In Re: Grumman Olson Industries, Inc.
Filing
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MEMORANDUM AND ORDER: For the foregoing reasons, this Court AFFIRMS the Bankruptcy Court's judgment entered February 25, 2011. (Signed by Judge J. Paul Oetken on 3/29/2012) (lmb) Modified on 3/29/2012 (lmb).
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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In Re:
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GRUMMAN OLSON INDUSTRIES, INC.,
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RODNEY GABLE,
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Debtor,
:
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MORGAN OLSON L.L.C.,
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Plaintiff-Appellant,
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-v:
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DENISE FREDERICO and JOHN FREDERICO, :
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Defendants-Appellees.
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:
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Chapter 11
Case No. 02 B 16131 (SMB)
Adversary No. 10-03052
11 Civ. 2291 (JPO)
MEMORANDUM
AND ORDER
J. PAUL OETKEN, District Judge:
This bankruptcy appeal requires the Court to address a question that has not been
resolved by the courts in this Circuit, but has been addressed by courts in several other circuits:
whether a bankruptcy sale order, pursuant to Section 363 of the Bankruptcy Code (the “Code”),
11 U.S.C. § 363, can extinguish the state law claims of third parties based on conduct by the
debtor before the bankruptcy, where no injury was caused until after the bankruptcy closed.
Because these claimants could not have received notice or an opportunity to participate in the
bankruptcy proceedings, the Court holds that enforcing the bankruptcy court’s orders to take
away their right to bring a claim would violate bankruptcy procedure and due process.
Presently before the Court is an appeal pursuant to 28 U.S.C. § 158(a) from an order of
the Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) granting a
motion for summary judgment by Appellees Denise Frederico and John Frederico (collectively,
1
the “Fredericos”), denying a motion for summary judgment by Appellant Morgan Olson L.L.C.
(“Morgan”), and dismissing the adversary action brought by Morgan in the Bankruptcy Court.
See In re Grumman Olson Indus., 445 B.R. 243 (Bankr. S.D.N.Y. 2011) (“BR Ct. Op.”). Morgan
brought the adversary action for declaratory and injunctive relief barring the Fredericos from
proceeding against Morgan in New Jersey state court on theories of successor liability.
For the reasons that follow, the Court affirms the order of the Bankruptcy Court in full.
I.
Background
The material facts in this case, as set forth in the Bankruptcy Court’s opinion, are not in
dispute.
A.
The Parties
Appellant, Morgan, is a corporation engaged in the manufacture of products for the truck
body industry. Morgan purchased certain assets of Grumman Olson Industries, Inc.
(“Grumman” or the “Debtor”) after Grumman declared bankruptcy.
Appellees, the Fredericos, initiated an action in New Jersey Superior Court against (inter
alia) Morgan for personal injury and products liability after Denise Frederico was injured after
the bankruptcy while driving a truck that was manufactured by Grumman prior to the
bankruptcy.
B.
The Bankruptcy and Sale Order
On December 9, 2002, Grumman, a company that designed, manufactured, and sold
products for the truck body industry, filed a petition for Chapter 11 bankruptcy. On July 1, 2003,
the Bankruptcy Court entered an Order approving the sale of certain of the Debtor’s assets (the
“Lot 2 Assets”) to MS Truck Body Corp., a predecessor of Morgan (collectively, “Morgan”),
pursuant to Bankruptcy Code §§ 363 and 365. (See Order Pursuant to Sections 363 and 365 of
the Bankruptcy Code and Bankruptcy Rules 2002, 6004 and 6006 (I) Approving the Sale by the
2
Debtor of Certain of its Operating Assets, Free and Clear of Liens, Claims and Encumbrances,
(II) Approving the Assumption and Assignment by the Debtor of Certain Associated Executory
Contracts and Unexpired Leases, and (III) Granting Other Related Relief, Appellant’s
Memorandum of Law in Support of Its Appeal (“Appellant Mem.”), Ex. A (Dkt. No. 9) (the
“Sale Order”).)
The Sale Order contained several provisions that purported to limit Morgan’s potential
liability arising from the sale of the assets for tort claims based on allegedly defective products
manufactured and sold by Grumman prior to the sale. In particular, the sale of the Lot 2 Assets
was ordered “free and clear of all . . . claims . . . and other interests . . . and all debts arising in
any way in connection with any acts of the Debtor.” (Sale Order ¶ Q; accord id. ¶¶ 4, 14.) In
addition, the Sale Order provided that the purchase of the assets by Morgan would not subject
Morgan to “any liability for claims against the Debtor or the Lot 2 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.” (Sale Order ¶ 19; accord ¶ S (providing that the purchaser “shall not by
virtue of this Order or the Lot 2 [Asset Purchase Agreement (“APA”)] or the transactions
contemplated hereunder or thereunder, be deemed to have ‘successor’ liability or responsibility
for claims against or obligations of the Debtor arising prior to or as a result of the purchase and
sale of the Lot 2 Assets hereunder”). 1
1
The relevant provisions of the Sale Order provide, in full:
Paragraph Q:
The sale, conveyance, and assignment of the assets to be purchased under the Lot 2 APA (the “Lot 2 Assets”) shall
be free and clear of all liens, claims, encumbrances, and other interests, including without limitation, mortgages,
security interests, pledges, liens, replacement liens, judgments, demands, encumbrances, or charges of any kind or
nature, if any, including, but not limited to, any restriction on the transfer, receipt of income or other exercise of any
attributes of ownership (the foregoing collectively referred to as “Liens”), and all debts arising in any way in
connection with any acts of the debtor, claims (including but not limited to “claims” as that term is defined in the
3
The Sale Order also provided that the Bankruptcy Court would retain jurisdiction “to
interpret, implement and enforce the provisions” of the Sale Order. (Sale Order ¶ 20.)
On October 31, 2005, the Debtor and the Official Committee of Unsecured Creditors
confirmed a joint liquidating plan. The Court signed the Final Order and Decree on December
29, 2006, thereby closing the bankruptcy proceedings.
C.
The New Jersey Action
Prior to the bankruptcy filing, the Debtor manufactured and sold truck chassis to various
companies, including FedEx. On October 8, 2009, the Fredericos brought a personal injury
action against Morgan and others in New Jersey Superior Court. The complaint alleges that Ms.
