Yesterday I filed this "Opening Brief" (plus the Sale Opinion at Appendix A and the Sale Order and MPA at Appendix B) on behalf of my five clients in our appeal of the GM Sale Order:  Callan Campbell, et al., v. Motors Liquidation Company, Case No. 09-6818 (NRB) (S.D.N.Y.).  The brief's "Summary of the Argument" is at the end of this post.

This appeal is the only one pending that challenges the abhorrent treatment of preexisting products liability claims in either the GM or Chrysler bankruptcy cases.

When I first got involved in the case three months ago, I summarized here the injuries and the myriad adversities faced by my clients on a daily basis.  I wrote:

The sad, and all too tragic, stories of my clients, taken from the filed objection, are set forth below.  The only thing my clients did wrong here was buy a GM car.  For this act of brand loyalty, they have paid dearly.   It's not enough that people lose their lives and get severely injured from design defects and product flaws, now they and their loved ones get thrown under the bus!

Having now lived with GM for about 450 hours the past three months, I have to say I'm thoroughly appalled at the cold-hearted stinginess of those calling the shots at GM and Chrysler.  They have left helpless accident victims hanging out to dry for reasons I cannot fathom, while otherwise spending "whatever it takes" -- to whomever it takes -- "to get the 'deal' done."  (See Opening Brief, at p.7).

With the US Treasury paying a mind-boggling $92 billion for most of "Old GM" (see Opening Brief, at p.7 fn.4), would it really be such a burden for the Secretary and his Boss to set aside another $250 million or so (or about 1/4% of the total consideration paid in the deal) to make sure there's a small, but adequate, reserve to cover medical bills, assisted care, and other basic requirements of those (see, e.g.,  here, here, and Callan Campbell here) severely injured by the design defects built into cars manufactured by the same plants they're now the stewards of?   (See Opening Brief at p.8 fn.6, estimating total remaining products claims left behind at $233.2 million).

Put another way, imagine you've got $92.00 in quarters in a big bucket.  Now imagine that you can dramatically change for the better the lives of hundreds, maybe even thousands, of people your own mirror-image predecessor destroyed through no fault of their own.  And imagine further that all you have to do to achieve that wonderful act of kind-heartedness is to take just one of those 368 quarters and put it aside for the benefit of those whose lives have been damned as a result of mistakes made by some of the people and property you just bought -- and now control -- for those 368 quarters.

That's all that needs to be done in GM to make things right, and my guess is that only about a dime needs to be put aside to cover the outstanding products liability claims left to rot in Chrysler.  But no one seems to have the political or moral compunction to wrestle those thirty-five cents from the Boss's own clenched fist.

"Sad" and "pathetic" are the first words that come to mind as I ponder the fact that I'm not on the "Slow Boat to China," but on the "Voyage of the Damned" (Art Spiegelman's take on it).

• Brother, can you spare a dime? (classic Bing Crosby)
• or sung by Allison Moorer (great soul)
• or by the Gas House Gang Barbershop Quartet (great harmony; my favorite)
• or instrumentalized by the Dave Brubeck Quartet (for jazz buffs)

My brief's "Summary of the Argument" is below:

SUMMARY OF THE ARGUMENT

          Case law in this Circuit establishes three necessary conditions to a Court's authorizing a 363 sale "free and clear" of potential products liability claims against a successor purchaser.  The first condition, a legal one, is set forth in Back v. LTV Corp. (In re Chateaugay), 213 B.R. 633, 638 (S.D.N.Y. 1997), and Pittsburgh Food & Bev., Inc. v. Ranallo, 112 F.3d 645 (3d. Cir. 1997), and requires that a reviewing court determine whether the bankruptcy court could colorably assert that it had "related to" subject-matter jurisdiction based on a finding that the outcome of the dispute could have a "conceivable effect" on the debtor's bankruptcy estate.

          The second and third conditions, factual ones, are explained in In re Chrysler LLC, 576 F.3d 108 (2d Cir. 2009).  One requires a finding that the "free and clear" aspects of the sale order be a "critical inducement" to the purchaser's willingness to consummate the sale.  The second requires a finding that the 363 sale process not be structured in a manner "inconsistent with the Bankruptcy Code's priority scheme."  Chrysler, 576 F.3d at 126.

          Though failure to satisfy any one of these conditions should be sufficient to deny a purchaser the right to a "free and clear" order cleansing it of potential successor liability, none of these conditions were satisfied in this case.  First, the Bankruptcy Court lacked authority to render the findings and conclusions being challenged in this appeal because resolution of Appellants' products liability claims against New GM, as successor, lacked any "conceivable effect" on the Debtors' estates.  In this regard, most significant is the fact that Old GM has no obligation to indemnify New GM for liabilities that were not expressly assumed under the MPA yet might be charged to New GM post-Closing.  Second, the record clearly establishes that entry of a "free and clear" order barring successor claims against New GM in respect of Existing Products Claims was not a "critical inducement" to New GM's willingness to consummate the 363 Sale.  In fact, the Bankruptcy Court found it "doubtful" that New GM "would have lent and ultimately bid a lesser amount" had it been required to assume these "politically sensitive" claims.  (Sale Op. at 51 n.91).  Third, the principle that creditors of equal priority should be treated similarly was cast aside in favor of Treasury's single-minded focus on assuming any liability it deemed "necessary for the commercial success of New GM."  See, supra at 7 [of brief].  For this reason, over $60 billion in unsecured claims were assumed by New GM in whole or substantial part while, in marked contrast, Appellants and other similarly situated unsecured creditors will recover, at best, a paltry pari passu share of the few remaining assets left in Old GM.

