Elliott v. Gen. Motors LLC (In re Motors Liquidation Co.)

• Decision Date: 13 July 2016
• Docket Number: 15-2848-bkXAP,15-2847-bkXAP,August Term 2015,Docket Nos. 15-2844-bkL
• Citation: 829 F.3d 135
• Parties: In the Matter of: Motors Liquidation Company, Debtor. Celestine Elliott, Lawrence Elliott, Berenice Summerville, Creditors–Appellants–Cross–Appellees, Sesay and Bledsoe Plaintiffs, Ignition Switch Plaintiffs, Ignition Switch Pre–Closing Accident Plaintiffs, Doris Powledge Phillips, Appellants–Cross–Appellees, Groman Plaintiffs, Appellants, v. General Motors LLC, Appellee–Cross–Appellant, Wilmington Trust Company, Trustee–Appellee–Cross–Appellant, Participating Unitholders, Creditors–Appellees–Cross–Appellants.
• Court: U.S. Court of Appeals — Second Circuit

829 F.3d 135

In the Matter of: Motors Liquidation Company, Debtor.

Celestine Elliott, Lawrence Elliott, Berenice Summerville, Creditors–Appellants–Cross–Appellees

Sesay and Bledsoe Plaintiffs, Ignition Switch Plaintiffs, Ignition Switch Pre–Closing Accident Plaintiffs, Doris Powledge Phillips, Appellants–Cross–Appellees

Groman Plaintiffs, Appellants
v.
General Motors LLC, Appellee–Cross–Appellant

Wilmington Trust Company, Trustee–Appellee–Cross–Appellant

Participating Unitholders, Creditors–Appellees–Cross–Appellants.¹

Docket Nos. 15-2844-bkL
15-2847-bkXAP
15-2848-bkXAP
August Term 2015

United States Court of Appeals, Second Circuit.

Argued: March 15, 2016
Decided: July 13, 2016

Gary Peller, Washington, D.C., for Creditors–Appellants–Cross–Appellees Celestine Elliott, Lawrence Elliott, and Berenice Summerville, and Appellants–Cross–Appellees Sesay and Bledsoe Plaintiffs.

Steven W. Berman (Andrew M. Volk, on the brief), Hagens Berman Sobol Shapiro LLP, Seattle, Washington, and Elizabeth J. Cabraser, Lieff Cabraser Heimann & Bernstein, LLP, San Francisco, California, and Rachel J. Geman, Lieff Cabraser Heimann & Bernstein, LLP, New York, New York, and Edward S. Weisfelner, David J. Molton, Howard S. Steel, Brown Rudnick LLP, New York, New York, and Sander L. Esserman, Stutzman, Bromberg, Esserman & Plifka, P.C., Dallas Texas, for Appellants–Cross–Appellees Ignition Switch Plaintiffs.

William P. Weintraub (Gregory W. Fox, on the brief), Goodwin Procter LLP, New York, New York, for Appellants–Cross–Appellees Ignition Switch Pre–Closing Accident Plaintiffs.

Joshua P. Davis, Josh Davis Law Firm, Houston, Texas, for Appellant–Cross–Appellee Doris Powledge Phillips.

Alexander H. Schmidt, Wolf Haldenstein Adler Freeman & Herz LLP, New York, New York, and Jonathan L. Flaxer, Golenbock Eiseman Assor Bell & Peskoe LLP, New York, New York, for Appellants Groman Plaintiffs.

Arthur J. Steinberg (Scott Davidson, on the brief), King & Spalding LLP, New York, New York, and Merritt E. McAlister, King & Spalding LLP, Atlanta, Georgia, and Edward L. Ripley, King & Spalding LLP, Houston, Texas, and Richard C. Godfrey, Andrew B. Bloomer, Kirkland & Ellis LLP, Chicago, Illinois, for Appellee–Cross–Appellant General Motors LLC.

Adam H. Offenhartz, Aric H. Wu, Lisa H. Rubin, Gabriel K. Gillett, Gibson, Dunn & Crutcher LLP, New York, New York,

829 F.3d 143

for Trustee–Appellee–Cross–Appellant Wilmington Trust Company.

Pratik A. Shah, Akin Gump Strauss Hauer & Feld LLP, Washington, D.C., and Daniel H. Golden, Deborah J. Newman, Akin Gump Strauss Hauer & Feld LLP, New York, New York, for Creditors–Appellees–Cross–Appellants Participating Unitholders.

Before: Straub, Chin, and Carney, Circuit Judges.

Chin, Circuit Judge:

On June 1, 2009, General Motors Corporation (“Old GM”), the nation's largest manufacturer of automobiles and the creator of such iconic American brands as Chevrolet and Cadillac, filed for bankruptcy. During the financial crisis of 2007 and 2008, as access to credit tightened and consumer spending diminished, Old GM posted net losses of $70 billion over the course of a year and a half. The U.S. Department of the Treasury (“Treasury”) loaned billions of dollars from the Troubled Asset Relief Program (“TARP”) to buy the company time to revamp its business model. When Old GM's private efforts failed, President Barack Obama announced to the nation a solution—“a quick, surgical bankruptcy.”² Old GM petitioned for Chapter 11 bankruptcy protection, and only forty days later the new General Motors LLC (“New GM”) emerged.

This case involves one of the consequences of the GM bankruptcy. Beginning in February 2014, New GM began recalling cars due to a defect in their ignition switches. The defect was potentially lethal: while in motion, a car's ignition could accidentally turn off, shutting down the engine, disabling power steering and braking, and deactivating the airbags.

