of filed claims and the integrity of the process may limit the application of the decision to mass tort and similar cases.
In re Global Industrial Technologies is important because, if it is applied beyond its facts, it would extend standing within the bankruptcy context from parties that have demonstrated an injury in fact to those with a legally protected interest that could be affected by a plan. The potential extension is highlighted by the observation of the dissent in In re Global Industrial Technologies that "[t]he majority's detour from the standard analytic pathway for determining contingent injury ensures that bankruptcy courts will, henceforth, be burdened with determining whether sufficient injury exists among a broad new class of persons who, to obtain party in interest standing, may now allege only a fear that future business dealings with the reorganized entity may result in less profit than projected."5
Whether one agrees with the majority or the dissent, it is undeniable that the In re Global Industrial Technologies decision will form the basis for future assertions of party in interest standing within chapter 11 cases on that grounds that a legally protected interest could be affected by the bankruptcy at issue.
1 In re Global Industrial Technologies, Inc., 2011 WL 1662792 at *5 (internal quotations omitted).
2 Id.
3 2011 WL 1662792 at *6.
4 2011 WL 1662792 at *8. The majority observed that the potential collusion between the Debtor and the asbestos claimants counsel in negotiating the establishment of the Silica Trust in exchange for the asbestos claimants favorable votes also supported standing for the insurers in that it called into question the integrity of the bankruptcy proceeding. Id.
5 2011 WL 1662792 at *12.