          Arguments that this appeal is moot on statutory and equitable grounds also fail.  This appeal is not moot on statutory grounds because Bankruptcy Code section 363(m) does not prevent a reviewing court from reversing provisions of a sale order that were "not even colorably within its jurisdiction."  Ranallo, 112 F.3d at 650.  Nor, applying the five factors outlined in Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 949-50 (2d Cir. 1993), is this appeal equitably moot.  Most significantly, the remaining Existing Products Claims left behind with the Old GM are de minimus relative to the approximately $92 billion purchase price paid by New GM.  Thus, striking the provisions of the Sale Order barring these claims will not "unravel intricate transactions" or impair New GM's viability.  Appellants' failure to seek a stay pending appeal is also not fatal to their cause.  Appellants sought, but were denied, expedited review.  Moreover, the "stay" factor carries little weight where-as here-granting the requested relief would in no way unravel or "knock the props out" from the consummated transactions.

 

If anyone knows anything about "stub" rent, it's Yitzhak, and I thank him for graciously providing us with his thoughtful analysis of this thorny issue of law in this post, which he entitles: 

In re Sportsman's: The Death Knell for Stub Rent?

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A recent Delaware Bankruptcy Court decision, In re Sportsman's Warehouse, Inc., 2009WL 2382625 (Bankr. D. Del. 2009), held that Bankruptcy Code § 365(d)(3) does not require the timely payment of stub rent, casting a shadow over the hope created by In re Goody’s Family Clothing, Inc., 401 B.R. 656 (D. Del. 2009).  Prior to Goody's, it was presumed that courts in the Third, Sixth and Seventh Circuits would not require the payment of stub rent pursuant to § 365(d)(3).  Then Goody’s was handed down, supporting a reading of § 365(d)(3) that required the timely payment of "stub" rent.  While Goody’s, decided by a Delaware District Court, focused on case law in Third Circuit, its logic extends to the Sixth and Seventh Circuits.  In light of Judge Posner’s opinion in In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998), courts in the Seventh Circuit may be particularly receptive to Goody’s.

"Stub" Rent

"Stub" rent is “the rent for the interim period between the day the order for relief was entered in the bankruptcy case and the end of that month.”  In re Stone Barn Manhattan LLC,  398 B.R. 359, 360-61 (Bankr. S.D.N.Y. 2008).  Stub rent issues arise because debtors generally file after the first of the month and prepayment of rent is due on the first of the month. § 365(d)(3) requires that the trustee “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected. . .”  “Congress passed § 365(d)(3) to relieve landlords of the uncertainty of collecting rent fixed in the lease in full, promptly, and without legal expense during the awkward postpetition prerejection period.”  HA-LO Industries, Inc. v. CenterPoint Properties Trust, 342 F.3d 794, 799 (7th Cir. 2003).

“Courts [even in the same district] have differed on whether an obligation to pay rent ‘arises’ on the day that rent is due (the ‘billing-date approach’), or on each day the tenant occupies the leased premises (the ‘proration approach’).”  Goody's, 401 B.R. at 663.  Courts adopting the proration approach conclude that stub rent arises during the post petition pre rejection period, and that § 365(d)(3) requires timely payment of stub rent.  Courts adopting the billing date approach conclude that stub rent arises prepetition.  

The Fall of Handy Andy and Decline of Proration in the Third, Sixth and Seventh Circuits.

While the Circuit Courts have not addressed the exact issue of stub rent, the Third, Sixth and Seventh Circuits have addressed § 365(d)(3) in other contexts. “  In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998)], [t]he Seventh Circuit Court of Appeals was the first Circuit Court to address § 365(d)(3).  Although the case involved the proration of taxes payable by the tenant-debtor under a commercial lease, Judge Posner's opinion endorsed a broad construction of § 365(d)(3) as requiring the proration of a lease obligation.”  Stone Barn, 398 B.R. at 362 (internal citations omitted).  However, the Seventh Circuit panel in HA-LO (with no overlap to the Handy Andy panel) adopted the billing date approach for post rejection rent, essentially eviscerating Handy Andy.

In Ha-Lo, the debtor rejected the lease on the fourth day of the month.  The Ha-Lo panel held that § 365(d)(3) required the debtor to timely pay the entire month’s rent because the rent arose on the first day of the month.  Ha-Lo relied upon the Sixth Circuit decision addressing post rejection rent.  See Koenig Sporting Goods, Inc. v. Morse Road Co., 203 F.3d 986, 989 (6th Cir. 2000) (holding that for the purposes of § 365(d)(3), the obligation to pay rent arose on the first of the month).

In In re Montgomery Ward Holding Corp., 268 F.3d 205, 209 (3d Cir. 2001), the Third Circuit followed suit adopting the billing date approach.  In Montgomery Ward, pursuant to the lease, the debtor was billed for taxes, including taxes that were accrued pre petition, during the post petition pre-rejection period.  The Third Circuit held that the debtor “had to pay the whole tax bill because, under the lease, the bill had become due and therefore arose, post-petition.”  Goody’s, 401 B.R. at 664.

