In the General Motors multidistrict litigation over defective ignition switches, District Judge Jesse M. Furman of New York plugged a hole in a Second Circuit decision from April by ruling that successor liability claims are not estate property if creditors were not given constitutionally adequate notice of bankruptcy.
Judge Furman’s most recent decision resulting from the ignition switch fiasco focused on plaintiffs who claimed they suffered economic damage, such as the decline in the value of their cars, following the adverse publicity surrounding GM’s prebankruptcy sale of vehicles that would shut off spontaneously, disabling steering and air bags.
Before bankruptcy in 2009, GM had not disclosed the known defect in the ignition switches in some of its models. Consequently, owners of those defective cars were not given notice of their right to file claims.
On account of constitutionally inadequate notice to owners of the defective cars, the Second Circuit opened the door in 2016 to suits against so-called New GM, the company formed to purchase and operate Old GM’s business. Even though the sale-approval order purported to preclude suits against New GM on account of many claims against Old GM, the Second Circuit said the plaintiffs were entitled to sue New GM. To read ABI’s account of the Second Circuit’s 2016 GM decision, click here.
Although given the right to sue, plaintiffs still had to concoct a theory that would hold New GM liable for defective products sold by Old GM. The plaintiffs based their economic damage claims in significant part on theories of successor liability under state laws.
New GM filed a motion to dismiss, based in part on the notion that the plaintiffs did not have standing because successor liability claims belonged to Old GM’s bankrupt estate. The idea that Old GM had the exclusive right to sue New GM for successor liability was facially appealing in light of a Second Circuit decision in April, Tronox Inc. v. Kerr-McGee Corp. (In re Tronox Inc.), 855 F.3d 84 (2d Cir. April 20, 2017).
New GM relied on the holding in Tronox, where the appeals court held that successor liability claims were “generalized, derivative claims comprising estate property.” Id. at 107. If New GM was reading Tronox correctly, the Second Circuit would have taken away in 2017 what it gave to ignition switch creditors in 2016.
Judge Furman distinguished Tronox on the facts and held in his Aug. 3 opinion that ignition switch claimants had standing to sue on theories of successor liability.
In Tronox, the creditors knew before bankruptcy that they had claims against the company. In contrast, Judge Furman said, plaintiffs did not know before bankruptcy about their claims against Old GM because the company had deprived them of their constitutional right to notice.
If he were to rule that Old GM owned the claims – even though creditors didn’t know there were any claims to be made – Judge Furman said he “would effectively render due process rights of creditors worthless.” Ruling that the creditors had no standing for successor liability claims “would reward debtors and asset purchasers who concealed claims known to them but unknown to potential claimants,” Judge Furman said.
To dismiss the successorship claims “would be a windfall for asset purchasers such as New GM; they would escape liability, with no attendant benefit to any creditor of the debtor.”
Absent “more explicit guidance from the Second Circuit,” Judge Furman said that “Tronox should not be read to apply where, as here, the party asserting a claim did not bring, and could not have brought, that claim prior to the bankruptcy.”
Ignition switch creditors won on standing but didn’t prevail altogether. Judge Furman went on to hold that the plaintiffs, as a matter of law, failed to state successor liability claims in seven states whose choice of law rules invoked Delaware law. He ordered further briefing regarding nine other states governed by other laws.