Frederico, an employee of FedEx, sustained injuries when the FedEx truck she was driving
struck a telephone pole on October 15, 2008. (See Appellant Mem. Ex. B.) The complaint also
Bankruptcy Code), obligations, demands, guaranties, interests, and matters of any kind and nature, whether arising
prior to or subsequent to the commencement of this Chapter 11 case, and whether imposed by agreement,
understanding, law, equity, or otherwise (the foregoing collectively referred to as “Claims”), with all such Liens and
Claims, and any and all other interests to attach to the proceeds of sale of, and with the same force, effect and
priority of such Liens, Claims and other interests had against, the Lot 2 Assets, and holders thereof shall be
permanently enjoined from asserting against the Lot 2 Assets and the and [sic] shall look solely to the proceeds of
sale.
Paragraph S:
Except as otherwise expressly provided by the Lot 2 APA and all related instruments, the Purchaser shall not by
virtue of this Order or the Lot 2 APA or the transactions contemplated hereunder or thereunder, be deemed to have
“successor” liability or responsibility for claims against or obligations of the Debtor arising prior to or as a result of
the purchase and sale of the Lot 2 Assets hereunder.
Paragraph 19:
Except as otherwise expressly provided in the Lot 2 APA or related instruments or as otherwise provided in this
Order, the Purchaser shall have no liability or responsibility for any liability or other obligation of the Debtor arising
under or related to the Lot 2 Assets other than for the purchase price payable under the Lot 2 APA. Without limiting
the effect of the foregoing, the transfer of the Lot 2 Assets and the assignment of the Lot 2 Contracts do not and will
not subject the Purchaser to any liability for claims against the Debtor or the Lot 2 Assets, including, but not limited
to, claims for successor 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. The Purchaser shall not
be deemed, as a result of SMB 7/1/03 the consummation of the transaction contemplated by the Lot 2 APA to: (a) be
the successor of the Debtor; (b) have, de facto or otherwise, merged with or into the Debtor; (c) be a mere
continuation or substantial continuation of the Debtor or the enterprise of the Debtor; or (d) be responsible for any
liability of the Debtor or for payment of any benefit accruing to the Debtor, except as specifically provided for in the
Lot 2 APA.
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alleges that the truck she was driving was manufactured, designed, and/or sold by Grumman in
1994 and was defective for several reasons. On April 28, 2010, the Fredericos filed an amended
complaint that alleged that Morgan continued Grumman’s product line, and was therefore liable
to the Fredericos under New Jersey successor liability law.
D.
This Adversary Proceeding
On March 24, 2010, Morgan brought this adversary proceeding in the Bankruptcy Court
seeking declaratory and injunctive relief barring the Fredericos from bringing their claims
against Morgan in New Jersey state court. Morgan’s complaint alleged that the Sale Order and
accompanying Asset Purchase Agreement “provided that the assets of the debtor would be sold
and purchased without liability for products manufactured prior to the sale, including without
liability under any state law successor liability theory.” (Complaint, 10-3052 (Bankr. S.D.N.Y.
Mar. 24, 2010) (Dkt. No. 1) (“Comp.”) ¶ 8.) The truck involved in the accident was
manufactured by Grumman, not Morgan, and so, the Complaint alleged, Morgan could not be
held liable for any damage caused by any alleged defects in that truck. (Id. ¶¶ 13-17.) The
parties cross-moved for summary judgment. As the Bankruptcy Court explained, the parties
dispute “whether Grumman had a role in designing, manufacturing or selling the FedEx truck at
issue,” but this factual dispute, “though critical to the question of Morgan’s potential liability, is
immaterial to the resolution of the meaning of the Sale Order. Instead, the motions present a
straightforward, threshold legal question: does the Sale Order exonerate Morgan from liability to
the Fredericos?” BR Ct. Op., 445 B.R. at 247. The Bankruptcy Court answered this question in
the negative, denying Morgan’s motion for summary judgment and granting the Fredericos’
motion for summary judgment dismissing Morgan’s complaint. This appeal followed.
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II.
Discussion
A.
Jurisdiction and Standard of Review
The Bankruptcy Court assumed jurisdiction to hear this adversary action pursuant to its
power to interpret and enforce its own prior orders, specifically the Sale Order. BR Ct. Op., 445
B.R. at 247-48 (citing Travelers Indem. Co. v. Bailey, -- U.S. --, 129 S. Ct. 2195, 2205 (2009);
Luan Inv. S.E. v. Franklin 145 Corp. (In re Petrie Retail, Inc.), 304 F.3d 223 (2d Cir. 2002)).
Under 28 U.S.C. § 158(a), district courts have jurisdiction to hear appeals from the final
judgments of bankruptcy judges.
Under Rule 8013 of the Federal Rules of Bankruptcy Procedure,
On an appeal the district court . . . may affirm, modify, or reverse a
bankruptcy judge’s judgment, order, or decree or remand with
instructions for further proceedings. Findings of fact, whether
based on oral or documentary evidence, shall not be set aside
unless clearly erroneous, and due regard shall be given to the
opportunity of the bankruptcy court to judge the credibility of the
witnesses.
Fed. R. Bankr. P. 8013. “A bankruptcy court’s conclusions of law, by contrast, are reviewed de
novo.” In re Adelphia Comm. Corp., 367 B.R. 84, 90-91 (S.D.N.Y. 2007) (citation omitted).
The Bankruptcy Court’s decision here granted the Fredericos’ motion for summary
judgment and denied Morgan’s motion for summary judgment. Under the Federal Rules of Civil
Procedure, a court “shall grant summary judgment if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a). 2
The material facts in this case are not in dispute, and the Bankruptcy Court did not make
any factual findings. Instead, the appeal presents a pure question of law as to the interpretation
2
Under Rule 7056 of the Federal Rules of Bankruptcy Procedure, a bankruptcy court is to apply Rule 56 of the
Federal Rules of Civil Procedure in adversary proceedings.
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and enforcement of the Sale Order. Thus, the Court reviews the Bankruptcy Court’s decision de
novo.
B.
Successor Liability
It is undisputed that Grumman, not Morgan, manufactured the truck involved in the
accident that injured Denise Frederico. 3 The Fredericos brought suit against Morgan under a
theory of successor liability.
Under traditional common law, including the law of this state, “a corporation that
purchases the assets of another corporation is generally not liable for the seller’s liabilities.”