Nevertheless, courts in these Circuits, generally, did not give a debtor a free ride and allowed an administrative claim for stub rent.  See Stone Barn, 398 B.R. at 367 (collecting cases); but see, e.g., In re Baby N' Kids, 2007 WL 1218768 (E.D. Mich. Apr. 24 2007).  Some courts went a step further, finding that if the Debtor occupied the premises, the lease’s rental-rate reflects the benefit received by the Debtor and, as such, these courts fixed the administrative claim in the amount of the rental rate.  See, e.g., Goody’s, 401 B.R. at 674 .

Goody’s: Hope for Landlords?

In Goody’s, the debtor appealed the bankruptcy court’s allowance of an administrative claim for stub rent.  On appeal, the District Court upheld the administrative claim and, therefore, was not required to decide the § 365(d)(3) issue.  However, Goody’s provided three ways to reconcile Montgomery Ward and the timely payment of stub rent: 

(i) “[R]ent might be viewed generally as a unique sort of obligation that “arises” each day of a tenant's occupancy.” Goody's, 401 B.R. at 664.  If the debtor fails to timely pay on the first of the month, “the month's rent obligation arises again, in full,… on every subsequent day of that month.” Id.;

(ii) The rent actually is due and arises during or at the end of the grace period.  Thus, if the grace period occurs or expires during the post petition pre petition period, a debtor is required to pay the entire month’s rent under § 365(d)(3); and

(iii) Default penalties create a “new obligation” and if the penalty is due during the post petition pre petition period,a debtor is required to pay the delinquent rent and penalties under § 365(d)(3). Id.

Goody’s noted that, as a matter of policy, it is “a perverse result that debtor-tenants could use § 365(d)(3) offensively to avoid timely rent payments.”  Id.  Moreover, Goody’s found it perplexing that the “statute's impact would turn upon such insignificant lease-drafting choices” of whether the rent was due daily, monthly or yearly.  Id.  “If commercial leases require full payment of the total rent obligation, with amortization in monthly installments … the entire rent obligation ‘arises’ pre-petition, thus depriving § 365(d)(3) of any practical effect.  Conversely, if a lease required that rent be due each day (say, allowing monthly payments for convenience), then § 365(d)(3) would presumably require full payment.”  Id.

The Seventh Circuit.

Judge Posner’s unequivocal support for the proration approach provides a powerful platform for landlords in the in the Seventh Circuit to seek stub rent premised on Goody’s.  Moreover, Ha-Lo focused on the debtor’s control over post petition rent.  A debtor has control over the timing of the rejection of a lease and could reject a lease on the last day of the previous month and not be liable for the next month’s rent.  In contrast, a landlord does not control the day that a debtor files its petition or rejects the lease.  But see In re UAL Corp., 291 B.R. 121 (Bankr. N. D. Ill. 2003) (post Handy Andy and pre Ha-Lo) (holding that § 365(d)(3) does not require the timely of payment of stub rent).

Sportsman’s.

Sportsman’s dimmed landlords’ expectations.  Most notable was the absence of any mention of Goody’s discussion of reconciling the timely payment of stub rent with Montgomery Ward.   In reliance upon the Goody’s lower (bankruptcy) court decision, Sportsman held that the debtor's obligation to pay that rent arose pre-petition and the stub rent is not allowable under section 365(d)(3).  Moreover, Sportsman held that the per se rule (the administrative claim is identical to the rental rate) advanced by Goody’s is a misapplication of the law.  Sportsman also held that a debtor can require an evidentiary trial through introducing evidence that the benefit to the estate is lower than the contract rent, including that “the contract rate fair market value of rent is less than the contract rent.”  Sportsman's WL 2382625 at ** 5-6.  Sportsman's thereby not only stripped the landlord of the § 365(d)(3) claim, it required that the landlord to go through the expense of an evidentiary hearing to receive any payment for stub rent.

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My Chrysler and GM posts over the last three months generated incredible traffic (around 100,000 page views since May 1 from about 50,000 unique sites), while my involvement in the GM case and appeal of the decision led to several media interviews and appearances, including this 20 minute podcast just posted on the LexisNexis communities / Bankruptcy Law Center webpage.  In it, I discuss the differences between 363 sales and reorganization plans, predictions of the "end of bankruptcy," why I got involved in GM, Judge Gerber's decision and my appeal, why I started blogging, and the implications of GM and Chrysler for bankruptcies generally and the economy at large.

Thanks to LexisNexis's Steve Berstler for the interview and to Erin Capellman and her colleagues at LexisNexis for making the podcast happen and for linking to my Chrysler and GM blog posts.  LexisNexis was the pioneer in online legal research and remains the premiere online legal research service.  And for those of you who are involved in litigation, get LexisNexis' CaseMap and Concordance litigation management software.  We use these products in every litigation matter we're involved in, and I can't recommend them strongly enough.

For posterity's sake, here's links to some other media interviews and quotes I've given in the past month or so.  As for the experience generally, I concur with these two architects of the GM sale, who recently summed up the experience as "entirely gratifying ... a 'once-in-a-lifetime' experience."

