Two recent cases serve as reminders the devil is truly in the details. As to the front-end risks associated with an early § 363(f) sale, in In re Motors Liquidation Company(the “GM” case) we have seen a $10 billion reminder that identification and actual notice to persons with claims against the Debtor is an indispensable element to the “free and clear” result intended by such a sale. On the back-end risks of a confirmed Chapter 11 Plan, In re AmCad Holdings, LLCteaches that failing to specifically identify claims of the Debtor against others for retained jurisdiction under the Plan can defeat the intended jurisdiction of the Bankruptcy Court to adjudicate those omitted claims.
GM involves the ongoing troubles from the 2009 insolvency of the General Motors Corporation, the United States’ largest car manufacturer. As opposed to the usual reorganization procedures of 11 U.S.C. §§ 1121?1129, which can take years to accomplish (if ever), the debtor opted for an expedited sale under § 363, which can close in a matter of weeks and did so even here. The sale resulted in a split between “Old GM”, the seller who remained the debtor-in-possession with limited assets, and “New GM”, the purchaser of substantially all of the Old GM assets which would use the purchased assets to carry on the majority of the business of the prior Old GM. The proposed sale, the hundreds of objections, and resulting Sale Order all anticipated that New GM would take these assets “free and clear” of liabilities under § 363(f) and that the Sale Order would therefore act as a liability shield to prevent individuals with claims against Old GM from suing New GM. Among its findings in the GM case, the Second Circuit effectively held that New GM was not shielded from certain large categories of tort claims related to defects in its cars because the debtor had the ability to notify the owners of such cars of the bankruptcy filing and of the proposed § 363(f) sale, yet failed to do so. (This was not the first ruling out of the GM case addressing snafus – for our prior coverage on the mistaken release of $1.5 billion in liens, see here.)
AmCad Holdings involved the more traditional route of reorganization and Plan confirmation. As part of the Plan, a liquidation trust was established and certain estate assets, including causes of action, were assigned to the liquidating trust. Five months after confirmation, the Trustee brought an adversary proceeding against some prior managers and officers of the debtor, including three counts asserting defendants breaches of fiduciary duty. The defendants moved to dismiss the fiduciary claims for lack of subject matter jurisdiction. The Trustee asserted the Court had jurisdiction over the fiduciary claims under the Plan’s provisions for retention of post-confirmation jurisdiction over “Causes of Action”, which were defined in a very broad and inclusive, but annoyingly general manner. The Plan had no specific retention of claims for breach of fiduciary duty. In dismissing the fiduciary claims, the Court noted that its post-confirmation jurisdiction over non-core but related matters was narrow and limited to matters that had a close nexus to the Plan. The Court reasoned that while a Chapter 11 Plan that retains jurisdiction over a specific cause of action generally satisfies this nexus, a wholesale assignment of causes of action to the post-confirmation trust did not.
In both cases, we observe that the attention to detail in the identification of claims – and in the case of AmCad Holdings, a proper disclosure of those claims – is not only important, but can be dispositive. Setting aside the sheer scale of the GM case, it’s still illustrative of the very basic issues of fairness and notice present in any § 363(f) sale on the front-end of a bankruptcy. AmCad Holdings is on a more common scale, yet illustrates the back-end, post-confirmation risk of relying on broad-brush treatment of retained jurisdiction and perfunctory, generic disclosures of claims to be brought in the future. But once you have processed the facial lessons: (1) give actual notice to potential claimants and creditors in § 363 sale, (2) specifically identify claims for retention of post-confirmation jurisdiction, there is still more to be observed.
If the specific identification of claims and claimants can prove dispositively important, then isn’t the indicated level of diligence in this area of practice of like import? We live in the Information Age and practice among colleagues and clients of high sophistication. Both the law firms and the clients hold information now measured in gigabytes and terabytes. It is not a good bet that Courts will accept the proposition that it was too hard to identify a debtor’s customers, or to be aware of potential claims, or to foresee the claims that might be brought by an estate or liquidating trust post-confirmation. But we also practice in a commercial and legal environment that is increasingly demanding, competitive, fast-paced, specialized, and that inherently involves delegation of detail work—both within the organization of the client and in that of the attorney. These two recent cases should remind attorneys and clients in this area that attention to the identification of claims and the indicated parties to claims are important enough to support the investment of time, information, and data management, adequate staffing, full communications between client and counsel, and both factual and strategic scrutiny. We can all learn from these cases – and adjust our habits and practices accordingly.