General Motors Co., formed by the federal government to buy the bankrupt auto maker’s assets, wants the Supreme Court to review and reverse the Second Circuit’s July decision potentially holding the company liable for claims of known creditors who did not receive notice by mail of the impending sale of the business.
In a petition for certiorari filed on Dec. 13, New GM argues that the Second Circuit “essentially [held] Section 363 unconstitutional as applied” and ignored the “clear statutory mandate” of Section 363(m), which precludes modifying a sale to a good faith purchaser absent a stay pending appeal. New GM contends that the appeals court in effect made the purchaser liable for the misdeeds of the seller and went beyond the Bankruptcy Code and Rules by requiring that a notice of sale must tell creditors why they may have claims.
The GM Bankruptcy and Quick Sale
Old GM, named General Motors Corp. before bankruptcy, filed a chapter 11 petition in June 2009 and sold the assets 40 days later as a going concern to New GM, which was initially 60% owned by the federal government. The sale set aside 10% of the stock and warrants for unsecured creditors when Old GM eventually confirmed a liquidating chapter 11 plan.
The sale approval order in 2009 only made New GM liable for specified liabilities, including warranty claims, accidents occurring after the sale, and Lemon Law claims. Otherwise, the sale was designed to immunize New GM broadly from successor liability claims.
In early 2014 — almost three years after plan confirmation in 2011 — New GM announced recalls of millions of vehicles to repair ignition switch defects that Old GM had known about for several years before bankruptcy. An onslaught of class actions ensued. New GM responded by asking the bankruptcy judge to enforce the “free and clear” sale order and bar claims against it based on the switch defect.
The Decisions in the Bankruptcy Court and Second Circuit
The bankruptcy judge determined that holders of the ignition switch claims were known to or reasonably ascertainable by Old GM and were therefore entitled to actual notice as a matter of due process. Because he would have approved the sale even had the ignition switch creditors been given notice of their claims and objected, the bankruptcy judge held that New GM could only be liable for its “own wrongful conduct” after the sale, such as failing to disclose the defect sooner.
In a 74-page opinion finding a due process violation, the Second Circuit reversed the bankruptcy court’s conclusion that there was no prejudice to owners of defective autos. The appeals court said the owners might have wrung additional concessions out of the government in light of their claims. Although the Second Circuit would allow lawsuits against New GM based on defective ignition switches, the appeals court arguably did not decide whether New GM in fact has successor liability. The appeals court decision could potentially make New GM liable for pre-closing accident claims and claims for economic loss that were theoretically barred by the sale order.
The Certiorari Petition
New GM submits that the Second Circuit committed at least two errors justifying Supreme Court review: (1) The Second Circuit should not have interpreted the Due Process Clause to require that a bankrupt company notify creditors about “the grounds for potential claims against the seller;” and (2) The Second Circuit ignored the mandate of Section 363(m) by holding that a good faith purchaser can be liable even though the sale was “free and clear” of claims.
Insinuating there is a circuit split, New GM contends that the Second Circuit ignored an 1884 Supreme Court decision and opinions by other courts of appeals holding that a notice defect cannot make a purchaser liable for claims against a bankrupt seller in a “free and clear” transaction.
Although the only constitutional violation was committed by Old GM, New GM contends that the Second Circuit’s remedy improperly saddled the buyer with liability. The certiorari petition argues that the appeals court “did not explain that non-sequitur or make any effort to square it with Section 363(m)’s absolute protection for good-faith purchasers.”
Indeed, the Second Circuit’s opinion cited Section 363(m) just once, and then only for the general proposition that sale orders cannot be modified on appeal absent a stay pending appeal. Otherwise, there was no explanation for why Section 363(m) did not govern. New GM therefore may be correct in interpreting the Second Circuit as holding that due process violations override Section 363.
New GM believes the Supreme Court should review the decision because the auto maker’s bankruptcy was one of the largest of all time, and because the Second Circuit’s ruling may scare purchasers away from bankruptcy sales for fear of successor liability resulting from no fault of their own.
Arguments Against Supreme Court Review
The Supreme Court is most likely to grant review if there is a split of circuits. In the GM case, it may be a stretch to say there is a split of circuits because, arguably speaking, the Second Circuit may only have misapplied its own authority.
The creditors who prevailed in the court of appeals could attack the certiorari petition on other grounds, however. New GM refers to the owners of defective autos as “potential creditors” for whom notice by publication should be sufficient. The bankruptcy court and the circuit court, however, classified them as known creditors because GM should have announced a recall years earlier.
Contrary to New GM’s contention, the creditors can argue that the notice of sale would not have been required to explain why they had claims because a recall years before would have identified the exact nature of the defect.
The certiorari petition also leaves the reader with the impression that the Second Circuit held New GM liable for pre-closing accident claims and claims for economic losses. Although not beyond doubt, the appeals court’s decision could be read only to mean that creditors are at liberty to pursue New GM on successor liability theories.
Plaintiffs in the class actions can argue against Supreme Court review by saying that the GM sale was sui generis and would not establish a precedent for federal practice generally. In that respect, they could point to the Second Circuit’s opinion saying that “New GM was not a truly private corporation,” thus allowing plaintiffs to petition the government for an accommodation on account of their claims, had they known there was a defect.
Apart from the flaws in the appeals court’s decision perceived by New GM, the Second Circuit’s opinion was helpful for purchasers in bankruptcy sales because the court held that a Section 363 sale indeed cuts off successor liability claims, assuming there was due process.
The time for filing responses to the certiorari petition has not been fixed. When the justices hold a conference some weeks from now, they may decide to ask the Acting Solicitor General for the government’s views, given the pivotal role the government played in the GM bankruptcy. Should that occur, the case could not be heard until the term beginning in October 2017, even assuming certiorari is granted.
New GM is being represented in the Supreme Court by former Solicitor General Paul D. Clement.
To read ABI’s discussion of the Second Circuit opinion, click here.