TV/Radio:

• with Judge Napolitano on Fox News Channel's Glenn Beck Show
• with Quinn Kiltfelter on Detroit Public Radio's, Detroit Today and rebroadcast in part nationally on NPR's Morning Edition (starting at 55:00 into the program)
• with Canada's BNN business news channel

Print / Blogs:

The Wall Street Journal    The New  York Times    NYT Dealblog    Bloomberg   

The Washington  Post   AmLaw Daily    National Law Journal    Financial Post

Lawyers USA    AP / Time    ABC    USA Today   Detroit Free Press  

Cleveland's Plain Dealer    Reuters / Forbes    PR News   

Lexblog's Real  Lawyers Have Blogs    Tom Lindmark / Seeking Alpha

The Pop Tort    China News    Viet Nam News

Thanks to everyone for reading, listening, or watching, and special thanks to the producers, reporters, and bloggers who made these interviews and appearances possible!

As for Judge Sotomayor's bankruptcy jurisprudence, Clean Slate's Andy Winchell (here and here) and Texas Bankruptcy Lawyer Steve Sather (here and here) were the first (and last) to canvass her opinions involving bankruptcy issues.  All in all, nothing to complain about, and certainly her decision in Official Comm. of Equity Sec. Holders v. Official Comm. of Unsecured Creditors (In re Adelphia Communs. Corp.), 544 F.3d 420 (2d Cir. 2008) (pdf), affirming dismissal of the equity committee's appeal was a notable one.  There, Bankruptcy Judge Gerber confirmed Adelphia's chapter 11 plan, which stripped the equity committee of standing previously granted to it to prosecute derivative claims and transferred those claims to a litigation trust established under the plan (the first about $6.5 billion of which would go to unsecured creditors until they were paid in full, leaving equity "hopelessly out of the money").  In affirming Judge Gerber's confirmation order (but don't forget to look at Judge Scheindlin's first crack at the appeal), Judge Sotomayor wrote that a court "may withdraw a committee's derivative standing and transfer the management of its claims, even in the absence of that committee's consent, if the court concludes that such a transfer is in the best interests of the bankruptcy estate."  In other words, she wrote, the "Equity Committee's derivative standing under STN [did not] vest it with ownership over its derivative claims."  Curiously, she never addressed the obvious question of whether the appeal was moot because the plan had been substantially consummated.  So maybe there is hope for those concerned that substantial consummation of a plan or sale moots all appeals (especially--as Steve Sather points out--given her having joined in last year's Manville decision that was just reversed on procedural grounds, as discussed here, by the Supreme Court in Travelers v. Bailey).

This is long-winded background to what I've been wanting to write about for a very long time.  And I figured as long as people are giving Judge Sotomayor tips on how to be a better Judge or Justice, I'd offer a tip of my own:

READ THESE BOOKS!

• Kenneth Klee's Bankruptcy and the Supreme Court; and

• Law Prof. Blogger M. Jonathan Hayes's Bankruptcy Jurisprudence from the Supreme Court.

Professor Klee's book is a remarkable resource and "hands-down" one of the best books on bankruptcy ever written.  Here's the WSJ Bankruptcy Beat's interview on how a project envisioned to last a year and result in a 190-page book morphed into a seven year labor of love that resulted in a 500 page book with 2,517 footnotes canvassing 570 Supreme Court opinions over the past 110 years.  The good news for those wanting more is that, Ken says in the Preface, "[t]his book is a beginning and not an end....  [and] only scratches the surface of the rich material contained in the Justices' private papers that were gathered as part of the research for this book."  Here's Ken's own Readers' Digest abstract.

One thing that leaves you wanting from Professor Klee's book, however, is the precise thing that Justice-to-Be Sotomayor continues to drive home in her confirmation hearings; that is, the importance of thoroughly understanding and delving into the facts of each case (see, today's questioning by (my law school classmate) Sen. Amy Klobuchar, who engages in an extended discussion with Judge Sotomayor about her being "tenacious about getting to the bottom of the facts").  Well, it's on the facts where Professor Hayes' book fills the gap.  His book is like a Casenote Legal Briefs to Supreme Court bankruptcy cases, but much better.  Like Ken's book, Jonathan's book is a labor of love that started modestly.  Jon started out planning to write an article about the "20 most important bankruptcy cases ever," and he ended up with a first edition covering 121 cases.  He's not stopping, he says, until he's briefed "every case the Supreme Court has ever published which deals with Bankruptcy."  His book starts at Sturges v. Crowninshield in 1819, concludes with Piccadilly Cafeterias in 2008, and includes about every case since 1984.  Along the way, he summarizes in each "brief" the issue before the Court, the holding of the case, and the key facts of the case.  Each "brief" also quotes extensively from the Court's opinion because, he writes, "how better to explain the court's reasoning than to use the court's words."  He ends each brief with a "tidbit" or two about the case, the Justice who authored the opinion, or the context in which the case was decided.

Knowing the "ins-and-outs" of Supreme Court precedent is essential for every bankruptcy practitioner.  While it's basically true that one can find a bankruptcy court opinion somewhere that'll stand for whatever proposition one wants to argue, there's only one Supreme Court, and for our purpose, it's the supreme law of the land.  Its holdings, reasonings, dicta, and dissents provide essential interpretive guideposts to bankruptcy practitioners, for while it may be a "constitution we are expounding," when it comes to bankruptcy, it's a "statute we are interpreting."