New York v. Nat’l Serv. Indus., Inc., 460 F.3d 201, 209 (2d Cir. 2006). Courts have traditionally
crafted specific exceptions to this rule where “(1) the successor corporation expressly or
impliedly agrees to [assume the liabilities of the predecessor entity], (2) the transaction may be
viewed as a de facto merger, (3) the successor is the mere continuation of the predecessor, or (4)
the transaction is fraudulent.” Id. at 205; see also Lefever v. K.P. Hovnanian Enters., Inc., 160
N.J. 307, 310, 734 A.2d 290 (N.J. 1999).
The New Jersey Supreme Court has also applied a “product-line” exception to the general
rule against successor liability. Under this exception, “by purchasing a substantial part of [a]
manufacturer’s assets and continuing to market goods in the same product line,” the purchasing
company can be held liable as a successor for defects in the predecessor’s products. Lefever, 160
3
Although this was apparently a disputed issue on the motion for summary judgment before the bankruptcy court,
see BR Ct. Op., 445 B.R. at 247, as the Fredericos point out, Morgan alleged in its own Complaint that the truck at
issue was “manufactured and sold by the debtor.” (See Memorandum of Law for Appellees Denise and John
Frederico in Opposition to Appeal from Decision of the Bankruptcy Court by Appellant Morgan Olson, L.L.C. (Dkt.
No. 10) (“Appellee Mem.”) at 5 (citing Comp. ¶ 13).) If facts emerge that cast doubt on whether the Debtor, in fact,
manufactured the truck that Denise Frederico was driving, that will likely affect whether Morgan will be held liable
by a New Jersey court, but it does not affect the Court’s analysis of the legal issue. Given that Morgan appears to
assume, for the sake of this appeal, that the Debtor did, in fact, manufacture the truck, the Court will do the same.
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N.J. at 310, 734 A.2d 290; Ramirez v. Amsted Indus. Inc., 86 N.J. 332, 431 A.2d 811 (N.J.
1981). 4
In Lefever v. K.P. Hovnanian Enterprises, Inc., the New Jersey Supreme Court held that
the product-line exception first set forth in Ramirez, 86 N.J. 332, 431 A.2d 811, applied even
where the purchaser obtained the assets pursuant to a sale order in a bankruptcy proceeding
where the order purported to transfer the assets free and clear of any claims against them. 160
N.J. at 316-18, 734 A.2d 290. The court considered whether supremacy and preemption
principles prevent imposition of state successor liability, and concluded that they do not, unless
the bankruptcy court “dealt with” the claims at issue. Id. at 316. If the claims were “dealt with”
by the bankruptcy court, then the supremacy of federal law in the area of bankruptcy would
preempt claims under the state theory of successor liability. Id.
The Fredericos argue that Morgan is liable under New Jersey successor liability law
because it continued to manufacture and market the same product line and actively exploited the
good will in the Grumman Olson name. 5 Further, the bankruptcy court did not “deal with” the
Fredericos’ claims (because they did not yet exist), so, under Lefever, there would be no bar to
the imposition of successor liability.
C.
Preemption
Morgan argues that this case turns on whether the New Jersey Supreme Court had the
power to rule as it did in Lefever, given federal preemption in the field of bankruptcy.
4
Although this approach to successor liability was rejected as too expansive by the drafters of the Restatement
(Third) of Torts, an academic article quoted by the New Jersey Supreme Court stated that, as of 1998, “thirteen
jurisdictions, representing 43 percent of the United States’ population, follow[ed] either the product line approach or
the continuity of enterprise approach.” Lefever, 160 N.J. at 315 (quoting Richard L. Cupp, Jr., Liability of Successor
for Harm Caused by Defective Products Sold Commercially by Predecessor, 8 Kan. J.L. & Pub. Pol’y 113, 114
(1998)).
5
For example, Morgan’s promotional materials list Jimmy Olson, who founded Grumman Olson, as its own
founder, and state that that the company has been “Building the Best . . . since its inception more than 60 years ago,”
a reference to the founding of Grumman Olson, and not Morgan, which was created eight years ago. (Appellee
Mem. at 6.)
8
Under the Constitution, federal law “shall be the supreme Law of the Land . . . any Thing
in the Constitutions or Laws of any State to the contrary notwithstanding.” U.S. Const. Art. VI,
cl. 2. Article I of the Constitution reserves for Congress the power to establish “uniform Laws
on the subject of Bankruptcies throughout the United States.” U.S. Const. Art. I, § 8.
Courts have long recognized “[t]he exclusive authority of Congress and the federal courts
to pass and enforce the bankruptcy laws.” In re Old Carco LLC, 442 B.R. 196, 207 (S.D.N.Y.
2010) (citing Int’l Shoe v. Pinkus, 278 U.S. 261, 263-64 (1929) (“A state is without power to
make or enforce any law governing bankruptcies that impairs the obligation of contracts or . . .
conflicts with the national bankruptcy laws.”)). There is little question that, broadly speaking,
federal bankruptcy law preempts state tort law. The bankruptcy code itself provides for an
automatic stay of all state proceedings against the debtor. See 11 U.S.C. § 362. Courts in this
district have held that federal preemption in the field of bankruptcy extends to orders of the
bankruptcy courts, which are vested “with authority to implement the federal statutory scheme”
by the Bankruptcy Code. Old Carco, 442 B.R. at 209 (holding that principles of preemption
preclude application of state car dealership franchise laws that conflict with orders issued by
court in bankruptcy proceedings).
Morgan argues that the type of successor liability authorized by the New Jersey Supreme
Court in Lefever tramples on the supremacy of federal bankruptcy law. In particular, Morgan
argues that imposing successor liability here is in direct conflict with the Sale Order—an order
from a federal bankruptcy court—which provided that Morgan would not be subject to successor
liability under the laws of any state. (See Sale Order ¶ 19.) Moreover, the imposition of
successor liability in this context would effectively defeat the possibility of selling debtor assets
“free and clear” of the liabilities of the debtor, which would inevitably result in purchasers’ being
unwilling to pay as much for those assets. This would run counter to one of the core policies of
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the Code in general, and Section 363 of the Code in particular, of “maximizing the value of the
bankruptcy estate.” Toibb v. Radloff, 501 U.S. 157, 163 (1991).
