Readers of this blog will be familiar with Seton Hall Professor Stephen Lubben’s prior work on credit default swaps and their impact on business bankruptcies. In a post on last week’s Credit Slips, Professor Lubben weighed in on another timely topic: Chrysler’s proposed asset sale to Fiat.
Of interest is a recent objection to the pending sale order filed by the State of Connecticut – the relevant portions of which are quoted in Lubben’s post – where 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”).
According to Lubben:
the State agues that the [Chrysler] sale order can’t release Chrysler from successor liability. This is a key issue, especially since the sale order in Lehman Brothers[' bankruptcy case] 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.
The professor points out a number of problems with Connecticut’s argument and the authorities supporting it, including (i) the State’s misstatement of the Alabama court’s holding; (ii) the absence of any mention by the South Carolina court of section 363; and (iii) the New Jersey court’s own misstatement of federal bankruptcy law. Of greater interest, however, is the New York decision cited by the State of Connecticut, which – according to the analysis offered on Credit Slips – relies on the Piper Aircraft decisions to find that successor liability under state law cannot be entirely eliminated by a federal bankruptcy sale order.
For Lubben, the New York trial court has a point about successor liability, though not for the reasons given by State of Connecticut. Instead, the bankruptcy court’s inability to “cleanse” the sale of distressed assets through a “Section 363 sale” has more to do with due process: In essence, those future claimants who may hereafter be injured by defective Chrysler vehicles should not be bound by a present bankruptcy order of which they had no notice. Lubben asks for comments on whether “[a] limited group of claimants might nonetheless be able to bring such [successor liability] claims, if they have good arguments that due process so requires.”
Great question, Professor Lubben. I have only one observation.
Successor liability to future claimants has long been a thorny issue where bankruptcy sales are concerned. It has received serious academic attention for well over a decade. However, such sales are not the only context in which bankruptcy courts have had to wrestle with successor liability. The Owens-Corning cases, which concerned the ability of an operating company to address future claims arising from asbestos-related product liability, resolved this problem and effectuated a successful reorganization through the appointment of a “future claims representative” – i.e., a representative appointed by the court and charged specifically with representing the interests of future claimants whose asbestos-related injuries had not yet manifested themselves in the company’s present reorganization. The Owens-Corning decision was of such creativity that its approach was implemented by Congress for all asbestos-related reorganizations in subsequent amendments to the Bankruptcy Code. See 11 U.S.C. 524(g) and its legislative history, which – incredibly – actually make for some interesting reading.
Where Chrysler’s asset sale will likely result in a liquidating plan, could the bankruptcy court follow a similar approach – i.e., appoint a claims representative to bargain with existing creditors on behalf of those future plaintiffs not yet injured by already-manufactured Chrysler vehicles for an appropriate share of the Chrysler sale proceeds, to be distributed through a claims trust and enforced by a channeling injunction similar to that prescribed for asbestos-related liabilities under Section 524(g)?
Comments, Professor Lubben? Anyone else? I’d love to hear from you at email@example.com.