Wednesday, April 2, 2014
New GM's Exposure for Old GM Ignition Defect Liability
Somewhat to my surprise, I could not find, in a Google search I ran earlier today, a good online explanation of the bankruptcy law issues pertaining to the extent of "New GM's" liability, if any, "for at least 31 crashes and 13 deaths" resulting from an ignition defect that may have been concealed from the outside world until well after government-controlled New GM's purchase of the operating business of General Motors in 2009. So I thought I would write one.
According to a helpful timeline NPR pulled together (see above link), all of the design and/or manufacturing defects, and internal awareness of the defect, occurred long before "old GM" (now known as Motors Liquidation Company) commenced its chapter 11 case in 2009. This means that any tort claims arising from the defect were pre-petition claims and their creditors, to the extent old GM gave them legally adequate notice of the asset transfer to new GM are bound by the Bankruptcy Court's order approving that sale. The general rule on notice is that claimants known to old GM should have been sent actual notice in the mail, and widespread publication would bind claimants unknown to old GM (those who had sustained an injury but not yet sued or demanded a payment outside of a lawsuit). Tort claimants were very active active in the bankruptcy case and even took appeals of the Sale Order to the U.S. District Court for the Southern District of New York. So it is unlikely any of them could show old GM failed to give adequate notice, and thus the Sale Order would, absent further proceedings, bind them. So the next step is to look at the Sale Order's provisions on tort liabilities.
The Sale Order was extremely clear that New GM was not taking on old GM's tort liabilities. The relevant provisions, as well as a depiction of the extensive litigation by tort claimants over those provisions, are laid out in District Judge Naomi Buchwald's April 2010 opinion dismissing certain tort claimants' appeal of the Sale Order for mootness. As she describes it, the Sale Order distinguishes between "Existing Products Claims" i.e., crashes or losses that had already occurred, and "Future Products Claims", those that occurred post-closing of the sale, whether or not the vehicle had been manufactured before the sale. New GM assumed the latter, but not the former. The Sale Order also clearly bars tort claimants from suing New GM on theories of liability outside of contractual assumption, such as successor liability, "de facto" merger and so forth. Judge Buchwald's opinion quotes the language at page 9 of her opinion and I won't repeat it here, but it's quite clear and explicit and broad.
Judge Buchwald also recounts, at page 8 of her opinion, how government-controlled New GM very explicitly stated in the purchase agreement that it would not go through with the sale if it could be held liable for any debts of old GM outside of the limited ones it agreed to assume.
These statements and provisions are consistent with what had been previously litigated in the context of the relatively contemporaneous Chrysler and Lehman sales that the Second Circuit Court of Appeals had upheld against somewhat similar challenges to the authority of bankruptcy courts to approves sales of entire businesses free and clear of claims under section 363 of the Bankruptcy Code. Judge Buchwald noted in footnote 13: "We cannot rewrite the negotiated MPA and Sale Order, in which the 'free and clear' provisions were critical and nonseverable terms of the bargained-for transaction." That ruling seems highly relevant to the extent of New GM's liability to similar claimants.
The Bankruptcy Code Makes it Very Hard to Undo a Sale Order After the Sale Closes
A bankruptcy court's sale order is especially hard to modify, owing to specific protections for buyers built into the Bankruptcy Code to maximize interest in buying assets out of bankruptcy. Judge Buchwald's dismissal of the tort claimants' appeal was compelled by the language of section 363(m) of the Bankruptcy Code, in which Congress severely limited the scope of appellate review of section 363 sale orders. 363(m) provides that, once a sale approved by a bankruptcy court has closed, an appeal is moot except to the extent the purchaser was not "in good faith". While some appellate courts have reasoned that appeals of ancillary or collateral terms of sale orders were not barred by section 363(m), the Second Circuit, in a 2010 decision involving an appeal from the sale order in the WestPoint Stevens case has reached the opposite conclusion, that the entire Sale Order is off limits once a sale has closed. In any case, there was little reason to believe that the provisions protecting New GM from liability for tort claims were not integral aspects of the transaction.
Section 363(n) provides a seller grounds to vacate a sale order if it is discovered that the buyer wsa engaged in collusive bidding but that seems irrelevant to the tort claims here, even if the claimants could persuade New GM to make such a motion.
The tort claimants behind the appeal to Judge Buchwald further appealed her decision to the Second Circuit but before the year was out, withdrew it. That left the Bankruptcy Court's sale order intact and enforceable against all parties who were given proper notice of it, unless they can somehow convince the bankruptcy court to modify the order at this late date, or come up with a claim that falls outside of its purview.
