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Welcome Back to Michelle Harner

posted by Bob Lawless

We are happy to welcome back Professor Michelle Harner of the University of Maryland and the reporter for the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11. Harner has kindly offered to blog on her perspectives on the Commission's report. So she does not have to say -- anything she writes represents only her own views and not her views in her capacity as the reporter.


Professor Harner,

I am the unsecured creditor who recently emailed you regarding my insight into small chapter 11s.

I read the Commission’s report and am struck by its failure to provide any basis for recommending approval for enjoining successor liability actions as part of a non-plan sale order.

Of most concern is the absence of at least lip service that whatever right or claim is enjoined via a 363 sale needs to be adequately protected pursuant to 363(e).

Does anyone believe that the issue of enjoining claims via a non-plan sale absent providing adequate protection will NOT some day make it to the Supreme Court.

For example, the Commission recommends enjoining claims against the buyer based on the debtor’s contracts. So, a creditor with a claim based on the debtor’s post-petition breach of a non-executory contract for the payment of money, which contract has an assignment clause making the successor obligated to assume the duties of the debtor is extinguished by a successor liability injunction as recommended by the Commission.

The Commission’s “broad” approach above results in an unconstitutional taking because the non-executory contract can not be rejected, passes through the bankruptcy, would otherwise remain actionable against the successor were it not for the injunction, and the contract and enforcement thereof represents a form of property invoking 5th Amendment scrutiny and protection.

It is no stretch to apply the same 5th Amendment takings scrutiny to an enjoined successor liability tort claim. While the underlying unsecured claim may not attach to the assets or be entitled to adequate protection, the enjoined successor liability claim is a common law action and right which is taken without just compensation, and without explicit authority under the Bankruptcy Code.

Robert: Hello, and thank you for this comment on the Report. I did pass on your original email. Your email and this comment provide a great deal of food for thought. I hope to touch on the sale provisions in a future post. I will try to address some of your points there, as well as through a subsequent response. Your comment represents the type of dialogue that the Commission hoped would flow from the Report. Indeed, the Commission views the Report as just the start of the conversation. Sincerely, Michelle Harner

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