What’s Bothering Ruthie? Chrysler Bankruptcy Sale Opinion Analysis – Part II

[6/9/09 PM Update: The United States Supreme Court just cleared the Chrysler sale! "The applications for stay … are denied," the Court wrote in this 2 page per curiam opinion. The Court still may hear the petition, but the petitioners needed to prove likelihood of success not just on the merits, but also "a likelihood that irreparable harm will result from the denial of a stay." Even the tort claimants can’t prove that as they’ll always have their day in court in their respective jurisdictions.]

[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,

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one stuffed with about 25 articles and the other with about 110 cases

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). 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.

***

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!

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Bankruptcy Litigation Blog 2.0

What’s Bothering Ruthie? Chrysler Bankruptcy Sale Opinion Analysis – Part II

Steve Jakubowski

Bankruptcy Litigation Blog 2.0

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