The Legal Methods for Trying to Undo or Modify the Sale Order
The Bankruptcy Code does not specify a substantive right or standard for that relief, so it is governed by Federal Rule of Bankruptcy Procedure 9024 which, with certain exceptions not relevant to a section 363 order, just says that the general rule on relief from federal court orders, Federal Rule of Civil Procedure 60, applies. The relevant provision of that rule is Rule 60(b), which clearly specifies that fraud is a basis for relief from a federal court order. A Rule 60(b) motion must be made to the court that entered the order from which relief is sought, here the bankruptcy court. The Second Circuit showed some inclination to interpret Rule 60(b) challenges to sale orders liberally in In re Lawrence, where insiders of a company secretly bought the company's stock from a bankruptcy estate without disclosing a major product development, and the stock quadrupled in value within a few weeks. Unfortunately, Rule 60(b) also clearly specifies that claims for relief based on fraud (and most other bases) must be brought within one year of the order being entered, as was the case in Lawrence, but here the Sale Order was entered almost 5 years ago. I could not find any Second Circuit case approving 60(b) relief from a bankruptcy court order entered more than a year before 60(b) relief was sought.
Claims that allege "fraud on the court" are exempted from the one-year limitation, but "fraud on the court" is an extremely limited doctrine, a full discussion of which is beyond the scope of this post, and, in any case, even if one were to believe that Old GM was somehow engaged in "fraud on the court" with respect to the ignition defect (overlooking the difficulty that the bankruptcy court was not a safety regulator and there is really nothing in the bankruptcy code or logic that requires extensive disclosure in a sale context about a liability that is not moving anywhere in the sale), it is hard to see how New GM could be tagged with the assumed fraud. New GM was just a shell entity controlled by the government prior to the sale. It would be difficult to impute any knowledge of the ignition defect to it.
But even more important, it is very clear from the Purchase Agreement and the proceedings around it, that no matter how much was known by the tort claimants or even New GM or the bankruptcy court about the ignition defect at the time the sale was under judicial review, it would not have led to a different result - the buyer was not assuming the tort liabilities it knew about, and the bankruptcy court knew that, so there is no reason to think New GM would have been willing to assume the ignition defect liability or the bankruptcy court would have been any more willing to disapprove the sale because of that. The existence of these suits was known at the time and the fact that anyone learned afterwards they had a better case than perhaps was assumed at the time certainly doesn't increase the buyer's willingness to take them on. This is the exact kind of adverse development that a buyer seeks to avoid by not taking on contingent liabilities, not a development outside of anyone's contemplation. This is not like a lawsuit between a plaintiff and a defendant in which the defendant hid evidence to defeat the plaintiff on the merits and then the plaintiff has an argument that things would have turned out differently if the evidence had been known at trial; here, the buyer, like many 363 buyers, is actually assuming the worst -- that the lawsuits have merit -- and for that reason declining to assume liability for them. So the alleged disclosure / nondisclosure have nothing to do with the legal act that bars the litigants from going after New GM and for that reason, "fraud on the court" or even "fraud" under Rule 60(b) should not be applied to impose any liability on New GM.
In the National Gypsum case in Dallas in the 1990's, asbestos claimants succeeded in convincing a bankruptcy judge in Dallas to reopen a plan of reorganization that, much like the GM sale, sent legacy liabilities to a trust that held a stake in the reorganized company's equity, while that company went on free and clear of legacy liabilities, because they convinced him that the management had deliberately concealed certain profit-increasing business plans that they put in place several months later. That case was never reviewed on appeal because the parties settled it, and its soundness as a matter of interpreting the Bankruptcy Code is questionable. It may just be one of those "bad cases make bad law" instances. In any case, it is meaningfully different from the New GM situation because they had a claim that the nondisclosure affected the negotiations in which they participated. In the New GM situation, there is no reason to think that was the case. Again, the more compelling their claim was against old GM, the less likely that New GM would take it on. The only counterargument I could see would be that, because New GM was controlled by the federal government, the egregious nature of the ignition defect coverup would have led the government to force New GM to assume the ignition defect liabilities as a special case, for political or reputational reasons. It's very speculative and I have no idea how you test such a proposition if you're a court asked to rule on it, other than to see what Treasury did with the money it got from the sale of New GM stock over the past four years. Or to look at what Treasury did when other politically powerful constituencies,, like car dealers in Barney Frank's district, demanded special treatment....
For some time, until late 2013. there was pending in the Motors Liquidation bankruptcy case, a litigation involving Old GM, New GM, GM Canada and about a dozen hedge funds that somehow became portrayed in the business press as having the potential to "re-open" the GM bankruptcy case. It grew out of a "lock-up agreement" entered into between Old GM and some of the hedge funds on the eve of bankruptcy, relating to over $1B in bonds issued by GM Canada that may have had the benefit of both guarantee claims against Old GM and an intercompany claim by GM Canada against Old GM, enabling the holders to "double-dip" the GM estate through the two channels and thereby double their recovery. A collateral issue to the merits was whether the terms of the lock up agreement had been properly disclosed in the bankruptcy case, which controversy led some to speculate about the potential to "reopen" the sale. Ultimately, the case settled for roughly 65% allowance of aggregate "double-dip" claims after extensive pre-trial litigation and mediation. The transcript of the hearing on the settlement (Case No. 12-09802-reg; Doc 266; Filed 10/29/13) reveals that the Judge thought the idea of "re-opening" the sale was far-fetched, even though he did not believe he had received full disclosure of the terms agreed on the eve of bankruptcy, as reflected in the following two excerpts from his remarks:
"Canvassing the issues here, there never was any possibility of the 2009 sale to New GM being undone in its entirety, as some pundits surprisingly have suggested. There is speculation in that regard demonstrated a failure to understand what the GUC Trust was asking for, and of course, a rather striking ignorance of the law in this area. At most, we would've been talking about whether elements of the 2009 order approving the sale should be modified. But even such a request would have run head on into principles making it exceedingly difficult to selectively modify a sale and confirmation orders, as exemplified by decisions like Judge Buchwald's on the tort litigants 2009 appeal of the sale order."
