On April 15, 2015, the US Bankruptcy Court for the Southern District of New York, in In re Motors Liquidation Co., denied successor liability claims against a purchaser of a debtor's assets on the basis that the due process rights of the plaintiffs were not violated, despite the fact that they did not receive sufficient notice of the sale, because they did not demonstrate that they were prejudiced as a result of the notice deficiency (No. 09-50026, (Bankr. S.D.N.Y. Apr. 15, 2015)).

In late 2008 and early 2009, General Motors Corporation (Old GM) suffered significant revenue and operating losses, and a dramatic drop in liquidity. In response, the federal government assisted Old GM with three separate cash infusions. The Obama administration declared that its financial support would last for only a limited period of time, and that Old GM would have to address its problems as a matter of great urgency.

In March 2009, the US Treasury gave Old GM 60 days to submit a viable restructuring plan. Old GM was unable to complete an out-of-court restructuring, and on June 1, 2009, Old GM commenced Chapter 11 proceedings. That same day, Old GM filed a motion (Sale Motion) for authority to sell substantially all of its assets in a section 363 sale. The acquirer ultimately became General Motors LLC (New GM). In the Sale Motion, Old GM asked the court to authorize the section 363 sale "free and clear of all other 'liens, claims, encumbrances and other interests,'" including all successor liability claims. Specifically, Old GM submitted a proposed order to the court containing provisions directed at cutting off successor liability, except where successor liability was contractually assumed.

In connection with the sale, the court entered a sale procedures order which provided for actual notice of the sale to 25 categories of persons and entities, including all:

The sale procedures order also provided for constructive notice, by publication, in several global and national media outlets and on the website of Old GM's noticing agent. On July 5, 2009, the court entered a sale order (Sale Order) approving the sale of Old GM's assets, free and clear of successor liability claims.

In March 2014, New GM announced to the public, for the first time, serious defects in ignition switches that had been installed in Chevy Cobalts and HHRs, Pontiac G5s and Solstices, and Saturn Ions and Skys (Ignition Switch Defect). Importantly, Old GM knew about, but failed to disclose, the Ignition Switch Defect before the 2009 sale.

In the spring of 2014, New GM issued a recall of the affected vehicles, under which New GM would replace the defective vehicles and bear the costs for doing so. New GM had previously agreed to assume responsibility for any accident claims involving post-sale deaths, personal injury and property damage (which would include any that might have resulted from the Ignition Switch Defect). Immediately following New GM's announcement, the following three classes of plaintiffs filed 60 class actions in various US courts:

The court considered the claims of the Economic Loss Plaintiffs and the Pre-closing Accident Plaintiffs (together, Plaintiffs) and deferred consideration of the Non-Ignition Switch Plaintiffs' claims pending its determination of the Plaintiffs' claims.

New GM sought to enforce the Sale Order's provisions to block:

The court held that while the Plaintiffs were denied their due process notice rights, they could not now assert claims against New GM arising from the Ignition Switch Defect caused by Old GM because the Plaintiffs were not prejudiced by Old GM's failure to provide the required notices in connection with the sale.

The court first focused on the Plaintiffs' due process rights. It held that the Plaintiffs were entitled to due process and were in fact denied their due process notice rights. The court explained that because at least 24 of Old GM's engineers, senior managers and attorneys knew of the Ignition Switch Defect at the time of the sale, the Plaintiffs had "known" claims and were entitled to receive sufficient notice of the sale. However, the court also concluded that there was no violation of due process with respect to successor liability, because the Plaintiffs did not demonstrate that they were prejudiced as a result of the notice deficiency. The court found that the Plaintiffs were not prejudiced because, while they did not receive notice of the sale, other objecting parties who received notice raised the same successor liability arguments that the Plaintiffs asserted. Because the court overruled these objections and approved the sale to New GM free and clear of successor liability claims, the Plaintiffs suffered no prejudice in failing to make those same objections. Even if the Plaintiffs had the opportunity to object to the sale, the court would have likewise rejected their objections and still would have approved the sale, free and clear of successor liability.

However, the court did find that the due process deficiency prejudiced the Economic Loss Plaintiffs with respect to the overbreadth of the Sale Order. No claimant at the 2009 sale hearing had argued that the proposed Sale Order was overly broad, and that it should not have barred claims involving Old GM vehicles and parts if they arose solely out of New GM's conduct, and not based on any kind of successor liability or acts committed by Old GM. Because the Economic Loss Plaintiffs missed the opportunity to raise this argument, the court allowed these types of claims to proceed even though the Sale Order would otherwise have enjoined these claims.

The court also barred the Economic Loss Plaintiffs from filing late claims in Old GM's bankruptcy case to obtain a distribution from the liquidating trust established for general unsecured creditors (GUC Trust), even though Old GM failed to notify the creditors of the claims' bar date because it concluded that their claims were equitably moot. The court reasoned that allowing these late claims would require modifying Old GM's plan, which would prejudice other creditors, including purchasers of GUC Trust units after plan confirmation, who had certain expectations concerning the size of the claim pool and the timing of distributions. Further, the court explained that it would be inequitable to allow late claims against the GUC Trust in light of the Plaintiffs' "tactical choice" not to seek a stay of distributions to claimholders, after they had become aware of their claims against Old GM.

The court certified its decision for direct review by the US Court of Appeals for the Second Circuit.

This decision reinforces the finality of sale orders and the power of the "free and clear" relief provided in these orders under section 363(f) of the Bankruptcy Code. Further, this decision may be an obstacle to creditors asserting due process violations and for those seeking to file late claims, particularly against a trust where distributions have already been made and where interests in the trust are actively traded.

For more information on section 363 sales, see Practice Notes, Buying Assets in a Section 363 Bankruptcy Sale: Overview and A Distressed Deal Buyer's Guide, and Timeline of a Section 363 Sale.