Although the New Jersey Supreme Court’s decision in Lefever grappled with interesting
questions about the intersection of state tort law and bankruptcy law, the validity of the New
Jersey court’s holding in Lefever was not decided by the Bankruptcy Court and is not properly
before this Court. This case does not turn on whether there will ultimately be successor liability
under New Jersey law, or whether Lefever was correctly decided. In fact, the case does not
actually require the Court to resolve a conflict between state law and federal bankruptcy law at
all. Rather, the case presents the more basic question whether enforcement of the Sale Order in
the manner advocated by Morgan is consistent with Bankruptcy Code procedure and due
process.
At oral argument, counsel for Morgan argued that the due process problem is only
created by virtue of the New Jersey Supreme Court’s erroneous decision in Lefever, but this is
not so. The Court would be faced with this question even if the New Jersey Court had never
decided Lefever. The basis for successor liability here—“product-line” successor liability—was
not created in Lefever; it dates back over thirty years to the New Jersey Supreme Court’s
decision in Ramirez, 86 N.J. 332, 431 A.2d 811. Lefever merely clarified the New Jersey courts’
application of Ramirez when the purported successor obtained the assets of the predecessor in a
bankruptcy sale.
The present case actually turns on the question whether, assuming arguendo that there is
a viable basis for state successor liability based on prepetition conduct of the debtor, a
bankruptcy court’s sale order may be enforced to extinguish those claims where no injury
occurred to the claimant until after the bankruptcy closed, such that the claimant was not
provided with notice of, or an opportunity to participate in, the bankruptcy proceedings that gave
10
rise to that order. The Court does not address whether Lefever will ultimately be applied by New
Jersey courts to find that Morgan is liable as a successor in the Fredericos’ case. Instead, the
Court rules only on whether the Sale Order prevents the Fredericos from pursuing the case at all.
D.
Applicable Law Regarding the Effect of “Free and Clear” Sale Orders
1.
“Free and Clear” Provisions Generally
The Sale Order in this case provided for a sale free and clear of interests in the property,
claims against the debtor, or any successor liability by virtue of the transfer of the assets. The
court authorized this sale pursuant to Section 363 of the Bankruptcy Code, 11 U.S.C. § 363
(“Section 363”). That section empowers the trustee to sell the debtor’s assets “free and clear of
any interest in such property of an entity other than the estate.” 11 U.S.C. § 363(f). 6 The trustee
may do so only “after notice and a hearing.” 11 U.S.C. § 363(b).
Although the text of the statute expressly refers only to interests in the property itself, it is
now generally agreed—including in this Circuit—that this provision may more broadly
extinguish claims that “arise from the property being sold.” In re Chrysler LLC, 576 F.3d 108,
126 (2d Cir. 2009) (quoting In re Trans World Airlines, Inc., 322 F.3d 283, 290 (3d Cir. 2003)),
vacated as moot sub. nom. Ind. State Police Pension Tr. v. Chysler LLC, -- U.S. --, 130 S.Ct.
1015 (2009). In other words, Section 363(f) “can be used to sell property free and clear of
claims that could otherwise be assertable against the buyer of the assets under the common law
6
Section 363(f) provides, in full, that:
The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in
such property of an entity other than the estate, only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate
value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of
such interest.
11 U.S.C. § 363(f).
11
doctrine of successor liability.” George W. Kuney, Misinterpreting Bankruptcy Code Section
363(f) and Undermining the Chapter 11 Process, 76 Am. Bankr. L.J. 235, 267 (2002)
(describing this as the “dominant interpretation”) (cited in Chrysler, 576 F.3d at 124).
The court’s power under Section 363 to authorize sales of assets “free and clear” of
claims is related to the provision in the Code that the confirmation of a plan of reorganization
renders the “property dealt with by the plan . . . free and clear of all claims and interests of
creditors, equity security holders, and of general partners in the debtor.” 11 U.S.C. § 1141(c). In
Chrysler, the parties objecting to entry of a sale order argued that the fact that Section 1141(c)
contains the terms “interests” and “claims,” but Section 363 mentions only “interests,” meant
that Congress “was willing to extinguish tort claims in the reorganization context, but unwilling
to do so in the § 363 sale context,” particularly because “reorganization provides unsecured
creditors procedural rights that are not assured in a § 363(b) sale.” 576 F.3d at 125. The court
rejected this argument, holding that, “[g]iven the expanded role of § 363 in bankruptcy
proceedings, it makes sense to harmonize the application of § 1141(c) and § 363(f) to the extent
permitted by the statutory language.” Id. 7
As the Bankruptcy Court explained here, the policy behind this broader reading of
Section 363 is twofold. First, allowing tort claimants to sue Section 363 purchasers directly—
rather than seeking relief from the estate itself—would subvert the Bankruptcy Code’s priority
scheme, by allowing a low-priority, unsecured claim to leapfrog over other creditors in the
bankruptcy. See Trans World Airlines, 322 F.3d at 291-92. Second, allowing sales of debtor
assets free and clear of liabilities of the debtor induces a higher sale price for the assets, thereby
7
Although the Chrysler opinion was later vacated as moot on instruction from the Supreme Court, courts in this
Circuit have continued to apply this broader conception of the “free and clear” provisions of Section 363 sales. See
In re Motors Liquidation, 428 B.R. 43, 57-58 (S.D.N.Y. 2010).
12
maximizing the value of the estate and maximizing potential recovery to creditors. See Chrysler,
576 F.3d at 126; Douglas v. Stamco, 363 F. App’x 100, 102-03 (2d Cir. 2010).
The Sale Order’s “free and clear” provisions are consistent with this line of cases.
However, the question remains whether the order can be applied to extinguish the claims in this
case.
2.
Dealing With “Future Claims” in Bankruptcy Generally
This case ultimately turns on the potential reach of a Section 363 “free and clear” sale
order to extinguish a claim against a purchaser that is based on pre-bankruptcy conduct of the
debtor that did not cause any harm to an identifiable claimant until after the bankruptcy closed.
(For the sake of simplicity, the Court will refer to this type of claim as a “future claim,” and
holders of this type of claim as “future claimants.”) This requires the Court to examine the
treatment of future claims in general in bankruptcy proceedings.
