Thoughts on the GM Ignition Switch Opinion

The Second Circuit handed down its much-anticipated decision on the GM successor liability claims. Bottom line is that most, if not all, of the various claims against New GM are not barred by the Sale Order because of lack of procedural Due Process.  That said, there's a lot more in the ruling.  My thoughts below the break: 

Four groups of plaintiffs made various arguments (not all making the same ones) appealing the bankruptcy court's decision to enforce the Sale Order as barring their claims against New GM:

1. The bankruptcy court lacked jurisdiction to enjoin their suits against New GM (made by the non-ignition switch plaintiffs)
2. The claims were beyond the scope of the "free and clear" power under 363(f), and therefore could not be enjoined (made by all plaintiffs)
3. The 363(f) sale did not comply with procedural due process, so their claims could not be enjoined (made by all plaintiffs)
4. The ability to pursue Old GM (now the GUC trust) is not equitably moot (made by all plaintiffs)

The Second Circuit completely dismissed the jurisdiction argument (which was being propounded by my Georgetown Law colleague Gary Peller). Basically, the bankruptcy court was interpreting its sale order, which is "arising out of" jurisdiction. That seems quite right to me. 

Regarding the scope of the "free and clear" power, the Second Circuit cut the salami very thin.  It held that certain claims were covered (pre-sale accident claims; economic loss claims from defects that existed prior to the sale), but not others (claims based on New GM's conduct; claims of used car purchasers). The holding regarding the pre-sale accident claims and the New GM conduct claims seem pretty obviously right. The real issue relates to the economic loss claims from defects that existed, but were latent, prior to the sale.  The Second Circuit's reasoning on these claims starts with the question of what is an "interest" under section 363(f).  The Second Circuit held that an interest for 363(f) requires a "claim" under 101(5). The Second Circuit then held that the economic loss claims were "contingent claims" and thus claims under 101(5) and therefore covered by 363(f).  

I'm not wholly convinced by this reasoning.  As an initial matter, however, I think the Second Circuit was correct to link 101(5) and 363(f).  The question of whether there is a claim is formally only an issue for whether the debt is dischargeable.  But given that the Sale Order purported to have the same injunctory effect as a discharge, I think it's reasonable to import the claim analysis into 363(f).  That said, the economic loss claims do not fit the classic definition of "contingent claims."  Two classic contingent claims would be a tort claim that is pending litigation where no answer has been filed (so the claim is not yet even disputed) or a claim based on a non-executory contract--the counterparty has performed and has a claim, contingent upon the debtor not performing.   Here, however, the Second Circuit said that the contingency was GM revealing the ignition switch defect. That's a wholly different type of contingency. These plaintiffs would have had a claim if GM hadn't engaged in a coverup.  That proves too much. Basically every latent injury based on a defective product is then a contingent claim.  

Even more puzzling to me, however, is the holding that the Sale Order did not cover the claims of purchasers of used GM cars.  This seems totally contrary to the principle of nemo dat.  Given the Second Circuit's position, if I had purchased a Chevy Cobalt in 2005 and still owned it, I would be subject to the Sale Order for any ignition switch defect because of my contingent claim.  But if I purchased the Cobalt in the used car market in 2010, I would not be.  Why does the post-bankruptcy purchaser get better rights than the pre-bankruptcy purchaser?  Isn't the claim's nature fixed at the time of the bankruptcy, rather than morphable by nature of ownership? Consider, what about transfers not by sale but by devise? What if I inherited the Cobalt in 2010? Would I no longer be subject to the Sale Order?  Yes, the used car purchaser or inheritor has no direct contact with GM. But the purchaser steps into the shoes of the seller.  Surely there's privity that runs both ways through the initial sale of the car.  But an earlier decision in Chateaugay shaped the Second Circuit's thinking. 

In any event, even though some of the plaintiff groups are covered by the Sale Order, the Second Circuit found that they had not received notice consistent with Due Process because GM knew that there was a defect and could identify most of the affected owners.  The Second Circuit sidestepped the question of whether prejudice is required because it found that the plaintiffs had clearly been prejudiced--had the defect been revealed, the Sale Order might have been quite different not because the parties might have raised different legal arguments, but because there would have been different demands and opportunities to negotiate.  In other words, the issue is not whether the bankruptcy court would have approved the Sale Order, but whether the Sale Order presented to the bankruptcy court in the first place would have been substantively different.  The Second Circuit thought there was reason to think that it might have been given political pressure and the possibility of delaying the sale.  In this regard, the Second Circuit issued a really wonderful legal realist opinion.  

Finally, the Second Circuit disposed of the equitable mootness matter by declaring it an impermissible advisory opinion because no plaintiff had ever sought relief from the GUC Trust (Old GM). I think the Second Circuit is on shaky ground here.  The no-advisory opinion principle is an Article III issue, and bankruptcy courts are not Article III courts.  The fact that bankruptcy court jurisdiction derives from a reference from Article III courts doesn't affect this. The reference is what gives the bankruptcy court the authority to decide the claims and controversies, but it is an enabling feature, not a limiting one, whereas Article III limits courts to addressing only actual cases and controversies. Given the rest of the opinion, however, the equitable mootness ruling doesn't seem to matter much. The lack of Due Process means that all of the various plaintiffs can proceed, with the possible exception of the non-ignition switch plaintiffs (represented by my colleague Gary Peller), as there's a factual question to be resolved regarding their notice and prejudice.  Unfortunately, given that the Second Circuit never decided whether prejudice is required for the Due Process violation, it's not clear to me how the bankruptcy court is supposed to handle the non-ignition switch plaintiffs on remand.  