Best of luck, Justice-to-Be!

After putting in 20+ hour days for a full week, including reviewing 35+ Gigabytes of OCR'd documents from GM, deposing Fritz Henderson and the Auto Task Force's Harry Wilson over two days, attending three days of hearing, and giving everything I had in this closing argument, Judge Gerber's opinion approving the sale and his bench decision denying my motion for direct appeal to the Second Circuit ended the fray for me and put my clients' appeal on the "slow boat to China," as the old saying goes.  But in doing so, he issued a persuasive opinion that--on reflection--actually did my clients a favor, despite their having to endure an extra year of appeal by first passing through the district court. 

How so?  Well, Judge Gerber himself acknowledged that the successor liability issue was the “most debatable” and “most important” of the issues before the Court.  He also correctly observed that I’d like to see this issue decided by the Supreme Court (assuming I can't get the Second Circuit to reverse itself or at least distinguish GM from Chrysler on the facts).  After all, 363 sales are so common nowadays that Baird and Rasmussen's prediction in 2002 of the "end of bankruptcy" is now being viewed as a shocking--but inevitable--fact of life.  And the undeniable split in the circuits over whether 363 sales can be "free and clear" of successor liability claims makes the case ripe for Supreme Court review, particularly given the magnitude of the claims being left behind (GM and Chrysler alone have shed about $2 billion of these liabilities in the past 45 days). 

One thing we know about the Supreme Court, however, is that it doesn't like to get "ambushed."  As Justice Ginsburg pointedly reminded counsel during oral argument in the Travelers Casualty v. PG&E case (discussed here):

We are a court of review. So no matter how well it's been aired [in other circuit cases], we wait to see what the lower courts have said on a question. We don't take it in the first instance.

Judge Gerber echoed these thoughts in his opinion denying my motion for direct appeal when he asked:

How could a decision presented and decided to the Second Circuit in two days (or on any other expedited basis) be helpful to the bankruptcy community, or the public, or the Supreme Court?   If the Supreme Court is to decide an issue that’s the subject of a Circuit split, doesn’t it deserve the best decision the Second Circuit can provide?

Hard to argue with that.  So, per Judge Gerber's sound instruction, we'll leave the "supercharged" Corvette ZR3 6.2L / 638 hp V8 at the dock and instead board the luxurious, brand-spanking-new, Bohai Zhenzhu, destination SCOTUS, with stops at the SDNY and 2d Circuit ports of call.

Bon Voyage!

In today's depressed environment, Howard Beale's famous rant in Network--the 1976 movie that took several academy awards against stiff competition (Rocky, All the President's Men, and Taxi Driver)--sure reads like something that could have been written today:

I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there's nobody anywhere who seems to know what to do, and there's no end to it.

We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be!

We all know things are bad -- worse than bad -- they're crazy.

It's like everything everywhere is going crazy, so we don't go out any more. We sit in the house, and slowly the world we're living in is getting smaller, and all we say is, "Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won't say anything. Just leave us alone."

Well, I'm not going to leave you alone.

I want you to get mad!

I don't want you to protest. I don't want you to riot. I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street.

All I know is that first, you've got to get mad.

You've gotta say,

"I'm a human being, goddammit! My life has value!"

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell,

"I'm as mad as hell, and I'm not going to take this anymore!!" 

Well, Howard's rant is what a lot of panicked plaintiffs' lawyers involved in cases against GM are screaming these days as they watch years of toil on behalf of people seriously injured by defective GM products (like crushed roofs, exploding "side saddle" gas tanks, and collapsing seat backs) potentially go for naught as GM makes its grandest attempt ever to crush an entire class of former customers (presumably including anybody who buys a GM car between now and the closing date of the sale) and existing and future products liability claimants (including those who haven't even been injured yet!) in a sale that many plaintiffs lawyers of record only received written notice of in the past couple of days. 

Those following this blog know my rising concern (even anger) over how products liability claimants were completely stiffed in Chrysler, so much so that Howard's famous rant came to mind!

So, I decided to do something about it, and officially stepped into the fray by filing this Objection to the GM Sale and this Memorandum in Support.  On the brief with me is Public Citizen's Adina Rosenbaum and Allison Zieve, counsel for the Center for Auto Safety, Consumer Action, Consumers for Auto Reliability and Safety, National Association of Consumer Advocates, and Public Citizen.

We should win; whether we do is a "horse of a different color."

***

Many thanks to the Center for Auto Safety's Executive Director, Clarence Ditlow, for his help in organizing the team, Public Citizen's Adina Rosenbaum and Allison Zieve for their tremendous assistance in framing the legal arguments and drafting the pleadings, and to Public Citizen's Director, Brian Wolfman, for his support.

And, of course, special thanks to The Coleman Law Firm's own Bob Coleman for his generosity in dedicating the firm's resources to this important pro bono effort.

The sad, and all too tragic, stories of my clients, taken from the filed objection, are set forth below.  The only thing my clients did wrong here was buy a GM car.  For this act of brand loyalty, they have paid dearly.   It's not enough that people lose their lives and get severely injured from design defects and product flaws, now they and their loved ones get thrown under the bus!

If their stories don't bring a tear to your eye, then you probably support the sale's treatment of product liability claimants too!