Many of the decisions evaluating the effect of bankruptcy court orders on future claims
arise outside the Section 363 sale context, and instead turn on the scope of the term “claim” itself
in the bankruptcy context, and the degree to which those future claims could be considered
“claims” discharged in the bankruptcy. If a particular cause of action does not fall under the
definition of “claim,” then, for example, it would fall outside the Code provision that “property
dealt with by the plan [of reorganization] is free and clear of all claims.” 11 U.S.C. § 1141(c)
(emphasis added).
The Code defines “claim” as broadly as possible, as a “right to payment, whether or not
such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” 11 U.S.C. §
101(5)(A). See Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (“Congress intended by this
language to adopt the broadest available definition of claim.”). As the Second Circuit has
13
explained, “Congress unquestionably expected this definition to have wide scope” so that “all
legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with
in the bankruptcy case.” In re Chateuagay Corp., 944 F.2d 997, 1003 (2d Cir. 1991) (quoting
H.R. Rep. No. 595, 95th Cong., 2d Sess. 309 (1978), reprinted in 1978 U.S. Code Cong. &
Admin. News 5787, 5963, 6266).
Despite the breadth of the term “claim” under the Code, problems arise when classifying
future claims as “claims” to be dealt with in a bankruptcy. The Second Circuit aptly illustrated
these difficulties with a hypothetical:
Consider, for example, a company that builds bridges around the
world. It can estimate that of 10,000 bridges it builds, one will
fail, causing 10 deaths. Having built 10,000 bridges, it becomes
insolvent and files a petition in bankruptcy. Is there a “claim” on
behalf of the 10 people who will be killed when they drive across
the one bridge that will fail someday in the future? The potential
victims are not only unidentified, but there is no way to identify
them. Sheer fortuity will determine who will be on that one bridge
when it crashes. What notice is to be given to these potential
“claimants”?
Id.
In Chateaugay, the Second Circuit was determining the applicability of a bankruptcy
court’s discharge of “claims” to claims for the cost of cleaning up hazardous waste that had been
released by the debtor before the bankruptcy proceedings, but which costs would continue to be
incurred by the Environmental Protection Agency (“EPA”) after the bankruptcy closed. Id. at
1002. The court expressly declined to resolve the hypothetical it had posited:
We need not decide how the definition of “claim” applies to tort
victims injured by pre-petition conduct, especially as applied to the
difficult case of pre-petition conduct that has not yet resulted in
detectable injury, much less the extreme case of pre-petition
conduct that has not yet resulted in any tortious consequence to a
victim.
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Id. at 1004. Instead, the court held that the unincurred cleanup costs could be dealt with as
“claims” in the bankruptcy because the relationship between the EPA and the debtor was “far
closer than that existing between future tort claimants totally unaware of injury and a tortfeasor.” Id. at 1005.
Generally, courts have held that future claims cannot be considered “claims” that are
dealt with and discharged by a confirmation plan. For example, in Lemelle v. Universal MFG.
Corp., the Fifth Circuit held that “even the broad definition of ‘claim’ cannot be extended to
include . . . claimants whom the record indicates were completely unknown and unidentified at
the time [the debtor] filed its petition and whose rights depended entirely on the fortuity of future
occurrences.” 18 F.3d 1268, 1277 (5th Cir. 1994); see also Taylor v. Strongbuilt Int’l, Inc. (In re
Strongbuilt), Nos. 03-31317, 09-3006, 2009 WL 5873047, at *4 (Bankr. W.D. La. Aug. 26,
2009) (“While the codal definition for ‘claim’ is intended to be broad, it does not go so far as to
define claim as ‘existent or non-existent’. . . .”).
The Eleventh Circuit has provided the clearest articulation of the test used by courts that
hold that future claims cannot be adjudicated as “claims” during a bankruptcy:
[A]n individual has a § 101(5) claim against a debtor manufacturer
if (i) events occurring before confirmation create a relationship,
such as contact, exposure, impact, or privity, between the claimant
and the debtor’s product; and (ii) the basis for liability is the
debtor’s prepetition conduct in designing, manufacturing and
selling the allegedly defective or dangerous product. The debtor’s
prepetition conduct gives rise to a claim to be administered in a
case only if there is a relationship established before confirmation
between an identifiable claimant or group of claimants and that
prepetition conduct.
Epstein v. Official Committee of Unsecured Creditors of the Estate of Piper Aircraft Corp’n (In
re Piper Aircraft Corp.), 58 F.3d 1573, 1577 (11th Cir. 1995). This was the test applied by the
Bankruptcy Court here. See BR Ct. Op. 445 B.R. at 252-53. Although the Second Circuit has
never embraced the Piper test, the basic approach articulated in Piper is consistent with the
15
Second Circuit’s holding in Chateaugay, which required a pre-confirmation relationship between
the claimant and the debtor before the claimant could have its claims dealt with in the
bankruptcy. See 944 F.2d at 1004-05.
As the Second Circuit suggested in Chateaugay, the concern that underlies these
decisions about the scope of the term “claim” is “the enormous practical and perhaps
constitutional problems [that] would arise” from treating future claims like “claims” in a
bankruptcy. Id. at 1003. In particular, as the court noted in posing the “bridge” hypothetical,
“What notice is to be given to these potential ‘claimants’?” Id. at 1003. Cf. In re Kewanee
Boiler Corp., 198 B.R. 519, 534 (Bankr. N.D. Ill. 1996) (reviewing cases and stating that “[t]he
proper definition of ‘claim’ was found to be inextricably tied to due process and notions of
fundamental fairness”). As the Bankruptcy Court for the Eastern District of Arkansas pointed
out in In re Hoffinger Industries, the Code “does not define ‘claim’ from the chapter 11 debtor’s
perspective as an ‘obligation to pay’” but rather as a “right to payment”: “Viewed from the
correct perspective, the focus must be on identifying that other party [holding the ‘right to
payment’] and protecting his or her due process rights.” 307 B.R. 112, 117 (Bankr. E.D. Ark.
2004); see also In re Piper Aircraft Corp., 162 B.R. 619, 628 (Bankr. S.D. Fla. 1994) (noting
that “significant and possibly insurmountable due process problems exist in providing notice to
[a] vast class of Future Claimants sufficient to allow the discharge of their claims”), aff’d, 168
B.R. 434 (S.D. Fla. 1994), aff’d as modified, 58 F.3d 1573 (11th Cir. 1995); Lemelle, 18 F.3d at
1277 (holding that in order to have future claims dealt with in the bankruptcy “there must be
evidence that would permit the debtor to identify, during the course of the bankruptcy
proceedings, potential victims and thereby permit notice to these potential victims of the
pendency of the proceedings”).
