Vol 13 (2016) - Issue 6

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Bankruptcy Court Sale Order Not Binding on Ignition Switch Claimants Who Did Not Receive Proper Notice – In the Matter of: Motors Liquidation Company, 2016 WL 3766237

Introduction
One of the noteworthy casualties of the 2008 financial crisis was US automaker General Motors Corporation ('Old GM'). After suffering significant losses in the second half of 2007, each quarter in 2008, and the first five months of 2009, Old GM filed a chapter 11 bankruptcy petition on 1 June 2009 in the US Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court'), along with a motion to approve the sale of its primary assets (other than certain excluded assets, the 'Asset Sale') to Vehicle Acquisition Holdings, LLC (subsequently renamed General Motors Corporation ('New GM')), free and clear of all liens, claims and encumbrances, other than specific assumed liabilities.
On 5 July 2009, the Bankruptcy Court entered an order (the 'Sale Order') approving the Asset Sale, and on 10 July 2009, a mere forty days after Old GM filed for bankruptcy protection, the Asset Sale was consummated. New GM took over the auto manufacturing operations, free of the pre-bankruptcy liabilities of Old GM. Or so it thought.
In February 2014, New GM disclosed that it was recalling numerous vehicles due to a serious ignition switch defect, including vehicles manufactured by Old GM prior to its bankruptcy. Soon thereafter, various plaintiffs initiated legal action against New GM seeking damages related to the ignition switch defect. New GM responded by filing a motion in the Bankruptcy Court seeking to enforce the Sale Order to bar plaintiffs from pursuing their ignition switch claims. In April 2015, the Bankruptcy Court issued a ruling stating that the Sale Order was binding on these claimants despite the fact that (i) the ignition switch defects were known to, but not disclosed by, Old GM prior to the Asset Sale, and (ii) these claimants did not receive prior notice of the Asset Sale and the proposed entry of the Sale Order that was consistent with procedural due process requirements.
In a ruling issued 13 July 2016, the US Court of Appeals for the Second Circuit (the 'Second Circuit') overturned the Bankruptcy Court decision. Left undisturbed, the Bankruptcy Court ruling would have shielded New GM from liability for the ignition switch defects that were known, but not disclosed, by debtor Old GM prior to the Asset Sale. In reversing the Bankruptcy Court ruling, the Second Circuit held that the failure to provide adequate notice to the ignition switch claimants denied those claimants Constitutional due process; as a result, the Sale Order was not binding on them.
The Second Circuit also remanded the case to the Bankruptcy Court for factual findings concerning whether certain other claimants had adequate prior notice of the Asset Sale, and whether the Sale Order should also be binding on them. The Second Circuit’s ruling in Motors Liquidation exposes New GM to billions of dollars of liability for obligations that could have been eliminated by the Sale Order, if proper notice had been sent to ignition switch claimants. These liabilities could result in a significant step backward for an automaker that had made substantial progress post-bankruptcy. The Motors Liquidation ruling thus highlights that in US bankruptcy proceedings, proper notice – consistent with Constitutional due process – can be critical, and that failure to comply with procedural due process requirements can have severe adverse consequences.