Many of the cars in question were built years before the GM bankruptcy, but individuals claiming harm from the ignition switch defect faced a potential barrier created by the bankruptcy process. In bankruptcy, Old GM had used 11 U.S.C. § 363 of the Bankruptcy Code (the “Code”) to sell its assets to New GM “free and clear.” In plain terms, where individuals might have had claims against Old GM, a “free and clear” provision in the bankruptcy court's sale order (the “Sale Order”) barred those same claims from being brought against New GM as the successor corporation.

Various individuals nonetheless initiated class action lawsuits against New GM, asserting “successor liability” claims and seeking damages for losses and injuries arising from the ignition switch defect and other defects. New GM argued that, because of the “free and clear” provision, claims could only be brought against Old GM, and not New GM.

On April 15, 2015, the United States Bankruptcy Court for the Southern District of New York (Gerber, J. ) agreed and enforced the Sale Order to enjoin many of these claims against New GM. Though the bankruptcy court also determined that these plaintiffs did not have notice of the Sale Order as required by the Due Process Clause of the Fifth Amendment, the bankruptcy court denied plaintiffs relief from the Sale Order on all but a subset of claims. Finally, the bankruptcy court invoked the doctrine of equitable mootness to bar relief for would-be claims against a trust established in bankruptcy court to

829 F.3d 144

pay out unsecured claims against Old GM (“GUC Trust”).³

The bankruptcy court entered judgment and certified the judgment for direct review by this Court.⁴ Four groups of plaintiffs appealed, as did New GM and GUC Trust. We affirm, reverse, and vacate in part the bankruptcy court's decision to enforce the Sale Order against plaintiffs and vacate as advisory its decision on equitable mootness.

BACKGROUND

I. Bailout

In the final two quarters of 2007, as the American economy suffered a significant downturn, Old GM posted net losses of approximately $39 billion and $722 million. General Motors Corp., Annual Report (Form 10–K) 245 (Mar. 5, 2009). In 2008, it posted quarterly net losses of approximately $3.3 billion, $15.5 billion, $2.5 billion, and $9.6 billion. Id. In a year and a half, Old GM had managed to hemorrhage over $70 billion.

The possibility of Old GM's collapse alarmed many. Old GM employed roughly 240,000 workers and provided pensions to another 500,000 retirees. Id. at 19, 262. The company also purchased parts from over eleven thousand suppliers and marketed through roughly six thousand dealerships. A disorderly collapse of Old GM would have far-reaching consequences.

After Congress declined to bail out Old GM, President George W. Bush announced on December 19, 2008 that the executive branch would provide emergency loans to help automakers “stave off bankruptcy while they develop plans for viability.”⁵ In Old GM's case, TARP loaned $13.4 billion on the condition that Old GM both submit a business plan for long-term viability to the President no later than February 17, 2009 and undergo any necessary revisions no later than March 31, 2009. If the President found the business plan unsatisfactory, the TARP funds would become due and payable in thirty days, rendering Old GM insolvent and effectively forcing it into bankruptcy.

On March 30, 2009, President Obama told the nation that Old GM's business plan was not viable.⁶ At the same time, the President provided Old GM with another $6 billion loan and sixty more days to revise its plan along certain parameters. President Obama also reassured the public:

But just in case there's still nagging doubts, let me say it as plainly as I can: If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always. Your warranty will be safe. In fact, it will be safer than it's ever been, because starting today, the United States Government will stand behind your warranty.⁷

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As the President stood behind the reliability of GM cars, pledging another $600 million to back all warranty coverage, bankruptcy remained a stark possibility.⁸

II. Bankruptcy

The federal aid did not succeed in averting bankruptcy. Old GM fared no better in the first quarter of 2009—posting on May 8, 2009 a $5.9 billion net loss. General Motors Corp., Quarterly Report (Form 10–Q) 57 (May 8, 2009). But entering bankruptcy posed a unique set of problems: Old GM sought to restructure and become profitable again, not to shut down; yet if Old GM lingered in bankruptcy too long, operating expenses would accumulate and consumer confidence in the GM brand could deteriorate, leaving Old GM no alternative but to liquidate and close once and for all. On June 1, 2009, with these risks in mind, Old GM petitioned for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York.

A. Mechanics of the § 363 Sale

The same day, Old GM filed a motion to sell itself to New GM (also dubbed “Vehicle Acquisition Holdings LLC” or “NGMCO, Inc.”), complete with a 103–page draft sale agreement and 30–page proposed sale order.

Through this proposed sale, Old GM was attempting not a traditional Chapter 11 reorganization, but a transaction pursuant to 11 U.S.C. § 363—a less common way of effecting a bankruptcy. See, e.g., In re Lionel Corp. , 722 F.2d 1063, 1066–70 (2d Cir. 1983) (explaining the history of § 363 ). The usual Chapter 11 reorganization follows set procedures: the company entering bankruptcy (the “debtor”) files a reorganization plan disclosing to creditors how they will be treated, asks those creditors to vote to accept the plan, and then emerges from bankruptcy with its liabilities restructured along certain parameters. See 11 U.S.C. §§ 1121 –1129.⁹ This jostling can take years.¹⁰ In contrast in a § 363 sale of substantially all assets, the debtor does not truly “reorganize.” Instead, it sells its primary assets to a successor corporation, which immediately takes over...