16
3.
Notice and Due Process in Bankruptcy
As courts have long recognized, the requirement of “[n]otice is the cornerstone
underpinning Bankruptcy Code procedure.” Western Auto Supply Co. v. Savage Arms, Inc. (In
re Savage Indus., Inc.), 43 F.3d 714, 720 (1st Cir. 1994). Provisions that the bankruptcy court
can take actions that affect parties’ rights only “after notice and a hearing” appear throughout the
Bankruptcy Code, including in the context of Section 363 sales. See, e.g., 11 U.S.C. 363(b)
(trustee may sell property of the estate “after notice and a hearing”); 11 U.S.C. § 1128 (“After
notice, the court shall hold a hearing on confirmation of a plan.”); cf. 11 U.S.C. § 1109 (“A party
in interest . . . may raise and may appear and be heard on any issue in a case under this
chapter.”). Generally speaking, “[i]nadequate notice is a defect which precludes discharge of a
claim in bankruptcy.” Chemetron Corp. v. Jones, 72 F.3d 341, 346 (3d Cir. 1995).
Courts have held in general that, for due process reasons, a party that did not receive
adequate notice of bankruptcy proceedings could not be bound by orders issued during those
proceedings. In In re John-Mansville Corp., 600 F.3d 135 (2d Cir. 2010), the Second Circuit
rejected the argument that bankruptcy provides a special “remedial scheme” that creates an
exception to the “principle of general application in Anglo-American jurisprudence that one is
not bound by a judgment in personam in a litigation in which he is not designated as a party or to
which he has not been made a party by service of process.” Id. at 153-54 (quoting Ortiz v.
Fibreboard Corp., 527 U.S. 815, 846 (1999)). As the court explained, the Supreme Court had
previously held that “where a special remedial scheme exists expressly foreclosing successive
litigation by nonlitigants, as for example in bankruptcy or probate, legal proceedings may
terminate preexisting rights,” but only “if the scheme is otherwise consistent with due process.”
Id. at 154 (quoting Martin v. Wilks, 490 U.S. 755, 762 n.2 (1989) (emphasis added in Second
Circuit opinion). Because the claimant in John-Mansville “did not receive adequate notice” of
17
the Bankruptcy Court’s orders, the claimant could not be bound by them. Id. at 158; see also
Savage Indus., 43 F.3d at 721-22 (refusing to enjoin successor liability claim against firearm
manufacturer despite “free and clear” provision in asset purchase agreement between debtor and
purchaser because no attempt had been made to provide notice of the sale to potential claimants).
The notice requirements of bankruptcy law are “founded in fundamental notions of
procedural due process.” Savage Indus., 43 F.3d at 721; see also Armstrong v. Manzo, 380 U.S.
545, 550 (1965) (holding that failure to give proper notice violates “the rudimentary demands of
due process of law”); City of New York v. New York, N.H. & H.R. Co., 344 U.S. 293, 297 (1953)
(stating in the bankruptcy context that “[t]he statutory command for notice embodies a basic
principle of justice—that a reasonable opportunity to be heard must precede judicial denial of a
party’s claimed rights”). At its core, the concern is whether a claimant can be “force[d] . . . to be
bound by proceedings in which he did not and could not participate.” Kewanee Boiler Corp.,
198 B.R. at 528-29. It is well settled that in order for any proceeding to satisfy due process,
there must be “notice reasonably calculated, under all the circumstances, to apprise interested
parties of the pendency of the action and afford them an opportunity to present their objections.”
Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). See also 11 U.S.C. §
102(1) (defining “after notice and a hearing” as “after such notice as is appropriate in the
particular circumstances, and such opportunity for a hearing as is appropriate in the particular
circumstances”); Savage Indus., 43 F.3d at 720 (“Under the Code . . . the debtor in possession or
trustee must ensure ‘parties in interest’ adequate notice and opportunity to be heard before their
interests may be adversely affected.”).
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. See Lemelle, 18 F.3d at 1277
18
(holding that plan of reorganization for mobile home manufacturer did not discharge claims
against successor company for injury caused by mobile home manufactured prepetition); White
v. Chance Indus., Inc. (In re Chance Indus., Inc.), 367 B.R. 689, 709-10 (Bankr. D. Kan. 2006)
(holding that state court action based on post-confirmation injury on amusement park
manufactured prepetition was not discharged because “no effort” was made to give notice to
potential future claimants, and even if claimant was deemed to have held a “claim” at the time of
the bankruptcy, “the discharge of that claim without giving [him] reasonable notice and the
opportunity to be heard on his claim violates due process”); Kewanee Boiler Corp., 198 B.R. at
539 (holding that state court action against reorganized company based on injury from boiler
manufactured prepetition could not be enjoined because claimant’s “right to notice under
bankruptcy law and the Constitution [was] not met”).
4.
Notice and Due Process for Future Claims in Section 363 Sale Context
The cases provide somewhat less guidance regarding how these principle affect future
claimants in the Section 363 sale context, although the same concerns pertain regardless of when
the assets are sold, whether at confirmation or after a Section 363 sale. The Second Circuit
recently acknowledged these concerns, but declined to resolve them one way or the other. In In
re Chrysler LLC, the Second Circuit addressed objections to the Bankruptcy Court’s approval of
an order pursuant to Section 363. That order authorized the sale of the car manufacturer’s assets
while extinguishing the right to pursue claims against the purchaser “on any theory of successor
or transferee liability[,] whether known or unknown as of the Closing, now existing or hereafter
arising, asserted or unasserted, fixed or contingent, liquidated or unliquidated.” 576 F.3d at 127.
The court ruled that claimants with existing product liability claims against “Old Chrysler” (the
debtor) could have their claims extinguished by the sale order, in part because “[t]o allow [those]
claimants to assert successor liability claims against the purchaser while limiting other creditors’
19
recourse to the proceeds of the asset sale would be inconsistent with the Bankruptcy Code’s
priority scheme.” Id. at 126 (quoting Trans World Airlines, 322 F.3d at 292) (quotation marks
and brackets omitted).
