In re Fairchild Aircraft Corp., Bankruptcy No. 90-50257. Adv. No. 94-5113.
| Decision Date | 06 July 1995 |
| Docket Number | Bankruptcy No. 90-50257. Adv. No. 94-5113. |
| Parties | In re FAIRCHILD AIRCRAFT CORPORATION, Debtor. FAIRCHILD AIRCRAFT INCORPORATED, Plaintiff, v. Barbara M. CAMBELL, Individually and as Administratrix of the Estate of Charles E. Cambell, Deceased, Yvonne C. Brooks, Individually and as Administratrix of the Estate of Markvan B. Brooks, Deceased, and R.H. Brooks, Individually, 911*911 Insurance Company of North America, Eastern Foods, Inc., Hooters of America, Inc., Joan W. Duncan, Individually and as Personal Representative of the Estate of G. Dan Duncan, Defendants. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas |
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James A. Hoffman, Clemens and Spencer, San Antonio, TX, Donald R. Anderson, Dennis M. Hill, Phillip G. Pampillo, Drew Eckel & Farnham, Atlanta, GA, for defendants Ins. Co. of North America, Eastern Foods, Inc. and Hooters of America, Inc.
John A. Hagins, Covington, Patrick, Hagins & Lewis, Greenville, SC, for defendant Joan W. Duncan.
Andrew M. Scherffius, Atlanta, GA, for defendant Barbara M. Cambell.
David William Boone, Atlanta, GA, for defendant Yvonne C. Brooks.
Deborah D. Williams, Cox & Smith, Inc., San Antonio, TX, Mark T. MacNamec, Thomas Dundon, Neal & Harwell, Nashville, TN, Geoffrey C. Hazard, Jr., Elizabeth Warren, University of Pennsylvania Law School, Philadelphia, PA, for plaintiff Fairchild Aircraft Corp.
AMENDED* MEMORANDUM DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
CAME ON for consideration the foregoing matter. Fairchild Aircraft Incorporated ("FAI") filed its Complaint for Declaratory and Injunctive Relief in the bankruptcy case of Fairchild Aircraft Corporation ("FAC"). Defendants moved for dismissal for lack of subject matter jurisdiction and failure to state a cause of action. FED.R.CIV.P. 12(b)(2), (6). After denying these motions, both parties moved for summary judgment. After hearing, the court took the matter under submission. This decision now resolves the cross-motions for summary judgment and decides the adversary proceeding.
The issue of future claims in bankruptcy has bedeviled the federal courts for many years now. What happens after a bankruptcy plan disposes of all the assets of a debtor and, years later, someone suffers an injury alleged to have arisen from a defective product produced by the prepetition debtor? Does the injured party have a claim against the successor entity for damages, unaffected by the bankruptcy process? Or may bankruptcy alter or even eliminate those claims before they even mature into an injury? That is the issue with which this decision struggles and attempts to resolve.
The facts surrounding this matter span over a decade, beginning sometime before 1985 and ending with the filing of this adversary proceeding in August 1994. As they relate to the resolution of the present controversy, the facts are undisputed.
Fairchild Aircraft Corporation manufactured and sold commuter aircraft, one a 19-seat passenger aircraft sold to civilians as a Metro III and to the military as the C-26, and the other a smaller aircraft sold as the Merlin II and III or the Fairchild 300. This case concerns the crash of one these smaller aircraft, a Fairchild 300. FAC stopped production of the Fairchild 300 in 1982. FAC continued to sell the aircraft as late as 1985, because it held several of the airframes in inventory. It is undisputed that the aircraft in question in this case was manufactured no later than 1982 and sold no later than 1985 — five years before FAC's later chapter 11 bankruptcy.
FAC filed for chapter 11 relief on February 11, 1990. Shortly after the filing, a chapter 11 trustee was appointed (the "Trustee"), with full authority to operate the debtor's business. The Trustee, Bettina M. Whyte, decided that reorganization was not a viable option for the estate, and solicited a buyer for the company's assets, which she proposed to sell as a going concern. On August 14, 1990, the Trustee entered into an asset purchase agreement with a group of investors who formed a corporation for the purpose of the acquisition, called appropriately enough Fairchild Acquisition, Inc. FAI was to pay $5 million in cash and was to assume liability for FAC's secured debt to Sanwa Business Credit, in the range of $36 million. The estate was to retain some cash, its estate causes of action (including preference actions), and a share of an anticipated tax refund. The asset purchase agreement also contained the following provision, which the acquiring entity maintains was an essential element of the bargain and induced the seller to purchase the assets for as much as it did:
Purchaser shall not assume, have any liability for, or in any manner be responsible for any liabilities or obligations of any nature of Seller or the Trustee, including without limiting the generality of the foregoing: ... (ii) any occurrence or event at any time which results or is alleged to have resulted in injury or death to any person or damage to or destruction of property (including loss of use) or any other damage (regardless of when such injury, death or damage takes place) which was caused by or allegedly caused by (A) any hazard or alleged hazard or defect or alleged defect in manufacture, design, materials or workmanship ...
