Corinne Ball
Corinne Ball ()

General Motors LLC—the New GM—is subject to a multitude of lawsuits stemming from its alleged wrongdoings and the alleged wrongdoings of its predecessor, General Motors Corp.—the Old GM—which sold its assets to New GM pursuant to a §363 “free and clear” sale in bankruptcy in 2009. The Second Circuit court previously held that certain plaintiffs could not be barred by the “free and clear” provisions of the 2009 sale order (a decision the U.S. Supreme Court elected not to review). Following the denial of its petition for certiorari, the New GM is attempting to resurrect its principal defense against these lawsuits, arguing that the tort claims brought against New GM are barred on a new theory based on a recent Second Circuit decision in In re Tronox, 855 F.3d 84 (2d Cir. 2017). In that case, the issue was whether individual claimants could pursue certain claims against Kerr-McGee, which had settled with the liquidation trust established as part of the Tronox bankruptcy. In Tronox, the appellate court barred individual plaintiffs from pursuing claims against Kerr-McGee, stating that the Bankruptcy Code prevented individual creditors from pursuing claims against a third party that are truly aimed at recovering “estate” assets. While Tronox may be a recent development in the Second Circuit, the theory has been previously adopted in the successor liability context in the Third Circuit. In In re Emoral, 740 F.3d 875 (3d Cir. 2014), the court held that prepetition personal injury claims that relied upon the “mere continuation” theory of successor liability constituted causes of action that were property of the bankruptcy estate and thus eligible for settlement, release and discharge as part of the bankruptcy proceeding. See Corinne Ball, “‘Emoral’: Third Circuit Provides Comfort to Distressed Purchasers,” NYLJ (April 24, 2014).

The Sale Order and Claims Against New GM

In 2009 the Old GM underwent a restructuring process pursuant to Chapter 11 of the Bankruptcy Code. As part of the process, the bulk of the assets of the Old GM were sold to a successor entity, New GM. The June 5, 2009 order authorizing the sale included a “free and clear” provision, designed to insulate New GM from liability for claims against Old GM.

Years after the sale, in February 2014, New GM initiated product recalls for an ignition switch defect on cars manufactured by Old GM with potentially fatal consequences. By the time the Old GM underwent the bankruptcy sale process, engineers had already resolved the defect for new cars, which was first discovered as early as 2001. However, the ignition switch issue did not become widely known to the public until New GM initiated product recalls. This prompted the filing of a multitude of class action lawsuits naming New GM as a defendant. There were two general types of claimants (1) the non-ignition switch plaintiffs (e.g., those plaintiffs alleging economic losses relating to the reduction of the resale value of the affected cars or unpaid time off to get the necessary repairs) and (2) the ignition switch plaintiffs suing New GM with respect to actual accidents that took place prior to the 2009 sale. New GM responded to these lawsuits by moving to enforce the 2009 sale order, and arguing that the order absolved New GM of liability because it authorized the sale of Old GM’s assets “free and clear of liens, claims, encumbrances, and interests.”

The argument was first considered by the bankruptcy court in April of 2014. The bankruptcy court ruled that New GM could only be sued for its own wrongful conduct related to the ignition switch defects so long as those claims did not in any way rely on any acts or conduct by Old GM, and that the other claimants were barred pursuant to the sale order. See Corinne Ball, “Successor Liability: GM Sale Vulnerable on Due Process Failures,” NYLJ (June 25, 2015). The plaintiffs appealed the bankruptcy court’s ruling enforcing the sale order directly to the Second Circuit.

The Second Circuit court reversed the bankruptcy court’s decision, ruling that enforcement of the sale order “would violate procedural due process” because even though the cars were manufactured by Old GM, the defect did not become apparent until 2014—years after the bankruptcy sale process. New GM appealed further, but the Supreme Court declined to consider the appeal.

Since then, Bankruptcy Judge Martin Glenn has been grappling with the interpretation of the Second Circuit’s ruling and its application to the variety of claims asserted against New GM. There are four threshold issues currently outstanding before Judge Glenn: (1) the delineation between ignition-switch and non-ignition switch plaintiffs based on the usage of such terms in prior rulings; (2) the ability of non-ignition switch plaintiffs to assert independent claims against New GM; (3) the limits, if any, of the Second Circuit’s ruling that claims of purchasers of used cars are not covered by the bankruptcy court’s 2009 sale order; and (4) whether post-closing accident plaintiffs are either bound by the sale order or can bring successor liability claims against New GM and seek punitive damages.

Recently, in light of a ruling from the Second Circuit in Tronox regarding successor liability issues, Judge Glenn asked New GM and the various plaintiffs to submit letters outlining their views on how the ruling bears on successor liability issues in New GM’s case, and, specifically, the aforementioned threshold issues two and four.

Second Circuit’s ‘Tronox’ Ruling

In Tronox, a chemical company, Kerr-McGee Corporation—the Old Kerr-McGee—spun off the bulk of its profitable assets into a new entity—New Kerr-McGee, leaving the significant environmental and tort liabilities of the company in another entity, Tronox Inc. Tronox went bankrupt shortly thereafter, and the litigation trust appointed in the case initiated a lawsuit against New Kerr-McGee alleging that the spin-off constituted a fraudulent transaction. The lawsuit was pursued by a litigation trust for the benefit of creditors, including certain tort claimants who alleged injuries from the operation of a wood-treatment plant owned by the Old Kerr-McGee. In those proceedings, as part of a $5.15 billion settlement, the parties agreed to a permanent injunction to protect New Kerr-McGee from claims extinguished by the settlement, including derivative and duplicative claims. When the tort claimants tried to revive their claims against New Kerr-McGee in Pennsylvania state court, the New Kerr-McGee moved to enforce the injunction issued by the bankruptcy court in the district court. The district court concluded that the claims were barred by the injunction, and the tort claimants appealed to the Second Circuit.