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• Callan Campbell is a GM tort victim. On August 17, 2004—a week before she was to start college—18 year old Callan was a front-seat passenger in a 1996 GMC Jimmy when the driver of the vehicle lost control while attempting to make a left turn. The vehicle entered a driver-side leading roll and rolled 1.5 times before ending on its roof. The roof collapsed over Callan’s seat, partially paralyzing her. The strength to weight ratio of the GMC Jimmy roof is about 1.9, which is among the lowest of all GM vehicles. GM’s own tests revealed that roof strengths in rollovers should be 3W to 4W. Callan’s paralysis could have been avoided at a mere fifty dollar cost to GM. Callan’s medical bills total $200,000 for the life-saving treatment she received immediately after the crash. Additionally, Callan’s parents have spent $160,000 renovating their home to accommodate Callan’s physical and medical needs as a C6 incomplete quadriplegic. A life care planner has estimated Callan’s current and future needs for extra doctor visits, medicine, durable equipment and home modifications at $4,518,831.00. An economist has predicted her work loss based on total disability at $4,120,538. Callan is also entitled to significant compensation for pain and suffering including loss of life’s pleasures, loss of dignity and independence, loss of the use of her limbs, and disfigurement.

• Kevin and Nikki Junso are the parents of Tyler, Matt, and Cole Junso. On April 25, 2006, Tyler and Cole Junso were involved a single car rollover accident while driving a 2003 GMC Envoy. During the rollover, the windshield and side windows were knocked out, reducing the strength of the roof structure. The Envoy sustained catastrophic damage to the roof structure, which buckled violently inwardly toward Tyler and Cole. Despite being belted, both occupants were partially ejected from the vehicle during the roll over. Seventeen year old Tyler, the driver, sustained massive skull and neck injuries and died at the scene of the accident. The evidence showed that Tyler’s head was partially outside the vehicle during the roll over sequence, due to the broken window and lateral displacement of the roof structure, and made contact with both the ground and the roof during the accident. The paramedics found Kevin, the passenger, with his left leg out the windshield and his right leg out the passenger side window. Kevin sustained serious injuries to his arms and legs, which eventually led to the amputation of his right leg below the knee.

• GM has been aware of the significant risks of “occupant excursion” if the safety mechanisms in its vehicles fail. Despite this knowledge, GM failed to introduce cost effective safety measures into its designs, which could have included side window plastics or laminates or seat belts resistant to excessive spool out. Not only has the Junso family lost a son as a result of GM’s failure to correct the strength instabilities in its SUVs, but Kevin has also lost his right leg. To date, Kevin has incurred medical bills totaling $555,204.19, and his future medical expenses are predicted to exceed $800,000.

• Edwin Agosto was driving his 2000 Chevrolet Blazer on September 22, 2008, when he lost control of his vehicle causing him to cross the center line and strike a tree. After striking the tree, the car once again crossed the center line and collided with a guardrail where it finally came to rest. Edwin’s airbags failed to deploy throughout the course of the entire accident. Because of that failure, Edwin suffered injuries including multiple spinous process fractures, a heavily comminuted fracture of the left scapula extending into his scapular spine and glenoid, multiple rib fractures, a humerus fracture, a subclavian vein injury, and a post traumatic subdural hygroma upon striking his head on the windshield. Due to these injuries, Edwin spent the next two and a half months of his life in a coma.

• Joseph Berlingieri was parked in a driveway on September 21, 2006 when the driver side impact airbag in his 1998 Cadillac DeVille malfunctioned and deployed. The air bag struck Joseph in his left ear, arm, and shoulder causing trauma injuries including hearing loss, tinnitus, and other serious injuries. The vehicle had previously been recalled for faulty side airbags, and after its repair was warranted to Joseph as being free from defect and suitable for purchase. However, the vehicle was not suitable for use, and was sold to Joseph despite the defective airbag mechanism.

[See Part I of my analysis of Judge Gonzalez's sale opinion here.]

The brilliant lawyer, author, and ex-blogger, Bill Patry (now senior copyright counsel at Google), wrote on his Patry Copyright Blog back in 2005 about the greatest Biblical scholar of all time, Rabbi Shlomo Yitzhak (whom everyone affectionately calls "Rashi").  Bill wrote:

Rashi is used as a learning device for children not because he is simple (he isn't) but because of the unusual nature of his commentary.  His commentary consists of very terse conclusions, but without the questions that prompted the conclusions.  Children are left with the task of asking "What's Bothering Rashi?"  ...  The "What's Bothering Rashi?" approach to learning text is useful in analyzing statutes because it teaches one to ask the why of things, rather than as we almost always do, just read the literal words divorced from what the law would be like in their absence.

Bill's post came to mind in thinking about "What's Bothering Ruthie?" that would prompt her to write a one-liner calling a halt to a sale that remarkably worked its way from bankruptcy filing to cert. review in less time than it takes the average person to buy a used Town & Country.  Here are a few ideas:

• Maybe she doesn't like the lawyers down the street telling her (as reported here by SCOTUS Blog) that "no court, including the Supreme Court, has the authority to hear a challenge by Indiana benefit plans to the role the U.S. Treasury played in the Chrysler rescue."  Tell that to Justice Marshall!

