The 2nd Circuits current opinion in The Matter of: Motors Liquidation Company, 2016 WL 3766237 (2nd Cir. 2016) should offer pause to all purchasers of assets from insolvency estates. This choice can be found in the personal bankruptcy procedures of General Motors, where the debtors possessions were offered by Old GM to New GM complimentary and clear of all liens, interests, insurance claims and encumbrances, including insurance claims of follower liability, within weeks after the petition was filed. The concern in this specific circumstance was whether the sale was complimentary and clear of insurance claims bought by consumers prior to the bankruptcy filing and which had a malfunctioning ignition switch. Numerous years after the insolvency sale closed, a group of lorry owners filed a foe case against New GM in the bankruptcy court, asserting financial losses developing from the ignition switch flaw and seeking liability against New GM on a theory of follower liability. New GM looked for to enforce the sale order, arguing it got Old GMs assets totally free and clear of these insurance claims.
The bankruptcy found that GM had actual understanding of the flaw and of possible claims based on it, which the holders of these insurance claims were entitled to actual notice of the sale hearing. Nevertheless, although finding that notice to the plaintiffs had been insufficient under the Due Process Stipulation of the Fifth Change, the personal bankruptcy court nonetheless enforced the sale order, concluding the claimants had not been prejudiced by the sale order because the court would have gotten in the sale order over any objection the plaintiffs might have raised. An appeal was certified straight to the Second Circuit.
The Second Circuit reversed and remanded the insolvency courts finding as to these ignition switch insurance claims. The court began its analysis by keeping in mind that numerous of its sister courts have actually held that sect; 363(f) might be used to bar a follower liability claims, concluding the usemaking use of the term insurance claim in sect; 363(f) is to be read in harmony with the meaning of the word in sect; 101. Since successor liability claims falls within the specifications of the term insurance claim as specified in sect; 101(5), the court concluded that possessions can be sold under sect; 363 complimentary and clear of such insurance claims. In shortSimply put, the court held that the totally free and clear language of sect; 363(f) uses to claims that flow from the debtors ownership of the offered assets.
The Second Circuit concurred with the bankruptcy court that the debtors cannot comply with the Due Process Clause when they failed to give actual notice by mail of the proposed sale to the holders of ignition switch claims. The court also concurred with the bankruptcy court that Old GM might have easily identified the holders of these insurance claims and could have offered them with actual notice of the proposed sale by mail. The court depended on the basic rule that notice by publication is not enoughinadequate with respect to an individual whose name and address are understood or very quickly ascertainable and whose lawfully safeguarded interests are directly affected by the case in question. Schroeder v. City of New York, 371 US 208, 212-13 (1962).
On the concern of prejudice, nevertheless, the Second Circuit pertained to a different conclusion than the bankruptcy court. The personal bankruptcy court held that bias is a requirement of the Due Process Stipulation, and that a party who has been denied due procedure may not be entitled to relief if he has actually suffered no prejudice. In this circumstances, the bankruptcy court found no prejudice, concluding it would have entered the sale order even if the complaintants had been provided notification. In evaluating this aspect of the personal bankruptcy courts choice, the Second Circuit noted a split in authority, with the First Circuit concluding prejudice should be revealed in asserting a due process violation, Perry v. Blum, 629 F. 3d 1 (1st Cir. 2010), whereas the Eighth Circuit has held a showing of bias is not needed, In re New Idea Hous., Inc., 951 F. 2d 932 (8th Cir. 1991). The Second Circuit did not take either side, concluding instead that, even assuming the claimants had to show bias, they had in this specific case. Keeping in mind the significant negotiations amongst many celebrations which cause the final sale order entered by the court, the Second Circuit believed the complaintants, had they received notice of the sale, might have prospered in working out more favorable treatment in the sale order.
This choice highlights the importance to buyers of possessions to make sure their debtor/seller offers suitable notice to all holders of claims against which the purchaser seeks protection from successor liability.…