Saturday, June 23, 2012

Limits of a §363 sale order in the context of claims based on successor liability on account of injuries suffered by future claimants


Bankruptcy 363 Sale Order May Not Shield Against Successor Liability

Good article in the current issue of New York Law Journal on the limits of a §363 sale order in the context of claims based on successor liability on account of injuries suffered by future claimants.
The article examines the Southern District of New York’s recent decision in Morgan Olson v. Frederico (In re Grumman Olson Indus.), 2012 WL 1038672 (S.D.N.Y. March 29, 2012).  As explained in the article, the court essentially held that principles of due process override provisions in a bankruptcy court’s order approving a sale, pursuant to Bankruptcy Code §363, that purported to insulate a purchaser from successor liability for future tort claims.

363 Generally

Bankruptcy Code §363(b) permits a debtor in bankruptcy to “use, sell, or lease, other than in the ordinary course of business, property of the estate.” Operating in conjunction with this provision, §363(f) generally permits the bankruptcy court to authorize a debtor to “sell property under subsection (b)…of [§363] free and clear of any interest in such property.”
As the authors of the article state, Grumman illustrates an important exception to the general rule for  potential successor liability for future tort claims, even in a situation where the bankruptcy court’s order explicitly provides otherwise.

Successor liability

Successor liability, a creature of state law, is an exception to the rule that an asset purchaser is not financially responsible for the liabilities associated with the purchased assets.   Under New York law, successor liability attaches where: (1) the purchaser assumes the seller’s liabilities, either expressly or implicitly; (2) there is a consolidation or merger of the seller and purchaser; (3) the purchaser is a mere continuation of the seller’s enterprise; or (4) the sale transaction itself was a fraudulent transaction designed to wrongfully avoid liabilities. See New York v. Nat’l Serv. Indus., 460 F.3d 201, 209 (2d Cir. 2006).

Future Claimants

In Grumman, future claimants were injured long after the sale of the assets and after the bankruptcy had been closed. Purchaser Grumman Olson bought certain of the debtor’s assets through a 363 sale approved by the bankruptcy court in 2003. More than five years later, the plaintiffs were injured in the crash of a FedEx truck allegedly caused by defective parts for the truck that the debtor had designed and manufactured approximately eight years earlier.
The Grumman sale order, which was a condition to Purchaser entering into and closing the transaction, expressly insulated Purchaser from successor liability. Among other provisions, the sale order specified that Purchaser would have no “liability for claims against the Debtors or the [assets], including, but not limited to, claims for successor or vicarious liability, by reason of such transfer under the laws of the United States, any state, territory or possession thereof or the District of Columbia applicable to such transactions.” 2012 WL 1038672, at *2.
Despite this clear language in the sale order, Grumman held that the Future Claimants could proceed with their state court litigation against Purchaser:
Because parties holding future claims cannot possibly be identified and, thus, cannot be provided notice of the bankruptcy, courts consistently hold that, for due process reasons, their claims cannot be discharged by the bankruptcy courts’ orders.
This is not groundbreaking law.  Nonetheless, with lawyers frequently stating that 363 sales can cleanse liabilities in an almost unequivocal manner, the case is a good reminder that this, simply, is not the law

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