Bgi creditors liquidating trust
In order to get the benefits of a bankruptcy court’s “free and clear” order, proper notice is paramount.
Under the plan, Old GM would establish the GUC Trust, a trust to be administered by Wilmington Trust Company.The Bankruptcy Court’s issuance of a section 363 sale order would then prohibit individuals with claims against Old GM from suing New GM based on Old GM’s pre-closing conduct. First, Old GM filed for chapter 11, became a debtor-in-possession under the Bankruptcy Code, and sought the Bankruptcy Court’s authority to sell portions of its business under section 363.Second, New GM (then named “Vehicle Acquisition Holdings LLC”), owned predominantly by the U. Treasury, would acquire Old GM’s auto business but would only take on a few of its liabilities; New GM then could operate the GM auto business free of Old GM’s debts.However, the release sought for New GM from Old GM’s liabilities would be tested by the public revelation of a serious defect in GM vehicle ignition switches that could, among other things, cause vehicles to suddenly lose power and could prevent vehicle airbags from deploying in the event of a crash. The defect led to over 60 vehicle recalls between February and October of 2014.Congressional testimony and an extensive report produced by attorney Anton Valukas on behalf of GM, to which the Second Circuit in its opinion cites extensively, indicates that beginning in 2002, Old GM produced cars with an ignition switch that had failed testing, and that GM was aware of the defect and of complaints, accidents, and fatalities related to the defect, but that GM personnel had at that time downplayed the issue and failed to inform customers of the danger prior to the 2014 recalls.The Bankruptcy Court addressed and dismissed the objections and approved the section 363 sale on July 5, 2009.
It then issued the final sale order (the “Sale Order”), which rendered effective the final sale agreement between Old GM and New GM.
Almost immediately upon the 2014 recalls being announced, individuals filed dozens of class action lawsuits against New GM claiming the ignition switch defect caused personal and economic injuries both before and after the section 363 sale closed. The estimated amount of these claims is between $7 and $10 billion in economic losses alone. In response, New GM raised the section 363 Sale Order, arguing that the Sale Order’s “free and clear” provision barred the plaintiffs from pursuing these claims. Bankruptcy Court Opinion The issue came before the Bankruptcy Court in April 2014, when certain plaintiffs raising ignition switch defect claims initiated an adversary proceeding against New GM, and New GM moved to enforce the Sale Order to enjoin those claims.
The proceedings eventually involved multiple classes of individuals, including: (i) individuals who suffered pre-closing (i.e., July 10, 2009) injuries arising from the ignition switch defect in Old GM Cars (“Pre‐Closing Accident Plaintiffs”); (ii) individuals alleging economic losses arising from the ignition switch defect (“Ignition Switch Plaintiffs”), a group that included individuals who had purchased Old GM cars on the used car market (i.e., they were not in direct privity of contract with Old GM) after the section 363 sale closed (“Used Car Purchasers”); and (iii) individuals alleging damages arising from defects other than the ignition switch in Old GM cars (“Non‐Ignition Switch Plaintiffs”). The Bankruptcy Court ruled against the Pre‐Closing Accident Plaintiffs, Ignition Switch Claimants, and Non-Ignition Switch Plaintiffs in a series of three decisions, though it did make an exception for those plaintiffs with claims based on New GM’s own wrongful conduct. Most importantly, although the Bankruptcy Court held that the plaintiffs lacked notice of the section 363 sale consistent with procedural due process, it found that the plaintiffs had not been prejudiced by the lack of notice. The Bankruptcy Court reasoned that it would have granted the Sale Order even if the plaintiffs had filed objections, and so the failure of the plaintiffs to receive notice of the proceedings had not changed the outcome.
When buying assets from a debtor in bankruptcy, purchasers have relied for years on the debtor’s ability to sell assets “free and clear” in a bankruptcy sale under section 363 of the Bankruptcy Code.
The purchaser can then obtain the assets “cleansed” of the debtor-seller’s liabilities, including, it was widely assumed, product liability claims against such debtor-seller.
Despite the “free and clear” nature of the sale, New GM voluntarily agreed to assume 15 categories of liabilities, including liabilities for accidents after the closing date for the section 363 sale and the obligation to make repairs pursuant to express warranties issued in connection with the sale of GM cars.