Charles M. Tatelbaum.
Charles M. Tatelbaum. (Photo: J. Albert Diaz/ALM)

In a ruling that was a surprise to many bankruptcy practitioners and professionals, the refusal by the U.S. Supreme Court on April 24 to grant the writ of certiorari in the case of General Motors v Celestine Elliott et al., riddled with uncertainty what had been almost a sacrosanct principle of bankruptcy law.

Section 363 of the Bankruptcy Code provides that following notice and hearing, a bankruptcy trustee may sell assets of an estate free and clear of liens, claims and encumbrances. Since a debtor-in-possession in a Chapter 11 case has the same powers and authority as a bankruptcy trustee in a Chapter 7 case, this provision is equally applicable in bankruptcy reorganization and liquidation proceedings.

Bankruptcy professionals have long utilized this provision to facilitate the sale of going concerns whether in prepackaged Chapter 11 proceedings, traditional Chapter 11 proceedings or occasionally in Chapter 7 proceedings. Additionally, the procedure can be used to sell assets of recently closed businesses in the same manner.

Because financially distressed businesses have uncertain, disputed and unliquidated liabilities, absent a court order under section 363 of the Bankruptcy Code, many prospective purchasers are hesitant to help save a business by purchasing the assets of a going concern unless there is the safe harbor of a court ordered sale free and clear of liens, claims and encumbrances. Additionally, when real estate is involved, title insurance companies are generally reluctant to issue “clean” title insurance policies insuring the title to real estate sold in a distressed financial situation without the protection of the court order authorizing such sale free of liens, claims and encumbrances.

As one may recall, before the Chapter 11 filing of General Motors, there was a massive recall of GM vehicles because of ignition switch issues which were alleged to have caused personal injury and property damage. When the Chapter 11 GM filed its plan of reorganization, the gravamen of the plan’s methodology was to sell the “Old GM” to a “New GM,” free and clear of liens or claims and encumbrances, so that the U.S. Treasury could facilitate the bailout and financial restructuring of the New GM. This procedure was heralded on many fronts as it facilitated the saving of jobs, the payment to certain classes of creditors, the continuation of the business and it avoided what was thought to be a financial catastrophe on a national or international basis.

The GM sale process and the Chapter 11 plan providing for the liquidation of the Old GM was expedited, and although challenged on grounds involving the claimed violation of the absolute priority rule in that junior classes of creditors were being paid at the expense of more senior creditors, the New York bankruptcy court ordered an authorized the sale free and clear of liens, claims and encumbrances and confirmed the Chapter 11 plan. Subsequently, following appeals that reach the U.S. Court of Appeals for the Second Circuit, the orders of the bankruptcy court were affirmed.

Lack of Notice

At this point, a group of individuals who claimed personal injury and property damage as a result of allegedly defective ignition switches attempted to assert their claims against the New GM based on the theory of successor liability, a principle relatively commonplace in mass tort liability cases. The claimants had not previously filed proofs of claim in the GM Chapter 11 case because they claimed that their damages and injuries had not yet occurred in time to do so. As such, they had no actual notice of the need to file a proof of claim in the GM bankruptcy proceedings. This similar situation faced many asbestos-related entities that have sought protection under Chapter 11 for future health care liabilities.

The New GM defended these actions by asserting that the Section 363 sale order issued by the bankruptcy court in the GM Chapter 11 proceeding, as well as the discharge of obligations created by the confirmation of the Chapter 11 plan, absolved the New GM of any responsibility or liability based on a successor liability theory.

In July 2016, following a series of appellate skirmishes, the Second Circuit found for the ignition switch claimants, finding that the failure to provide notice to them in time to file a proof of claim in the GM bankruptcy case for the ignition switch defect claims would violate these claimants’ right to due process and, as a result, the Second Circuit found that the New GM could be subject to successor liability claims.

The New GM sought a writ of certiorari with the U.S. Supreme Court, as while not directly on point, other appellate rulings seem to hold to the contrary. The bankruptcy community was anticipating that the Supreme Court would accept the case to put the rest of the uncertainty facing prospective purchasers of going concerns where there may be lingering but unknown personal injury or product liability claims in a bankruptcy environment.

Thus, the announcement on April 24 by the Supreme Court that it was not accepting the case was a surprise to many.

Based upon the now affirmed ruling by the Second Circuit in the GM case, legal and accounting professionals must be very careful when representing prospective purchasers of assets and businesses in a bankruptcy environment in order to try to create some certainty by notifying every potential claimant that may exist in order to gain the benefit of the protection of a section 363 sale order.

