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Thursday, June 5, 2014

Further on the Effect of the GM Bankruptcy on New GM's Exposure to Ignition Defect Litigation


The Wall Street Journal website has recently run a series of posts about “GM’s liability for claims related to the recall of cars with defective ignition switches” from various persons with knowledge – some professional, some academic - about chapter 11 matters, whom the Journal has labeled “The Examiners”.
I was quite stunned at the extent to which certain of the posts contained wildly inaccurate or inapposite observations about the matter.   In particular, that from a tenured professor at Harvard Law School who teaches bankruptcy, Mark Roe, seemed remarkably disconnected from both  the facts and the applicable law, and left me to ponder what his students actually learn from taking his course. 
Roe writes:  “Bankruptcy law says that an ‘old GM’ was sold to a ‘new GM’ and the ‘new GM’ excluded product liability from the debts it picked up in the sales agreement. But it’d take a bankruptcy expert to know the difference between the old and the new GM; GM today is the same organization as the one that put the bad switches into its cars and, the media reports, knew about it years ago.”

Most of that is just wrong.   Bankruptcy law does not say that an “old GM” was sold to a “New GM”.   First, obviously, bankruptcy law states general legal rules not specific facts.  Second, “old GM” was not “sold”, it was the seller.  It was an asset deal, not a stock deal.  Old GM sold certain of its assets to “New GM”, a newly formed company that was owned by the Department of the Treasury of the United States,  a Canadian government agency, a trust for UAW retirees and 10% by Old GM, but which had no prior operating existence.  Secondly, one does not have to be “a bankruptcy expert” to know the difference between the two companies.  One was owned by public shareholders, and was bankrupt.  One was 90% owned by two North American governments and some UAW retirees, and was solvent, with access to fresh capital to pay its debts in full on time.  It simply isn’t true that they are “the same organization”.  There were completely different directors and shareholders; the CEO has changed twice since the filing; there are different creditors; and  a different cost structure.  Plants, employees, brands and dealerships were all reduced, generally by more than 20 percent of the pre-filing total.  As President Obama said the day GM filed for bankruptcy, “the GM of the future will be different from the GM of the past.”  In any relevant legal sense, it is.
Roe goes on to write: “GM’s sale was no arms-length deal with a third-party organization, as a sale to Toyota or Fiat or a hedge fund would be.  So it’s not so clear what bankruptcy law ought to be here.  If anyone bought GM, the government did, and it’s doubtful the government would have cut out the tort claimants had it focused on them.”

Regrettably, every one of those statements is factually wrong.  How someone makes so many errors in so few lines just boggles my mind.  Judge Gerber’s decision approving the sale says at page 40: “To the contrary, the evidence establishes that the 363 Transaction was the product of intense arms’-length negotiations.”  And that order became final.  Therefore, contrary to the professor’s post, the sale was “arms’-length” and it is quite evidently “clear what bankruptcy law should do here.”  It shouldn’t rewrite, ignore or deny the facts, as the professor chooses to do.
 
When Roe writes “it’s doubtful the government would have cut out the tort claimants had it focused on them”, that is also manifestly false.  Had Roe "focused on the facts and the doucments, perhaps he wouldn't have mischaracterized them.  The government as buyer did indeed "focus" intensively on the issue of which tort liabilities to assume, as the Judge recited in his opinion, and deliberately modified the purchase agreement to specify the scope of them, agreeing to assume only those tort liabilities “arising from operation of GM vehicles occurring subsequent to the closing of the 363 Transaction“ (see page 15 of the decision linked to above).   So, beyond a shadow of a doubt, the government “focused on” the tort claimants and “cut [them] out” contrary to the professor’s unmoored assertions.  As the Judge wrote at 51: “in a 363 sale … the bankruptcy court is invariably asked to provide, in its approval order, that the transferee does not assume liability for the seller’s pre-sale conduct.   New GM would not assume liability for any injuries or illnesses that arose before the 363 Transaction.” Judge Gerber considered at length (pages 50-61 of the decision) the objections of numerous tort claimants to New GM’s request for an injunction against them pursuing New GM under theories of successor liability and overruled them all.
 
Roe’s next paragraph completely slips the bonds of earthly reality and becomes one of the weirdest pieces of legal gibberish I have ever read.  “Bankruptcy courts should worry about a company selling its assets back to itself, or its ongoing owners, to wash itself clean of preexisting tort liabilities. Such sales may really be reorganizations of existing debts, not true sales to third parties.  What if GM were viewed as being reorganized, rather than sold? Concealed debts do not get the same full discharge as debts that were fully listed and disclosed. Whether the judge who oversaw GM’s “sale” to itself would backtrack and consider it a reorganization will be interesting to watch.”

