Lack of Prejudice Defeats Procedural Due Process Claim of Plaintiff Class

By: Bryant Churbuck

St. John's Law Student

American Bankruptcy Institute Law Review Staff

            In In re Motors Liquidation Co.,[1] the Bankruptcy Court of the Southern District of New York held that the class of "Pre-Closing Accident" plaintiffs would be unable to proceed[2] with their personal injury claims against the new General Motors (“GM”), rather than the old GM[3], because they suffered no prejudice to support a procedural due process violation,[4] despite the fact that the notice by publication given to the "Pre-Closing Accident" plaintiffs was insufficient.[5]  In Motors Liquidation, several classes of plaintiffs were asserting claims related to an ignition switch defect that was known by GM as far back as 2003.[6]  At least 24 GM business and in-house legal personnel employees knew about the ignition switch defect at the time of GM's 2009 chapter 11 bankruptcy case and section 363 Sale Order.[7]  On July 10, 2009, the sale of Old GM in accordance with the Section 363 Sale Order  closed, forming the new GM.[8]  In the Spring of 2014, GM finally recalled the vehicles with the faulty ignition switch issue.[9] Shortly thereafter, GM announced the ignition switch defect, resulting in several class action lawsuits.[10]

         After the class action cases were filed, GM moved to enforce the section 363(f) "Free and Clear"[11] provision of the section 363 Sale Order, cutting off the plaintiffs' successor liability claims against GM.[12]  In response, the plaintiffs claimed that their procedural due process rights were violated due to insufficient notice being provided by GM at the time the Sale Order was entered.[13]  GM countered by asserting that procedural due process requirements do not apply to section 363 sales.[14]  The court disagreed with GM and held that procedural due process requirements do apply, and examined whether those requirements were met.[15]  In regards to accident victims whom GM was unaware of, the court found that notice by publication was proper because actual notice to either the 27 million people with some defect requiring a recall then or in the future or the 70 million owners of all GM vehicles would have been impractical given the dire financial situation GM found itself in.[16]

            The court could not reach the same result for potential claimants that GM was aware of at the time of its filing.[17]  At least 24 GM business and in-house legal personnel employees knew of the ignition switch defect, yet GM did not recall these vehicles despite the fact that a recall was required by federal law.[18]  While GM did not know precisely who would be injured by the ignition switch defect, it did know that some would be injured.[19]  Nevertheless, the court concluded that all of those with the ignition switch defect were owed actual notice.[20]  However, the mere fact that actual notice was due to the plaintiffs was not enough to maintain a procedural due process violation, as the plaintiffs had to show that they suffered prejudice as a result of the lack of actual notice.[21]  Ultimately, the court held that the "Pre-Closing Accident" plaintiffs could not show that they suffered any prejudice.[22]  The objections to the "Free and Clear" provision that the plaintiffs were asserting were considered and rejected during GM’s  bankruptcy, provided no basis to reconsider any prior rulings, and called for speculation as to political factors.[23]

            Under section 363, a sale may be approved only after notice and hearing.[24]  The importance of notice, and the right to be heard, is something the Supreme Court held to be a fundamental part of an individual’s procedural due process rights.[25]  Despite GM’s assertions to the contrary[26], Circuit Courts have rejected the argument that procedural due process requirements do not apply to section 363 sales.  For example, the Seventh Circuit observed in Fogel v. Zell that norms of fair notice "apply to bankruptcy as to other settings in which a person's legal right is extinguished if he fails to respond to a pleading."[27]  Similarly, the First Circuit held in Western Auto Supply Co. v. Savage Arms (In re Savage Indus.) that because the parties in interest "were never afforded 'appropriate' notice of the chapter 11 proceeding, the chapter 11 plan, or the privately negotiated terms of the asset transfer agreement, not only do their state-law based successor liability claims" survive the bankruptcy proceedings but the claims against "Debtor Industries" do as well.[28]  However, as the court in Motors Liquidation recognized,[29]"the individual interest does not stand alone, but is identical with that of a class."[30]  Notice sufficient to afford one the opportunity to speak may be able to safeguard the rights of all.[31]

            While the court dismissed the "Pre-Closing Accident" plaintiffs' claims in this case, it was largely due to the fact that the issues they raised were previously raised by other parties back in 2009 only to be considered and rejected by the court.[32]  However, another class, the "Economic Loss" class, were prejudiced by overly broad language in the Sale Order that protected GM from liability for acts committed by GM after it exited bankruptcy, an argument which the "Economic Loss" plaintiffs would have successfully asserted had they received actual notice.[33]  In future cases, classes that make legal arguments not previously raised or that impinge the rationale of a  Sale Order or its provisions, may very well find more success than the "Pre-Closing Accident" plaintiffs in this case.  Also, the court's holding that actual notice was required for all of the owners of cars with the ignition switch defect, as well as the court weighing the fact that GM knew of the defect and did not recall the vehicles in violation of federal law, make it more likely that notice will properly be provided to classes of potential, but known, claimants.  Likewise, companies in the same or similar circumstances are more likely to recall their potentially dangerous products, thereby protecting consumers from injuries, and the need for future claims, in the first place, as failure to do so could threaten the finality of any section 363 sale and force the new entity to incur liabilities that could have otherwise been avoided.  Or, courts may require these possible costs be built into the purchase price prior to final approval of any sale.