"It tends to show that Old GM's management and counsel were not in any way trying to hide anything, and that they at least seemingly complied with Old GM's 34 Act reporting duties. It does not show, however, despite suggestions by some to the contrary, that I, as a judge, was on notice of it, or should've been on notice of it. The implication that a judge should have on notice of something not in the record, not called to the judge's attention, and not said to be relevant to any judicial decision then before the Court is puzzling."
Lawsuits outside of the scope of the Bankruptcy Court's orders
In general, new lawsuits that try to circumvent orders of bankruptcy courts are very hard to sustain. In 2009, by way of example, the Supreme Court ruled that dozens of "direct actions" by alleged asbestos victims of Johns-Manville against Travelers Indemnity Company, Manville's largest insurer, were barred as collateral attacks on the bankruptcy court's order in the Manville's 1980's bankruptcy protecting Travelers from liability to third parties for Manville's asbestos exposure as part of the overall settlement where Travelers helped fund Manville's asbestos trust. The principle re-affirmed by the court was a simple one: once orders become final and appeals are exhausted, they have to be complied with, whether they are later perceived to have been wrong or beyond the power of the court in the first instance.
Courts have been somewhat more receptive to lawsuits seeking damages from individuals who engaged in misconduct while they worked for the debtor during the bankruptcy case. This case from 2003 allowed lawsuits against officers and directors of National Gypsum over the conduct described earlier in this post to proceed. It also contains a thorough discussion of cases and authorities on the subject. These cases, however, relate to officer-director wrongdoing during the bankruptcy and it is not clear that there was any during the few weeks between the bankruptcy and the sale. As noted above, I don't see a plausible basis that disclosure of the ignition defect to the bankruptcy court was required in the context of the sale to New GM, as neither New GM nor the bankrputcy court would have done anything different had the liability been clearer at the time of the sale.
In a somewhat similar vein, in the High Voltage chapter 22 case in Massachusetts a few years ago, an assortment of claims against professional advisors who worked on the company's first chapter 11 case for assisting the company to confirm a plan of reorganization that failed within the first year were rejected by the bankruptcy court and two appellate levels for several reasons, including the preclusive effect of the confirmation order and the orders approving the advisors' fee awards. However, such provisions, when included in confirmation orders, typically have a carveout that allow claims for intentional misconduct ( for instance, fraud) to proceed; so, were a plaintiff to find an individual who had committed fraud during the bankruptcy that was responsible for some harm the plaintiff suffered, it is conceivable the claim could skirt the bankruptcy orders' protections and proceed, assuming it was otherwise viable and not barred by a statute of limitations. The attractive feature of the carve out is that it doesn't require a motion to the bankruptcy court for relief from an order, because the order already contains the relief embedded within it. But even if a lawsuit arising out of the ignition defects is allowed to proceed against an individual, unless that person has been indemnified by New GM for liabilities arising out of old products liability claims, I don't see how New GM can be tagged with that liability. There is, I suppose, a conspiracy theory approach that says New GM was part of a conspiracy to screw the tort victims, but the problem, again, is that disclosure/nondisclosure to the tort victims have nothing to do with where the liabilities wound up.
A last possible route into New GM lies in the dealer network. According to Judge Buchwald's opinion, New GM assumed liability to its dealers for any liability they might sustain for old products liability claims, so, to the extent that plaintiffs have sued the dealers of the cars that were defective, or can still sue them and not be barred by a statute of limitations, it is possible that GM could wind up ultimately writing the check.
Separate Exposure Under Securities Laws
A final interesting issue of potential liability is what, if any, securities law liability exists with respect to securities offerings and sales of New GM stock, including those by the Department of the Treasury, between the time the 2009 sale closed and the facts surrounding the ignition defect came to light. Treasury was a "selling stockholder" in New GM's November 2010 IPO and thus liable on the prospectus for any damages for violations of securities law, such as material nondisclosure, therein. Most likely, Treasury would have been indemnified by New GM for any losses thereby sustained. Of course, even assuming a case for liability and damages could be made out concerning those offerings, it would not help the tort victims; it's just a risk to New GM.
But Treasury's extensive involvement in regard to New GM during the period of nondisclosure about the ignition defect, and its convenient exit from the position before the worst news, does raise the question whether it should be contributing to any sort of a victims' compensation fund as opposed to leaving the current stockholders who might not have paid the purchase prices they did had they known all the facts to bear the economic consequences of the nondisclosure that occurred on Treasury's watch.