iStock_000016357066_MediumAs we previewed last week, the U.S. Bankruptcy Court for the Southern District of New York recently handed General Motors (“New GM”) an enormous victory that may end up shielding the company from up to $10 billion in successor liability claims. The court’s ruling also bolsters the power and importance of sale orders entered under section 363 of the Bankruptcy Code, and will certainly be cited by purchasers in future cases should parties in interest seek to revisit a consummated sale.

The question before the bankruptcy court was whether the 2009 order (“Sale Order”) allowing the sale of the assets of GM (“Old GM”) to New GM barred claims against New GM arising from defective ignition switches in Old GM cars. Making this case difficult was the fact that Old GM knew about the ignition design defect before the 2009 sale but failed to disclose the defect, even to customers who had purchased affected vehicles. After the ignition switch problems were disclosed by New GM in 2014, three primary groups of plaintiffs filed hundreds of suits seeking to recover from New GM. Using the court’s designated terms, these groups of plaintiffs were: (1) “Economic Loss Plaintiffs,” who claimed $7-10 billion in economic losses resulting from reduced resale value of affected cars, unpaid time off from work when having ignition switches replaced and inconvenience; (2) “Pre-Closing Accident Plaintiffs,” who claimed losses resulting from actual accidents that occurred before the sale from Old GM to New GM; and (3) “Non-Ignition Switch Plaintiffs,” who claimed economic losses, such as reduction in resale value, but with respect to cars that did not have ignition switch problems. In response to these claims, New GM argued that it was insulated from liability by provisions in the Sale Order protecting New GM from successor liability.

The court determined that it was able to decide the controversy for groups 1 and 2 (referred to by the court together as the “Plaintiffs”) using a single set of stipulated facts, and deferred consideration of the third group’s claims until later. In his 138-page ruling, Bankruptcy Judge Robert Gerber focused on the Plaintiffs’ due process rights, distilling their claims down to the question of whether the Plaintiffs had received sufficient notice of the asset sale and, if not, to what extent the lack of sufficient notice might have prejudiced them. The court found that that Old GM had not provided sufficient notice to the Plaintiffs, even though these Plaintiffs were potentially known at the time: Old GM’s engineers and in-house lawyers were aware of the ignition switch problem at the time of the Sale Order.

Nonetheless, the court held that the Plaintiffs had not been denied their due process rights because neither group of Plaintiffs was prejudiced (and prejudice is a required element of a due process claim). As support for this position, Judge Gerber found that all of the Plaintiffs’ arguments concerning New GM’s successor liability for hypothetical defects caused by Old GM had been raised by objecting parties, and rejected by the court, at the sale hearing in 2009. This is interesting in part because of the extremely quick sale timeline in the case: the sale from Old GM to New GM was completed just 34 days after the bankruptcy case was filed, giving objecting parties a relatively short time to flesh out the successor liability arguments. Additionally, the court found that the Pre-Closing Accident Plaintiffs had the opportunity to file proofs of claim against Old GM, so they cannot be prejudiced now by not being allowed to bring claims against New GM for the same damages. The court further held that the Plaintiffs could not file late proofs of claims against Old GM because the claims would impair the rights of unitholders in the trust that was established to pay unsecured creditors and also those who have purchased interests in the trust based upon the amount of claims allowed pursuant to the confirmation order.

All is not lost for the Economic Loss Plaintiffs. In its decision, the court allowed claims against New GM by the Economic Loss Plaintiffs, even claims concerning Old GM cars, but only if the claims are based upon the conduct of New GM. Such claims were held to be consistent with the Sale Order since “New GM would have such liability not because it had assumed any Old GM liabilities, or was responsible for anything wrong that Old GM did, but only because it had engaged in independently wrongful, and otherwise actionable, conduct on its own.” Opinion, p. 14. In other words, the Sale Order cuts off liability for any pre-sale actions of Old GM, despite the fact that the company had many of the same employees before and after the sale.

Besides largely insulating New GM from ignition switch design liability, the GM decision will certainly have an impact on future sale cases. First, the decision bolsters the power of sale orders and the “free and clear” relief afforded by section 363(f) of the Bankruptcy Code. Judge Gerber held that “In the absence of a constitutional violation, the Court suspects that the power to deny full enforcement of a sale order (assuming that such is even permissible) will rarely, if ever, be invoked. The principles underlying the finality of 363 sale orders are much too important.” Opinion, p. 18. Second, the decision will make it more difficult for creditors to establish a due process violation, especially since here the court held that there had not been a denial due process even though the required notice had not been provided. Third, the decision will certainly be cited as support for the proposition that sale orders will not be disturbed except in the most extraordinary cases. Fourth, the decision will make it harder for creditors to seek leave to file late claims, especially where a trust has been established and distributions made to unitholders, and where a market exists for trading interests in the trust.