Unfortunately, this may be an impossible task.

In a ruling that was a surprise to many bankruptcy practitioners and professionals, the refusal by the U.S. Supreme Court on April 24 to grant the writ of certiorari in the case of General Motors v Celestine Elliott et al., riddled with uncertainty what had been almost a sacrosanct principle of bankruptcy law.

Section 363 of the Bankruptcy Code provides that following notice and hearing, a bankruptcy trustee may sell assets of an estate free and clear of liens, claims and encumbrances. Since a debtor-in-possession in a Chapter 11 case has the same powers and authority as a bankruptcy trustee in a Chapter 7 case, this provision is equally applicable in bankruptcy reorganization and liquidation proceedings.

Bankruptcy professionals have long utilized this provision to facilitate the sale of going concerns whether in prepackaged Chapter 11 proceedings, traditional Chapter 11 proceedings or occasionally in Chapter 7 proceedings. Additionally, the procedure can be used to sell assets of recently closed businesses in the same manner.

Because financially distressed businesses have uncertain, disputed and unliquidated liabilities, absent a court order under section 363 of the Bankruptcy Code, many prospective purchasers are hesitant to help save a business by purchasing the assets of a going concern unless there is the safe harbor of a court ordered sale free and clear of liens, claims and encumbrances. Additionally, when real estate is involved, title insurance companies are generally reluctant to issue “clean” title insurance policies insuring the title to real estate sold in a distressed financial situation without the protection of the court order authorizing such sale free of liens, claims and encumbrances.

As one may recall, before the Chapter 11 filing of General Motors , there was a massive recall of GM vehicles because of ignition switch issues which were alleged to have caused personal injury and property damage. When the Chapter 11 GM filed its plan of reorganization, the gravamen of the plan’s methodology was to sell the “Old GM” to a “New GM,” free and clear of liens or claims and encumbrances, so that the U.S. Treasury could facilitate the bailout and financial restructuring of the New GM. This procedure was heralded on many fronts as it facilitated the saving of jobs, the payment to certain classes of creditors, the continuation of the business and it avoided what was thought to be a financial catastrophe on a national or international basis.

The GM sale process and the Chapter 11 plan providing for the liquidation of the Old GM was expedited, and although challenged on grounds involving the claimed violation of the absolute priority rule in that junior classes of creditors were being paid at the expense of more senior creditors, the New York bankruptcy court ordered an authorized the sale free and clear of liens, claims and encumbrances and confirmed the Chapter 11 plan. Subsequently, following appeals that reach the U.S. Court of Appeals for the Second Circuit, the orders of the bankruptcy court were affirmed.

Lack of Notice

At this point, a group of individuals who claimed personal injury and property damage as a result of allegedly defective ignition switches attempted to assert their claims against the New GM based on the theory of successor liability, a principle relatively commonplace in mass tort liability cases. The claimants had not previously filed proofs of claim in the GM Chapter 11 case because they claimed that their damages and injuries had not yet occurred in time to do so. As such, they had no actual notice of the need to file a proof of claim in the GM bankruptcy proceedings. This similar situation faced many asbestos-related entities that have sought protection under Chapter 11 for future health care liabilities.

The New GM defended these actions by asserting that the Section 363 sale order issued by the bankruptcy court in the GM Chapter 11 proceeding, as well as the discharge of obligations created by the confirmation of the Chapter 11 plan, absolved the New GM of any responsibility or liability based on a successor liability theory.

In July 2016, following a series of appellate skirmishes, the Second Circuit found for the ignition switch claimants, finding that the failure to provide notice to them in time to file a proof of claim in the GM bankruptcy case for the ignition switch defect claims would violate these claimants’ right to due process and, as a result, the Second Circuit found that the New GM could be subject to successor liability claims.

The New GM sought a writ of certiorari with the U.S. Supreme Court, as while not directly on point, other appellate rulings seem to hold to the contrary. The bankruptcy community was anticipating that the Supreme Court would accept the case to put the rest of the uncertainty facing prospective purchasers of going concerns where there may be lingering but unknown personal injury or product liability claims in a bankruptcy environment.

Thus, the announcement on April 24 by the Supreme Court that it was not accepting the case was a surprise to many.

Based upon the now affirmed ruling by the Second Circuit in the GM case, legal and accounting professionals must be very careful when representing prospective purchasers of assets and businesses in a bankruptcy environment in order to try to create some certainty by notifying every potential claimant that may exist in order to gain the benefit of the protection of a section 363 sale order.

Unfortunately, this may be an impossible task.