Law School Case Brief
Elliott v. GM LLC (In re Motors Liquidation Co.) - 829 F.3d 135 (2d Cir. 2016)
A bankruptcy court's decision to interpret and enforce a prior sale order falls under the formulation of "arising in" jurisdiction. An order consummating a debtor's sale of property would not exist but for the Bankruptcy Code, 11 U.S.C.S. § 363(b), and the Code charges the bankruptcy court with carrying out its orders.
On June 1, 2009, General Motors Corporation ("Old GM"), the nation's largest manufacturer of automobiles and the creator of such iconic American brands as Chevrolet and Cadillac, filed for bankruptcy. During the financial crisis of 2007 and 2008, as access to credit tightened and consumer spending diminished, Old GM posted net losses of $70 billion over the course of a year and a half. The U.S. Department of the Treasury ("Treasury") loaned billions of dollars from the Troubled Asset Relief Program ("TARP") to buy the company time to revamp its business model. When Old GM's private efforts failed, President Barack Obama announced to the nation a solution -- "a quick, surgical bankruptcy.” Old GM petitioned for Chapter 11 bankruptcy protection, and only forty days later the new General Motors LLC ("New GM") emerged. This case involves one of the consequences of the GM bankruptcy. Beginning in February 2014, New GM began recalling cars due to a defect in their ignition switches. The defect was potentially lethal: while in motion, a car's ignition could accidentally turn off, shutting down the engine, disabling power steering and braking, and deactivating the airbags. Many of the cars in question were built years before the GM bankruptcy, but individuals claiming harm from the ignition switch defect faced a potential barrier created by the bankruptcy process. In bankruptcy, Old GM had used 11 U.S.C. § 363 of the Bankruptcy Code (the "Code") to sell its assets to New GM "free and clear." In plain terms, where individuals might have had claims against Old GM, a "free and clear" provision in the bankruptcy court's sale order (the "Sale Order") barred those same claims from being brought against New GM as the successor corporation. Various individuals nonetheless initiated class action lawsuits against New GM, asserting "successor liability" claims and seeking damages for losses and injuries arising from the ignition switch defect and other defects. New GM argued that, because of the "free and clear" provision, claims could only be brought against Old GM, and not New GM.
Did the Bankruptcy Court err in assuming that all of the claims fell within the scope of the "free and clear" provision in the sale order?
Judgment affirmed in part, reversed in part, vacated in part, and remanded. While the bankruptcy court had jurisdiction to interpret and enforce its prior sale order, it erred in assuming that all of the claims fell within the scope of the "free and clear" provision in the sale order because the court's power in a quick 11 U.S.C.S. § 363 sale was no broader than its power in a traditional Chapter 11 reorganization and the provision did not cover all of the claims; The bankruptcy court properly found that the debtor should have provided notice to vehicle owners with claims arising out of certain defects under 49 U.S.C.S. § 30117(b)(1) by direct mail or some equivalent because it knew or should have known about the defects; The bankruptcy court's ruling that any relief from a trust would be equitably moot was advisory because the trust was not a litigant and the ruling concerned a hypothetical scenario.
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