The mess that General Motors Corp. made when it failed to disclose a known defect in ignition switches before bankruptcy continues generating precedents both for bankruptcy and tort law almost 10 years after the auto maker’s chapter 11 filing in 2009.
In the realm of the Bankruptcy Code, law is being made both in the bankruptcy court and in multidistrict litigation in federal district court in New York. Much of the law deals with the extent to which so-called New GM, the entity that purchased Old GM’s assets in 2009 in a chapter 11 sale, is immune from lawsuits by owners of defective cars as a result of the bankruptcy court’s order selling the assets to New GM free and clear of claims. New GM disclosed the defect in 2014.
The most recent decision was handed down by District Judge Jesse M. Furman, wearing his hat as an appellate judge reviewing decisions made in bankruptcy court. Judge Furman is also the district judge playing ringmaster in the multidistrict litigation.
In his 42-page opus on May 29, Judge Furman handed down two nuggets of law applicable generally in bankruptcy.
Law of the Case
An ignition switch plaintiff raised an issue that had already been decided by the bankruptcy court years ago. The particular plaintiff was not a party in the case when the bankruptcy judge issued the earlier ruling.
The plaintiff asked the bankruptcy judge to revisit the previously decided issue. The bankruptcy judge refused, ruling that the issue was law of the case. The plaintiff appealed and lost.
Judge Furman said there was “no precedent suggesting that a court is obligated to revisit a prior ruling on a question of law merely because certain parties did not participate in the earlier ruling.” Indeed, he said, “courts have held that the law of the case doctrine ‘applies to different adversary proceedings filed within the same main bankruptcy case.’”
Punitive Damages Against Buyers in ‘363 Sales’
Another issue dealt with punitive damages sought against New GM for Old GM’s failure to disclose the known defect.
Judge Furman began with the proposition that the claims against New GM were based on successor liability. It follows, he said, that claims cannot be brought against the successor that could not be asserted successfully against the predecessor.
Section 726(a)(3)-(4), listing priorities for the distribution of estate property, provides that general unsecured creditors must be paid in full before holders of claims for punitive damages may receive a distribution. Because Old GM’s creditors are not being made whole, punitive damage claims are therefore barred against Old GM.
Because plaintiffs could not assert punitive damages claims against Old GM, Judge Furman said that the bankruptcy court was correct in holding “that there is no liability for such claims to be transferred to New GM and that those claims cannot be brought against New GM.”
Judge Furman also said that holding a buyer at a bankruptcy sale liable for the acts of the seller would not be consistent with the purpose of punitive damages to punish the wrongdoer and deter others from acting illegally.