• Or maybe, like her predecessors during the Depression in the Schechter Poultry Corp. v. US case, she's wondering whether (as argued here by Ralph Nader) Congress abdicated the essential legislative functions with which it is vested by letting the Executive Branch alone structure and implement the deal.

• As noted in my Part I analysis, however, I doubt she's losing sleep over whether the sale is a sub rosa plan or whether the absolute priority rule was violated. 

I'm guessing, though, that what bothers her most -- and frankly what's really been bothering me most (hence Part II) -- is the sale's treatment of tort claimants, both present and future, and Judge Gonzalez's cursory justification for such treatment.  He wrote:

Various objections were raised related to property damage claims and personal injury and wrongful death claims, including those which have not yet occurred.  Some of these objectors argue that their claims are not "interests in property" such that the purchased assets can be sold free and clear of them.  However, the leading case on this issue, In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir.2003) ("TWA"), makes clear that such tort claims are interests in property such that they are extinguished by a free and clear sale under section 363(f)(5) and are therefore extinguished by the Sale Transaction.  The Court follows TWA and overrules the objections premised on this argument.  Even so, in personam claims, including any potential state successor or transferee liability claims against New Chrysler, as well as in rem interests, are encompassed by section 363(f) and are therefore extinguished by the Sale Transaction.  See, e.g., In re White Motor Credit Corp., 75 B.R. 944, 949 (Bankr. N.D. Ohio 1987); In re All Am. Of Ashburn, Inc., 56 B.R. 186, 190 (Bankr. N.D. Ga. 1986). The Court also overrules the objections premised on this argument.

Additionally, objections in this category touching upon notice and due process issues, particularly with respect to potential future tort claimants, are overruled as to those issues because, as discussed elsewhere in this Opinion, notice of the proposed sale was published in newspapers with very wide circulation.  The Supreme Court has held that publication of notice in such newspapers provides sufficient notice to claimants "whose interests or whereabouts could not with due diligence be ascertained."  Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 317 (1950).  Accordingly, as demonstrated by the objections themselves, the interests of tort claimants, including potential future tort claimants, have been presented to the Court, and the objections raised by or on behalf of such claimants are overruled....

Another objection related to an asbestos claim raised both the failure to comply with section 524(g) and that the Sale Transaction improperly provides for the release of third parties, but this objection is overruled as to both issues because section 524(g) is inapplicable to a free and clear sale under section 363 and the Sale Transaction does not contain releases of third parties.  Such claims can still be asserted against the Debtors' estate.

There's far more to say about this issue than can be summarized in a blog post that only an insomniac at Zero Hedge can appreciate (as attested by the two redwells on my desk relevant to successor liability issues in bankruptcy, Normal 0 false false false MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} one stuffed with about 25 articles and the other with about 110 cases Normal 0 false false false MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} ).  Here, for example, is an overview of the successor liability issues, written last September after reading about an asset purchaser's claim that it had no responsibility to comply with the Simplicity crib recall. 

Suffice it to say, however, as touched upon in part in these two briefs filed with the Supreme Court by attorneys for some tort claimants, there are a number of decisions out there -- both state and federal -- holding that Section 363(f)'s reference to a sale "free and clear of interests" doesn't permit a court to enter an sale order "free and clear of claims."  As such, the argument goes, Section 363(f) can't be the basis for enjoining a tort claimant's well-established state law rights to assert successor liability claims under the "product line" and "business continuity" exceptions (and all the more so, even Professor Lubben would agree, for future claimants whose injuries arise or become manifest only after the sale).

And why should all this bother Justice Ruthie so much?  Well, maybe because an opinion deciding the seminal case that opened the door to this variation of the so-called "channeling injunction" against non-consenting tort claimants is in its final draft on one or more of the Justices' desks (maybe even hers given the way she pounced from the gate at oral argument before petitioner's counsel had gotten halfway through the second sentence of his opening remarks).  As explained in this neat little summary, the Court is on the verge of deciding Travelers Indemnity Co. v. Bailey, an appeal from the Second Circuit's decision in modern bankruptcy's first mega-case, In re Johns-Manville, in which the Second Circuit held that "while there is no doubt that the bankruptcy court had jurisdiction to clarify its prior [1986] orders [enjoining all third-party derivative claims against Travelers], that clarification cannot be used as a predicate to enjoin claims over which it had no jurisdiction [i.e., direct claims against Travelers by the asbestos plaintiffs that Travelers, as Manville's primary insurer, conspired with Manville to withhold knowledge of the ill effects of asbestos]."  Travelers Cas. and Surety Co. v. Chubb Indem. Ins. Co., 517 F.3d 52, 60-61 (2d Cir. 2008).

The implications of this decision are ginormous (an official word), to say the least, and in many ways the arguments in that case echo those made by the tort claimants in their objections to the Chrysler sale.  I think that's "what's bothering Justice Ruthie" and I think that's what prompted her to stay the sale above all else.

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Thanks for reading, and please excuse the late night errors (though I don't think anyone on the sale side will be excusing this particular one)!  And a special shout-out to my favorite Judge Ruthie, the first to read my blog, who once met Justice Ginsburg at the National Women's Judges Conference and introduced herself as the "other Judge Ruth" and who I know joins me in hoping that Mom and Dad, of blessed memory, are enjoying this all from their perch!