Roe uses the name “GM’ in those sentences but, other than that, what he wrote bears no relation to what actually happened in the bankruptcy case of “GM” but seems to be the product of his imagination.  Yes, I suppose a bankruptcy court “should worry about a company selling its assets back to itself or its ongoing owners” and proposals like that were in fact made and litigated in the early days of business reorganizations in the US.  Based on the well-developed case law that resulted, which included, inter alia, the absolute priority rule (see here for an excellent summary), I am quite confident, however, that if Old GM had actually proposed to do that, Judge Gerber would have stopped it and probably appointed a trustee, but that isn’t close to what Old GM proposed or Judge Gerber approved; it simply didn’t happen in our universe, as explained above.  So, whether “such sales may really be reorganizations” is irrelevant to analyzing the consequences of the GM sale that took place in the real world. 

Roe’s reference to “concealed debts” is also ridiculously inaccurate and misleading as it rests of multiple false premises.   The first false premise is that the law he refers to dealing with the discharge of “concealed debts” has anything to do with the liabilities assumed in the GM 363 order.   It doesn’t.  New GM assumed what it assumed; what it chose to assume was disclosed to the world (that's why the plaintiffs were objecting!); and the court’s order bars everything else from passing over to New GM.  If something was “concealed”, then New GM didn’t assume it.  The other false premise is that “the debts” were concealed.  Here, Roe seems to confuse the existence of debts with the amount of them, or the evidence in support of the claims.   The existence of product liability suits did not go undisclosed and, even if they did, that has nothing to do with whether the buyer assumed them.   Judge Gerber specifically mentions at page 21 of the opinion that GM’s contingent liabilities “are difficult to quantify” but notes without comment that its then most recent 10-Q “present valued contingent liabilities of $934 million for products liability …”   The ignition defect was alleged in multiple pre-petition lawsuits and the evidence related thereto was discovered in those lawsuits.  Thus, any concealment was of evidence or of the prospective size of the resulting liability, but not of the existence of the debt.  And in any case, whether GM had $934 million or $9.34 billion in products liability exposure, New GM didn’t take any of it. So it’s just a red herring from a legal perspective.

Roe goes on to muse “What if GM were viewed as being reorganized, rather than sold?” and further asks whether Judge Gerber “would backtrack and consider it a reorganization.”   He seems unaware that this question too was also considered at length and resolved by the judge.  See pages 26-38 and 41-47 of the decision linked to above.  The judge decided the transaction was not a sub rosa plan of reorganization and could be authorized under section 363 rather than having to be proposed in a plan of reorganization. As the numerous citations in his decision to pre-existing precedents demonstrate, the GM sale broke “no new ground.  This is exactly the type of situation where under the Second Circuit’s many holdings there is good business reason for an immediate sale. GM does not have the luxury to wait for the ultimate confirmation of a plan, and the only alternative to an immediate sale is liquidation.”  Decision at 39.  Nor does Roe explain how a bankruptcy judge can “backtrack” from a final order that authorized a transaction that closed nearly 5 years ago.   To suggest such an outcome probably implies, to the uninformed reader, that such an eventuality is somewhat plausible when in fact it is one of the most outlandishly implausible outcomes possible in federal jurisprudence.   I went over the reasons why it is so implausible in my prior post on this topic and won’t repeat them here.  

Roe concludes with the lament that “GM’s winning would look to the country, its leaders, and car buyers as hiding behind a bankruptcy technicality.”  I suppose that’s true if persons identified as bankruptcy experts supply the media, as Roe has done, with inaccurate and uninformed “analysis” that supports such a conclusion.  But the truth is that, as Obama himself stated when he announced the Treasury’s commitments on the day GM filed for 11:  Throughout this process, I wanted to ensure that none of GM's stakeholders receives special treatment because of our government's involvement. That's why I instructed my Auto Task Force to treat all of GM's stakeholders fairly and to ensure that this restructuring was carried out in a way that was consistent with past precedent -- and it was.”  (Italics added).  Following the 363 buyer’s manual gave the then-new Administration a politically essential argument that it was not acting in a suspect manner from an economic or political perspective, neither taking improper risk with  taxpayer money, nor playing favorites with that money  (even though it was, as between retirees and  other creditors).   It was the Administration’s choice, not GM’s, to pattern its assumption of liabilities on the business practices of hundreds of private sector buyers that had made 363 purchases before it.  It was the Administration's considered choice not to privilege all the non-bondholder constituencies and they picked one that -- the UAW -- that carried more weight than plaintiffs and their lawyers.  That’s not a “bankruptcy technicality” nor was it GM’s decision, both facts Roe gets absurdly wrong.   It was a conscious political and financial decision by the government buyer.   That is what “the country” should conclude -- and might, if it were not being misled by gibberish like Roe’s essay. 

Whether New GM chooses to do something for these plaintiffs as a business matter defies legal analysis. It strikes me as mainly a media-driven decision -- there are plenty of Old GM products liability lawsuits left behind; favoring the subset with ignition defect issues has no legal rationale and could only be justified as a response to the effect on the brand of the media focus.  Ironically, that subset of plaintiffs could wind up benefiting dramatically from the alleged concealment of evidence, since, had the facts been brought out years earlier, there would have been no media frenzy to pressure New GM to extract those lawsuits from the mass of lawsuits left behind and give them a better deal than the government bargained for back in 2009.