The Second Circuit determined that it lacked jurisdiction to review the district court’s determination because the district court’s order only interpreted and enforced the injunction and settlement agreement. In making its determination, however, the Second Circuit court reviewed de novo the district court’s determination that the bankruptcy court had jurisdiction over the plaintiff’s claims as derivative claims of the bankruptcy estate. The Second Circuit distinguished between claims that are derivative, which arise from third party’s harm to the bankruptcy estate before the commencement of the bankruptcy case and independent claims, which arise from injury that is particularized to the creditor, that has its own damages, as opposed to damages arising from a course of action that harmed the debtor company (and thus all of its creditors) prior to the commencement of its bankruptcy case. The Second Circuit court concluded that the claims in Tronox were “derivative” within the meaning of the injunction. Consequently, the Second Circuit deferred to the district court’s interpretation of the scope of the injunction finding that the injunction barred individual lawsuit against third party successors of debtors because recovery should benefit all creditors and thus the claims belonged to the bankruptcy estate. The Second Circuit held, among other things, that if the claims succeeded against New Kerr-McGee, it would be subject to the very claims against Tronox that it had settled as such individual claims alleged the same course of action as the source of harm and their damages. For that reason the plaintiffs’ claims were barred.

New GM’s Reliance on ‘Tronox’

In its letter to the bankruptcy court, the non-ignition switch plaintiffs argued that Tronox had no bearing on their claims, because their claims against New GM were not derivative and based solely on New GM’s post-sale wrongdoing and allege harm done by New GM itself. Thus, the claims sought assertion of direct liability, not successor liability. New GM on the other hand argued that Tronox reinforced its position that the bankruptcy court has continuing jurisdiction to determine whether the claims are truly independent or derivative.

The parties made similar arguments in their letter submissions to the District Court Judge Jesse M. Furman, who is handling the ignition switch multidistrict litigation in which a motion for summary judgment is currently under consideration. See General Motors LLC Ignition Switch Litigation, Cases No. 14-MD-2543 and 14-MC-2543 (S.D.N.Y. 2017). New GM argued that the plaintiffs’ claims are generalized, derivative claims comprising property of the bankruptcy estate of Old GM. Relying upon the Tronox rationale that successor liability claims belong to the bankruptcy estate because establishing successor liability would benefit all creditors and the facts to prove successor liability are available to any creditor, New GM argued that successor liability claims against it for actions taken by Old GM similarly belong to the bankruptcy estate, thus barring individual claims. Moreover, New GM further argued that the injunction should be enforced even when plaintiffs became aware of the underlying claims after the sale closed because all potential successor liability claims belonged to the estate from the time of the sale. Plaintiffs on the other hand, argued that Tronox is distinguishable because the Tronox lawsuits were brought before the bankruptcy filing (while for New GM the defect underlying the lawsuits was not know about until years after the bankruptcy sale process was completed). In addition, the Tronox plaintiffs specifically argued that Kerr-McGee was an alter ego of Tronox and underwent the bankruptcy process solely to absolve itself of environmental liabilities. Thus, if the plaintiffs in Tronox prevailed, New Kerr-McGee would be deemed the alter ego of Tronox and on the hook for all of its liabilities. Plaintiffs attempted to distinguish their case focusing on particularizing their injury through successor liability claims that are not based upon a “legal theory that any other party could take advantage of” to pursue New GM, suggesting that the “alter ego” allegations against New Kerr-McGee in Tronox are central to its holding. It remains to be seen whether that argument will be persuasive.

On June 7, 2017, Judge Glenn considered the effect of Tronox in the context of addressing one of the threshold issues pending before the bankruptcy court—whether non-ignition switch plaintiffs are barred from asserting independent claims against New GM. See In re Motors Liquidation Company, f/k/a General Motors Corporation, No. 09-50026, ECF No. 13959 (Bankr. S.D.N.Y. June 7, 2017). The bankruptcy court concluded that the sale order does not bar non-ignition switch plaintiffs from asserting independent claims against New GM to the extent such claims are based solely on New GM’s post-closing wrongful conduct. It also held that claims for failure to warn based on the conduct of both New GM and Old GM were allowed to proceed because such claims were assumed under the sale order, along with claims based on failure to recall and retrofit based on New GM’s conduct, but not the conduct of Old GM. In the context of this inquiry, the bankruptcy court did not feel that Tronox affected its decision, stating that Tronox only barred duplicative or derivative claims that could have been brought by the bankruptcy estate or its successor, the litigation trustee.

Both the district court and the bankruptcy court have yet to consider the effect of Tronox on the remaining successor liability issues in the context of on-going lawsuits against New GM.

Conclusion

The extent to which a purchaser at a §363 bankruptcy sale can be protected from product liability claims otherwise viable against a successor remains an important issue for distress investing, especially in industrial companies. Due process will always be a concern and perhaps, in an abundance of caution, purchasers or settling defendants should insist that some provision be made by the bankrupt seller (or any litigation trustee successor) for future claimants.