A concluding thought.  It's instructive to compare this decision with the Second Circuit's Chrysler decision.  It shows just how differently courts view matters when they are facing a financial crisis or not.  There was little question that Chrysler was going to barrel down the highway--what court has the cojones to risk a national economic meltdown?  The Supreme Court didn't have the gumption when faced with the Gold Clause cases, and it didn't when faced with Chrysler.  (There were due process problems in Chrysler, I think, much like those in GM, but not the priority problems that were argued at the time.) But now that there's no longer a crisis, courts are in a position to finger wag at how business gets done during a crisis.  Which is exactly what we should expect. But it shows that courts are a very poor forum for trying to deal with systemic financial risk--they inevitably turn into rubber stamps, which is bad for the rule of law. Put another way, bankruptcy is a really bad method for addressing systemic risk, and it the systemic risk burden would be bad for bankruptcy courts. 

 

Comments

[Robert White]

The 2nd Circuit botched interpretation of 363.
Thank God the outcome did not depend on it.
“Claims” are not automatically “interests” under 363(f)and when they are 363(e) mandates adequate protection of those claims.
Nor are claims discharged in a liquidating plan.
So where in the Code is an injunction provided for a claim that is not adequately protected or discharged?
Not much chance a writ will be taken to straighten things out because all the Appellants won.

[Robert White]

Realizing the argument for enjoining successor liability claims I thought I would preempt the exchange.

Here is my problem with the logic that enjoined successor liability claims are only due the same adequate protection as unsecured claims - namely zilch.

Even though the remedy for the successor liability claim is the same as the underlying claim the cause of action is different.

Limiting the remedy is not the same as limiting the cause.

The cause is against the successor not the debtor and the cause of action is based on the successor’s independent behavior, not the debtor’s behavior.

THEREFORE, A SUCCESSOR LIABILITY CLAIM AGAINST THE BUYER IS AN INDEPENDENT AND ADDITIONAL CLAIM AGAINST THE DEBTOR FOR THE SEPARATE UNDERLYING UNSECURED CLAIM!!!!

While the cause may follow the assets it will not prevail absent certain behavior by the successor; therefore, enjoining successor liability actions has zero value as a separate claim against the debtor absent a successful cause of action against the successor.

So go ahead and enjoin the successor claim but give it the adequate protection such a cause of action deserves as an independent claim.

If you did this no one in their right mind would enjoin successor liability claims absent good faith consideration.

[Robert White]

As to the issue of the Bankruptcy Court's jurisdiction to determine its jurisdiction to issue and enforce the successor liability injunction the 2nd Circuit held:
“Hence, a bankruptcy court ʺplainly ha[s] jurisdiction to interpret and enforce its own prior orders.ʺ Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151(2009)”

But Travelers v Bailey recognized three exceptions to res judicata in footnote #6:
More broadly, the Restatement (Second) of Judgments §12, p. 115 (1980), describes three exceptional circumstances in which a collateral attack on subject-matter jurisdiction is permitted:
“(1) The subject matter of the action was so plainly beyond the court’s jurisdiction that its entertaining the action was a manifest abuse of authority; or
“(2) Allowing the judgment to stand would substantially infringe the authority of another tribunal or agency of government; or
“(3) The judgment was rendered by a court lacking capability to make an adequately informed determination of a question concerning its own jurisdiction and as a matter of procedural fairness the party seeking to avoid the judgment should have opportunity belatedly to attack the court’s subject matter jurisdiction.”

Now the question is: “Does an Article II Court have authority to enjoin actions reserved for Article III adjudication?” like a common law complaint for successor liability between third parties. Stern v Marshal counsels against it and Executive Benefits explicitly puts injunctions in Article III territory:
See, e.g., Celotex Corp. v. Edwards, 514 U. S. 300, 307, n. 5, 308 (1995) (“Proceedings ‘related to’ the bankruptcy include . . . suits between third parties which have an effect on the bankruptcy estate”). Accordingly, because these Stern claims fit comfortably within the category of claims governed by§157(c)(1), the Bankruptcy Court would have been permitted to follow the procedures required by that provision, i.e., to submit proposed findings of fact and conclusions of law to the District Court to be reviewed de novo.
(slip opinion pg. 11)

The pivot regarding the Bankruptcy Court's authority to issue and later enforce successor liability injunctions relies on the old adage that courts have authority to determine their own jurisdiction which was established eight decades ago in Chicot Drainage v Baster State Bank.

But that was a pre-Code case where the Article III District Court exercised jurisdiction sitting in Bankruptcy on a plenary issue that was later upheld according to res judicata. Clearly an Article III Court has jurisdiction to determine jurisdiction of an Article III Court. But does an Article II Court have authority to determine jurisdiction of an Article III Court?

Query again: Does the Bankruptcy Court have authority to enforce orders it did not have authority to issue?

I think not.