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§363(f) and Successor Liability

posted by Stephen Lubben

Another interesting objection to the Chrysler sale motion comes from the State of Connecticut.  The State argues

Neither the Supremacy Clause of the United States Constitution nor the doctrine of preemption obligate state courts to enforce an otherwise valid order of any United States Bankruptcy Court where such order is challenged under the successor liability law of the states.  See e.g. MPI Acquisition, LLC v. Northcutt, 2009 Ala. LEXIS 14 at * 10 (Ala. 2009); Lefever v. K.P. Hovnanian Enterprises, Inc., 160 N.J. 307 (1999) (bankruptcy sale order did not preclude application of product-line successor liability); Gross v. Trustees of Columbia Univ., 816 N.Y.S. 2d 695 (2006) (successor liability imposed against purchaser of assets free and clear of claims in bankruptcy proceeding); Simmons v. Mark Lift Industries, Inc., 366 S.C. 308, 313 (2005) (“a plaintiff may maintain a state-based product liability claim under a successor liability theory against a successor corporation which purchased the predecessor's assets in a voluntary sale approved by the federal bankruptcy court”).

In short, the State agues that the sale order can’t release Chrysler from successor liability.  This is a key issue, especially since the sale order in Lehman Brothers expressly included just such a release.  Obviously the market for distressed assets would become even more illiquid if bankruptcy courts were unable to “cleanse” the assets as part of the sale process.

But it turns out the State’s brief is another lesson in why it’s important to read cases for yourself, rather than relying on others’ representation of the same.  First, the Alabama case directly contradicts the proposition for which it is cited.  2009 Ala. LEXIS 14 at * 9 (“we hold that the Supremacy Clause of the United States Constitution, Art. VI, cl. 2, and the doctrine of preemption obligate a trial court to enforce an order of a United States Bankruptcy Court in cases where Alabama successor-liability law is raised.").

The South Carolina case was based on a certified question from the District Court – but arguably the question of successor liability after a bankruptcy sale is federal and should not have been certified.  In any event, the South Carolina Court simply says “the normal rules apply,” and §363(f) never comes up in the analysis.

The New Jersey opinion, which I’ve often bad-mouthed in my corporate finance class, supports Connecticut’s position, but the opinion is based on several important errors of bankruptcy law.  For example, although the plaintiff received notice of the bankruptcy case, and was clearly aware of his injury at that time, the New Jersey Supreme Court boldly states that the “Plaintiff was not a creditor of the bankrupt. He filed no claim in the bankruptcy proceedings.” 160 N.J. at 320.  If only it was so easy to avoid the discharge.

And then there’s the New York opinion, which turns out to be an unpublished trial court opinion (apparently that “Supreme Court” thing even confuses people in Connecticut).  Nevertheless, this may be the most persuasive opinion of the lot.

Although this court’s analysis is a bit loose, its argument that the Piper line of cases could preclude complete elimination of successor liability claims of future tort claimants makes some sense to me.  But I would base the argument in due process, rather than state successor liability law itself, which seems to be clearly preempted in most respects.  I would also limit such an exception to those who could not know they might have a claim in the bankruptcy case – thus, current owners of Chrysler cars could be given notice and forced to file a claim, no matter how contingent, but future owners of already manufactured defective Chryslers and those who have yet to be run over by these defective cars would seem to have a good argument that the Bankruptcy Code, and Congress’ power under the Bankruptcy Clause, must bend to the 5th Amendment’s requirements of due process.

Of course, even in the case of such unknown claims, this analysis only argues for the inability of the bankruptcy court to cleanse assets in violation of the claimant's due process rights.  The claimant would still have to show that they have a valid successor liability claim under relevant state law.

In sum, despite Connecticut's argument, I think the court can enter an order cleansing the assets of successor liability claims.  A limited group of claimants might nonetheless be able to bring such claims, if they have good arguments that due process so requires.

Thoughts?

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