The sale took place as part of the confirmation of the Trustee's First Amended Plan of Reorganization and was of course subject to the approval of the bankruptcy court. See 11 U.S.C. § 1123(b)(4). On September 17, 1990, the court confirmed the Trustee's Plan and the asset sale agreement which was its central feature. The confirmation order expressly stated that the assets were sold "free and clear of all liens, claims, and encumbrances," except for those liens and encumbrances assumed by the buyer under the plan. See 11 U.S.C. § 1141(c). The order further stated that the purchaser would not "assume, have any liability for, or in any manner be responsible for any liabilities or obligations of any nature of Debtor, Reorganized Debtor, the Trustee or the Fiscal Agent." Finally, the order enjoined and stayed "all creditors, claimants against, and persons claiming or having any interest of any nature whatsoever" from "pursuing or attempting to pursue, or commencing any suits or proceedings at law, in equity or otherwise, against the property of the Debtor's estate ... the proceeds of the sale ... or any other person or persons claiming, directly or indirectly, including the Purchaser under the Asset Purchase Agreement ..."
The court found that the consideration to be paid by FAI (the cash and the assumption of secured debt) was "fair and adequate and fully representative of the maximum value that can be realized at this time for Debtor's Property." The court also made a finding that the notice provided concerning the plan and disclosure statement was reasonable under the circumstances. The Trustee had published notice of the disclosure statement, plan of reorganization and confirmation hearing in the Weekly News of Business Aviation, and in two local newspapers, the San Antonio Light and the San Antonio Express-News.
The Trustee made no provision in her plan for claimants in the position of these defendants. Indeed, the debtor had not even listed any of the owners or operators of FAC aircraft in its bankruptcy schedules, though their identities were available and ascertainable from the records of FAC.1 The Trustee made no particular effort to reach these persons in the plan process, and the plan itself made no particular provision for these persons.
On April 1, 1993, a Fairchild 300 aircraft, originally sold and manufactured by FAC crashed near Blountville, Tennessee. Four individuals lost their lives. Multiple lawsuits were of course filed on the heels of this crash, in both federal and state courts in Georgia, Tennessee and South Carolina. Three of the plaintiffs were persons suing both individually and on behalf of estates of the individuals killed in the aircraft crash. The plaintiffs also included Eastern Foods, Inc. and Hooters of America, Inc., the owners of the airplane, as well as Insurance Company of North America, the owner's insurance carrier. The plaintiffs named FAI as one of the defendants, alleging that the aircraft was defectively manufactured by FAC, and that FAI is now liable for the manufacture and sale of a defective product on a successor liability theory.2 FAI filed this adversary proceeding as a preemptive strike, seeking an order for declaratory and injunctive relief premised on the provisions of the plan, the asset purchase agreement, and the court's order confirming the plan. As such, the plaintiffs in the products liability lawsuits find themselves as defendants in this action for declaratory relief.
The legal issues presented can be stated simply. FAI claims that the provisions of the asset purchase agreement and order confirming the plan "cleansed" the property acquired of any liability for the acts of FAC, including any successor liability growing out of the sale of those assets to FAI by the trustee of FAC's bankruptcy. FAI says that the sale was free and clear of this sort of liability, and that the bankruptcy court should here so declare. FAI also contends that any lawsuit to force liability on FAI based upon its acquisition of assets would violate the bankruptcy court's injunction contained in the confirmation order, and asks the court to enforce that injunction.
FAI would like to stop the defendants in their tracks without ever having to defend against a successor liability lawsuit. It is not hard to understand why. Even if FAI believes the successor liability allegation to have little merit (and that is its position), it must still incur the cost of defense and risk the uncertainty of litigation. Moreover, there are still other FAC aircraft out there, and if another one...
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