Unlike a settlement before confirmation as part of a chapter 11 plan dealing with thousands of filed and unfiled claims, a settlement long after confirmation fixing the right of creditors with unfiled claims must comply with the class certification requirements in Rule 23, according to Bankruptcy Judge Martin Glenn of Manhattan.
Judge Glenn’s 57-page opinion filed on September 25 is the latest effort by the courts to assign liability and unwind the chaos created when General Motors Corp., or Old GM, failed to recall millions of automobiles with known defects before bankruptcy in June 2009.
The Ignition Switches and GM’s Sale
Within 40 days of the auto maker’s chapter 11 filing, the bankruptcy court in New York approved a sale of the business as a going concern to General Motors Co., or New GM, which was initially 60% owned by the federal government. The sale carved out 10% of New GM’s stock and warrants for eventual distribution to unsecured creditors when Old GM confirmed a liquidating chapter 11 plan in 2011.
In the bankruptcy court’s 2009 sale approval order, New GM agreed to assume responsibility only for specified liabilities, including warranty claims, accidents occurring after the sale, and Lemon Law claims. Otherwise, the sale was to be free and clear of claims, thus broadly immunizing New GM from successor liability claims.
In early 2014, New GM initiated recalls of millions of vehicles. It was later discovered that Old GM had known about a defect in its ignition switches for several years before bankruptcy.
The defect caused cars and their electrical systems to shut down unexpectedly, in some cases causing accidents. With the electrical system off, air bags would not inflate, resulting sometimes in death or injury.
Auto owners flooded the courts with lawsuits against New GM following disclosure of the switch defect. New GM responded with a motion asking the bankruptcy judge to enforce the “free and clear” sale order and bar claims against it based on the switch defect. New GM also wanted the bankruptcy court to bar plaintiffs from making claims against the trust created for unsecured creditors under the confirmed plan.
Now-retired Bankruptcy Judge Robert E. Gerber ruled in April 2015 that 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.
Judge Gerber went on to rule, however, that the plaintiffs suffered no prejudice from the lack of due process because he would have approved the sale in any event. Judge Gerber’s ruling had the effect of immunizing New GM for the most part from claims for personal injury, death, and property damage occurring before the sale. Under Judge Gerber’s ruling, New GM also escaped liability for owners’ economic losses, particularly the cars’ lower values resulting from the defect.
In addition, Judge Gerber ruled that equitable mootness barred any claims against the creditors’ trust. He certified the case for direct appeal to the Second Circuit. As it turned out, Judge Gerber’s opinion did not stand the test of time.
The Second Circuit Reversal
In July 2016, the Second Circuit reversed.
In Elliott v. General Motors LLC (In re Motors Liquidation Co.), 829 F.3d 135 (2d Cir. 2016), the appeals court allowed no excuse for failing to give actual notice to creditors of an impending sale when the company in reorganization knew claims to exist. The circuit court did not decide whether New GM in fact had successor liability. To read ABI’s discussion of Elliott, click here.
With regard to the creditors’ trust, the Second Circuit reversed, holding that the bankruptcy court’s decision founded on equitable mootness was an advisory opinion. At that time, none of the plaintiffs had taken even the first step to collect from the creditors’ trust.
The circuit court held that the bankruptcy court had improperly issued an advisory opinion because there was no case or controversy. The appeals court said there must be an Article III case or controversy “before relief may be equitably moot.” The opinion, therefore, did not say one way or the other whether equitable mootness protects the trust’s assets from late-filed claims.
The Effect of Reversal
Even before the Second Circuit reversal, thousands of suits had been filed against New GM around the country based in significant part on New GM’s own culpability. They were consolidated into a multidistrict litigation before a district judge in New York. In the multidistrict litigation, the district judge is sorting out New GM’s liability.
Judge Glenn took over the bankruptcy court side of the GM litigation when Judge Gerber left the bench. New GM’s liability is not the focus of Judge Glenn’s new decision.
Rather, Judge Glenn was dealing with the liability of the creditors’ trust, now that equitable mootness is no longer a bar.
Although owners of GM cars made claims against the creditors’ trust, they faced several hurdles, including the bar date, which had lapsed years ago. Even if they could file late claims, most of the property in the trust had already been distributed to other creditors.
Success by ignition switch claimants against the trust might have meant clawing back distributions already made to other creditors in order to equalize distributions to “old” creditors and ignition switch claimants.
Given the potential exposure on both sides, the trust and ignition switch claimants negotiated a settlement to allow late-filed ignition switch claims for personal injury, wrongful death, property damage and economic losses. The trustee of the creditors’ trust proposed a settlement under Bankruptcy Rule 9019 and Section 105(a) of the Bankruptcy Code to cover hundreds of creditors who had made claims against the trust and thousands more who have not yet filed claims.
The settlement called for the trust to set aside $6 million for notice and $15 million exclusively for ignition switch claimants. However, the principal feature of the settlement was designed to take advantage of a provision in the agreement under which New GM purchased the assets.
If the aggregate allowed claims against Old GM exceed $35 billion, New GM is obliged to issue an additional $1 billion in stock to the trust. At present, Judge Glenn said that allowed claims total almost $32 billion, while ignition switch creditors contend their claims aggregate more than $7 billion. Consequently, Judge Glenn said that the settlement might possibly kick in the so-called accordion feature and require New GM to convey another $1 billion in stock to the trust.
Significantly, the settlement would make any additional stock available only for ignition switch claimants. The settlement would not preclude the creditors from recovering against New GM for its own liability in the multidistrict litigation.
However, New GM objected to the settlement. Among other things, New GM argued that a settlement under Rule 9019 and Section 105(a) with regard to economic loss claims could not circumvent the class procedures under Rule 23, made applicable by Bankruptcy Rules 7023 and 9014.
Judge Glenn Requires Rule 23 Class Procedures
Judge Glenn agreed with New GM and denied the settlement motion without prejudice. He held that the trust is obliged to employ Rule 23 class certification procedures with respect to economic loss claims.
Judge Glenn’s opinion is required reading to understand case law concerning class claims: when they are or are not permissible, and when they are mandatory. He acknowledged that class claims are generally disfavored prior to confirmation because the Bankruptcy Code and the confirmation process have a multitude of protections for creditors with unfiled claims, and for creditors whose claims are yet to arise.
Judge Glenn held that neither Rule 9019 nor Section 105(a) contains “procedural safeguards that must be satisfied before millions of putative claimants may be bound.” He said he would not approve the settlement without first certifying a class of economic loss claimants under Rule 23, because the non-opt-out settlement would bind potentially millions of creditors who were not parties to the settlement.
In part, Judge Glenn was constrained by the sale agreement. New GM is only obliged to issue more stock if “allowed” claims exceed $35 billion. Unfiled claims by the non-signatories would not even be deemed “filed,” much less “allowed,” until a class is certified. A certified class would allow proponents of the settlement to have allowed claims to count against the $35 billion threshold.
In substance, Judge Glenn said that approving the settlement will entail proof that the settlement is “procedurally and substantively fair under Rule 23 and Federal Rule of Bankruptcy Procedure 9019.”
The trust contended that the settlement had sufficient due process and other protections for creditors with unfiled claims. Judge Glenn disagreed. He said the trust had “not cited any precedent approving an avenue other than Rule 23 for binding millions of absent individuals, absent a settlement included in a reorganization plan that is subject to the usual plan confirmation requirements.”
Judge Glenn did not say whether he would approve a revised settlement or certify a class. However, he did say that the settlement “makes a lot of sense, ending years of uncertainty and litigation and providing Claimants with the possibility of recovery.”