General Motors and the Second Circuit,…Again!

Last week, the Second Circuit Court of Appeals issued a significant decision regarding the General Motors bankruptcy.  You probably remember an earlier case, where the Second Circuit reversed the bankruptcy court’s determination that JPMorgan Chase and its syndicate could remain as a secured party despite having erroneously filed a UCC Termination Statement.  Last week’s decision is another blow to a significant bankruptcy court determination.  In its decision, the bankruptcy court found “new GM” to be clear from claims arising out of defective ignition switches, even though the claims were known or reasonably ascertainable by “old GM” prior to its sale of assets to “new GM,” and yet, “old GM” did not provide those plaintiffs and potential plaintiffs with notice of the bankruptcy sale.

The bankruptcy court ruled that the plaintiffs were not provided with notice as required by procedural due process, even though “old GM knew or with reasonable due diligence should have known of the[ir] . . . claims.”  Although publication notice was issued and parties are presumed to have received such notice, publication notice does not assure that claimants or potential claimants actually received notice.

Nonetheless, the bankruptcy court concluded that failure to give notice did not entitle plaintiffs to pursue their claims against new GM because even if they had received notice and objected, the bankruptcy court determined that it would have overruled the objection and approved the 363 Sale as it was.  The Second Circuit reversed that thinking.

The Second Circuit focused on the plaintiffs’ rights under the “due process clause” of the Fifth Amendment of the United States Constitution providing that:  “No person shall . . . be deprived of life, liberty, or property, without due process of law.”  This is one of the most fundamental rights afforded under our Constitution.

The Second Circuit maintained that the bankruptcy court erred by concluding that the lack of notice was inconsequential because any legal argument the plaintiffs would have brought would have failed, resulting in the approval of the 363 sale.  Taking in the entirety of the business circumstances and the lost opportunity to negotiate, the Second Circuit concluded that due process is not limited to the opportunity to make a legal argument. Rather, it is the opportunity to participate in the proceedings in a meaningful way.

Although the Federal Judge overseeing the product liability cases dismissed many of them by the end of last week, many remain, and there is the potential for “new GM” to become burdened with obligations it had not intended to assume as part of its “purchase.”

So what does this mean to us?  It certainly means that when we are funding a purchaser of assets in a 363 Sale we want to be assured that all creditors, potential creditors, and potential claimants have received fair notice so as to entitle them to due process.  That is a pretty tough standard because the lender only knows what it knows, and even in this situation, would not have known what GM knew – that there was a defective ignition switch that was causing accidents and deaths and that owners of GM vehicles would likely be asserting those claims.

This is a dilemma that lenders will need to focus on in financing acquisitions of assets under § 363.  Stay tuned, I suspect we will be discussing this in future blogs.