However, the court declined to rule on whether the sale order could be enforced against
“claimants who, although presently unknown and unidentified, might have claims in the future
arising from Old Chrysler’s production of vehicles.” Id. at 123. The court affirmed the order
itself “insofar as it constituted a valid exercise of authority under the Bankruptcy Code,” but
“decline[d] to delineate the scope of the bankruptcy court’s authority to extinguish future claims,
until such time as [the court is] presented with an actual claim for an injury that is caused by Old
Chrysler, that occurs after the Sale, and that is cognizable under state successor liability law.”
Id. at 127.
Other courts, when presented with future claims in the context of Section 363 sale orders,
have held that the claims cannot be extinguished without due process for the future claimants. In
Schwinn Cycling & Fitness Inc. v. Benonis, 217 B.R. 790 (N.D. Ill. 1997), a manufacturer of
bicycles and exercise equipment declared bankruptcy. During the course of the proceedings,
most of the debtor’s assets were sold pursuant to an order under Section 363, approving an
agreement that the purchaser did not assume any liability for conduct of the debtor’s business
prior to the closing of the sale. Sometime after the reorganization plan was confirmed, an
individual using equipment manufactured by the debtor was injured and (along with members of
his family) brought suit in state court, seeking to impose successor liability under state law on
the purchaser of the assets. The purchaser (“New Schwinn”) brought an adversary action in the
bankruptcy court to enjoin the state court action.
The court concluded that the finding in the sale order that New Schwinn was not a
“successor in interest” to the debtor was “directed at forcing existing pre-confirmation personal
20
injury claimants to bring such claims against [estate assets]. It was not intended to, nor could it,
preempt all possible future successor liability claims.” Id. at 796-97 (emphasis added). In any
event, the court held, because the plaintiffs in the state court action did not receive notice of the
sale or bankruptcy proceedings, their claim could not have been extinguished by the sale order.
Id. at 797. In the court’s view, to enjoin the plaintiffs’ state court action “would, in effect, deny
them of their rights to due process.” Id. The court noted that the fact “[t]hat there existed no
notice reasonably calculated to reach parties like [the plaintiffs] does not lessen the due process
implications of New Schwinn’s contentions in the adversary proceeding.” Id.
D.
Application to this Case
The “free and clear” provisions of the Section 363 Sale Order in this case are broader
than those of the confirmation plans analyzed in some of the other cases dealing with future
claims. The Sale Order expressly purports to extinguish any “claims for successor or vicarious
liability, by reason of [the] transfer [of the Lot 2 Assets] under the laws of the United States, any
state, territory or possession thereof or the District of Columbia applicable to such transactions.”
(Sale Order ¶ 19.) On its face, this would encompass the theory of successor liability set forth by
New Jersey state courts. The case thus does not turn directly on how to define the term “claim”
in the Bankruptcy Court’s orders. Nevertheless, the due process and notice concerns that
underlie the decisions discussed above are fully applicable here.
The Fredericos did not receive adequate notice of their potential claim in the Grumman
bankruptcy proceedings because, at the time of the bankruptcy, there was no way for anyone to
know that the Fredericos ever would have a claim. Enforcing the Sale Order against the
Fredericos to take away their right to seek redress under a state law theory of successor liability
when they did not have notice or an opportunity to participate in the proceedings that resulted in
that order would deprive them of due process. See Schwinn, 217 B.R. at 797 (“Allowing the
21
provisions of the Bankruptcy Court’s orders to limit the rights of injured parties . . . who had no
notice, and no reason at the time, to present an interest in the bankruptcy proceedings or to take
action in response to the threatened deprivation of their rights, would violate due process and
bankruptcy notice concerns.”).
Morgan does not grapple directly with the due process argument in its briefs, preferring
instead to focus on the idea that policies underlying the bankruptcy code preempt state successor
liability law. Morgan points out that under New Jersey law, a purchaser of assets in a Section
363 sale could be subject to decades of uncertainty about when some claimant may come
forward, suing Morgan for conduct based on conduct by a totally different entity. As Morgan
points out, the Lefever court acknowledged this potential unfairness, but expressed that
“competent counsel” could effectively advise a “prudent purchaser” about the risks of potential
successor liability down the line. 160 N.J. at 324. According to Morgan, any “competent
counsel” would advise the client not to pay as much for the assets. This, Morgan argues, would
necessarily violate the Bankruptcy Code’s policy of maximizing the value of the estate.
A recent summary order from the Second Circuit appears to lend support to Morgan’s
argument. In Douglas v. Stamco, 363 F. App’x 100, the court affirmed the dismissal of a
complaint for failure to adequately plead successor liability against the purchaser of assets in a
bankruptcy sale. The court noted that allowing the plaintiff to proceed with his tort claim against
the purchaser “would be inconsistent with the Bankruptcy Code’s priority scheme because
plaintiff’s claim is otherwise a low-priority unsecured claim.” Id. at 102. The court went on to
observe that
to the extent that the ‘free and clear’ nature of the sale . . . was a
crucial inducement in the sale’s successful transaction, it is evident
that the potential chilling effect of allowing a tort claim subsequent
to the sale would run counter to a core aim of the Bankruptcy
22
Code, which is to maximize the value of the assets and thereby
maximize potential recovery to the creditors.
Id. at 102-03 (citations omitted).
However, as the Bankruptcy Court in this case explained, the Second Circuit was not
presented with, and did not consider, due process issues or whether the plaintiff in the case had a
“claim” that could have been dealt with in the bankruptcy proceedings. Moreover, the action
was not to enjoin a state lawsuit. Rather, the case had been removed to federal court and the
district court held that the plaintiff had failed to plead a valid basis for successor liability under
applicable law. Here, the Court is not addressing whether the Fredericos will ultimately be able
to sustain their successor liability claim; the question is whether the Sale Order prevents them
from even bringing the suit in the first place. In light of the due process problems that would
result from such an interpretation, the Court holds that the Sale Order cannot be enforced in this
manner.