Well it's official, and really no surprise:  Judge Gonzalez in this opinion (WL) approved the sale of Chrysler's assets in the Fiat Transaction "free and clear of liens, claims, interests and encumbrances."

Part I of my quick take on the opinion focuses on the most discussed elements of the case that have caused so much unnecessary heartburn (some caused, I admit, by my own three previous posts).  Here's my thoughts on a few of the key issues in the opinion that I touched upon in prior posts:

• Was it a sub rosa plan (as questioned here)?  The Court said no.  And I actually agree.  It's hard to argue something circumvents the chapter 11 plan process when the debtor wouldn't have survived long enough to be able to propose a plan in the first place.  Arguments that a sale is a sub rosa plan make sense when the debtor can survive to confirmation; they are irrelevant where the debtor can't.

• Was the absolute priority rule violated (as questioned here)?  The Court danced around this issue pretty well, taking the position, well stated in this Credit Slips blog post, that "the allocation of ownership interests in the new enterprise is irrelevant to the estates' economic interests" and that "in addition, the UAW, VEBA, and the Treasury are not receiving distributions on account of their prepetition claims ... [but] under separately-negotiated agreements with New Chrysler ... [that are] not value which would otherwise inure to the benefit of the Debtors' estates." 

Everyone cares about the retirees' medical claims under VEBA, but it's hard to see why this group should get any consideration from the New Chrysler since they will provide no value to the new enterprise.  Moreover, it's quite common in bankruptcy cases (see In re UAL, discussed here) for the current employees to leave the retirees hanging out to dry precisely because they'll provide no value to the new enterprise and the existing employees want to retain whatever benefits they can eke out for themselves.  To this limited extent, therefore, perhaps the flow of consideration does violate the absolute priority rule.  The auto workers union is obviously a tighter and more cohesive group, however, and they refused to do what their comrades in the pilots union did to the retiree pilots, thus enabling the Court here to find that the "unprecedented modifications to the collective bargaining agreement, including a six-year no-strike clause" were sufficient to justify New Chrysler's assumption of obligations to all VEBA claimants, as demanded by the union.

• What are the rules of the game for "last-resort" lenders?  One thing I said in my 10 minute interview with Anthony Mason that didn't make it on TV was that "what goes around, comes around" (as the apparently not so old saying goes) and that here, the secured lenders were getting a taste of their own medicine, so it was hard to feel too sorry for them.  After all, in most bankruptcy cases, the existing secured lender is the lender of last resort, and it is the existing secured lender that takes the hard-line, "take it or leave it" position described by Judge Gonzalez that leaves everyone else gasping for air as it stuffs its demands down everyone's throat, including the court's.  Such practices, Judge Gonzalez tells us, are "troubling to some, but such is the harsh reality of the marketplace."  Further, as I was quoted in my 7 seconds of  fame, "the [governments'] providing the money, and they're the ones who are ultimately going to decide how that money's going to be spent."  And that's pretty much what Judge Gonzalez said, though far more articulately:

The absence of other entities coming forward to fund any transaction highlights the risk presented to distressed companies that are situated similarly to Chrysler.  Accompanying that risk is the lender's ability to dictate many of the key terms upon which any funding will occur.  The hard-fought "take it or leave it" approach that often drives the outcome of this type of negotiation is troubling to some, but such is the harsh reality of the marketplace.  Here, the Governmental Entities, as lenders of last resort, are dictating the terms upon which they will fund the transaction, thereby leaving the Debtors with few options.  Nevertheless, the usual marketplace dynamics play out and the Court applies the same bankruptcy law analysis.  Moreover, the Debtors' CEO testified that the demands from the Governmental Entities were not greater than that presented by other lenders, and in some aspects were not as onerous.... 

[T]he ordinary marketplace dynamic played out with respect to the lenders and whatever ability they had to dictate terms.   The fact that the lenders of last resort happened to be Governmental Entities did not alter that dynamic.  The Governmental Entities did not preclude other entities from participating or negotiating, they merely set forth the terms that they required to provide financing and the parties were either amenable to them or not.  Finally, as noted, the Governmental Entities had no obligation to fund the transaction and Chrysler and Fiat were free to walk away from the negotiations.

• Has the "Rule of Law" Been Withered (as questioned here)?  Maybe, as I'll discuss later in Part II, but not for the reasons the Indiana Pension Funds are arguing on appeal.  In fact, if anything, the following well-worn rules have been affirmed in this case:

  1.  You can't circumvent chapter 11's plan process when you can't even fund next week's payroll.

  2.  You can't violate the absolute priority rule if junior creditors necessary to the new enterprise get something out of the deal.

  3.  Lenders of last resort owe no duty to anyone but themselves and can dictate the terms of a plan or sale so long as the terms aren't unconscionable, which they aren't here.

More to follow, and thanks as always for reading!

Many thanks to the CBS Evening News production team for the call and the opportunity, and to the TV House in Chicago for a cool, comfortable setting in which to give the interview.

5/28/09 Update:  Make that about 7 seconds.  Eight more to go.

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And special thanks to Charles Osgood for including me in his 5/29/09 broadcast.  I well remember the one time I met him when I was fresh out of college and working part-time for the CBS News / NYT Poll during the 1980 presidential election, and he was, as he always has been, the consummate gentleman.