An additional point bears noting: Some courts deal with the issue of future claims by
appointing a future claims representative to advocate for the interests of future claimants. The
future claims representative can negotiate for the creation of special trusts where funds may be
set aside to pay claims that will be asserted for injuries caused by prepetition conduct that do not
occur until after the bankruptcy closes. This is often particularly useful in mass tort cases, such
as those involving asbestos or medical implants, where a discernible class of potential claimants
has already been exposed to the product, and it is only a question of when (and to what extent)
harm will manifest itself. See, e.g., Grady v. A.H. Robins Co., Inc., 839 F.2d 198 (4th Cir. 1988)
(employing representative for class of individuals who used intrauterine device); see generally
Kewanee Boiler Corp., 198 B.R. at 540 (“In all cases found where a trust was created out of
which future claims against the estate were to be paid, some assertedly injurious contact between
23
the future victim and the product occurred pre-petition. Only the manifestation of a disease was
lacking. In those cases, the existence of pre-petition physical contact, such as inhalation of
asbestos, or insertion of a contraceptive, or implantation of a breast implant, more or less fixed
the class of potential victims.” (internal citations omitted)). In fact, the Bankruptcy Code sets
forth a specific procedure for representation of claims on behalf of people exposed to asbestos.
See 11 U.S.C. § 524(g).
On the other hand, courts faced with future claimants like those in this case—in essence,
the unknown future claimants of the Chateaugay “bridge” hypothetical—often reject efforts by
future claims representatives to submit those “claims” for approval. For example, in Piper, the
Eleventh Circuit rejected the efforts of a future claims representative to set aside funds for people
who would be injured after the bankruptcy by airplanes manufactured by the debtor. The
representative based his calculation on “statistical assumptions regarding the number of persons
likely to suffer, after the confirmation of a reorganization plan, personal injury or property
damage caused by Piper’s pre-confirmation manufacture, sale, design, distribution or support of
aircraft and spare parts.” 58 F.3d at 1575. The court set forth, and then applied, the Piper test to
find that these hypothetical future claimants did not have sufficient pre-confirmation
relationships with the debtor for them to hold “claims” that could be adjudicated in the
bankruptcy. See also Hoffinger, 307 B.R. at 121-22 (applying Piper test to reject efforts to
resolve future claims against swimming pool manufacturer because “[t]he post confirmation
person unknown, unborn, or about to take their first swimming lesson simply does not have a
logical prepetition nexus to Hoffinger’s products” that would allow due process to be satisfied if
their claims were resolved in the bankruptcy).
The Fredericos point out that their due process rights would be violated because not only
did they not receive notice of the bankruptcy, but there was no future claims representative or
24
any provisions made for future claimants. Morgan pointed out at oral argument that under cases
like Piper, there likely could not have been a future claims representative who could have
represented claimants such as the Fredericos. The Court does not express a view on whether a
future claims representative would have been appropriate or permissible in this case. Either way,
the fact remains that there was not a future claims representative in this case, or any provisions
made for unrepresented future claimants. Thus, the Fredericos (and other future claimants in
their position) were not afforded either the notice and opportunity to participate in the
proceedings or representation in the proceedings that due process would require in order for them
to be bound by the Bankruptcy Court’s orders.
The Court is certainly cognizant of the inherent uncertainty that allowing successor
liability claims (notwithstanding the “free and clear” provisions of a bankruptcy court’s orders)
imposes upon purchasers of debtor assets in a bankruptcy. However, to whatever extent
maximizing the value of the estate is an important policy of the Bankruptcy Code, it is no more
fundamental than giving claimants proper notice and opportunity to be heard before their rights
are affected, to say nothing of constitutional requirements of due process.
Courts have rejected the premise that maximizing the value of the estate outweighs the
due process rights of potential claimants. In a slightly different context, in response to the
argument that “the price received in a bankruptcy sale will be lower if a court is free to disregard
a condition in the sale agreement enjoining claims against the purchaser based on the sellers’
misconduct,” the Seventh Circuit stated that though this is true, it “proves too much”:
It implies, what no one believes, that by virtue of the arising-under
jurisdiction a bankruptcy court enjoys a blanket power to enjoin all
future lawsuits against a buyer at a bankruptcy sale in order to
maximize the sale price: more, that the court could in effect
immunize such buyers from all state and federal laws that might
reduce the value of the assets bought from the bankrupt; in effect,
that it could discharge the debts of nondebtors . . . as well as of
25
debtors even if the creditors did not consent; that it could allow the
parties to bankruptcy sales to extinguish the rights of third parties,
here future tort claimants, without notice to them or (as notice
might well be infeasible) any consideration of their interests. If the
court could do all these nice things the result would indeed be to
make the property of bankrupts more valuable than other
property—more valuable to the creditors, of course, but also to the
debtor’s shareholders and managers to the extent that the strategic
position of the debtor in possession in a reorganization enables the
debtor’s owners and managers to benefit from bankruptcy. But the
result would not only be harm to third parties, such as the
[claimants in the case], but also a further incentive to enter
bankruptcy for reasons that have nothing to do with the purposes
of bankruptcy law.
Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 163 (7th Cir. 1994) (Posner, J.). See also
Savage Indus., 43 F.3d at 722-23 (in case where claimant did not receive adequate notice of asset
sale, rejecting argument that refusing to enforce “free and clear” provision of asset purchase
agreement would “‘chill’ chapter 11 asset bidding”).
The Court does not decide whether or not there may be circumstances under which a
Section 363 sale order could extinguish the claims of future claimants who, because they were
not injured before the close of the bankruptcy, had no way to receive notice of the bankruptcy
proceedings. And the Court does not reach any conclusion regarding whether use of a future
claims representative can always address the due process concerns of unknown future claimants,
nor whether use of such a representative would have been possible or appropriate in the
bankruptcy proceedings here. Finally, as previously stated, the Court does not reach the question
whether Morgan actually is liable as a successor to Grumman under New Jersey law. The Court
holds only that, under the circumstances presented in this case, to enforce the Sale Order to
enjoin the Fredericos’ state law suit would deny them due process and violate the Bankruptcy
Code’s requirements of notice and opportunity to be heard for those affected by a bankruptcy
26
court’s rulings. Thus, the Court agrees with the Bankruptcy Court that the Fredericos are entitled
to judgment as a matter of law, and Morgan’s adversary complaint should be dismissed.
Conclusion
For the foregoing reasons, this Court AFFIRMS the Bankruptcy Court’s judgment
entered February 25, 2011.
SO ORDERED
Dated: New York, New York
March 29, 2012
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