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  • Writer's pictureKirk Hartley

Asbestos Claimants Appeal in GM and Seek Appeal to the Second Circuit, as Do Individual Accident Vic

The Ad Hoc Committee of Asbestos Claimants notice of appeal in GM is here but says only that an appeal is taken (Docket No. 2988). The appeal lists as counsel both Stutzman, Bromberg, Esserman + Plifka, as well as the Caplin + Drysdale firm. Like the other product liability claimants, the Ad Hoc Asbestos Claimants also have moved for a direct appeal to the Second Circuit. The Ad Hoc Committee also has moved for a stay of the sale approval order entered on Sunday night the 5th of July.

The core of the Ad Hoc Committee’s substantive argument is as follows:

“12. Congress has proscribed the very conduct that the Debtors seek to accomplish through their improper Section 363 Sale–i.e., the transfer of substantially all of their assets to a “new” entity that will simply continue operating free from the liabilities of the old entity–in two parallel provisions of the Bankruptcy Code: Sections 1141(d)(3) and 727(a)(1). The Second Circuit has held that claims–and specifically successor liability claims–are not discharged by a corporate liquidation in bankruptcy. In re Goodman, 873F.2d 598, 602 (2d Cir. 1989). The Bankruptcy Court’s erroneous interpretation of Section 363(f) effectively nullifies Sections 1141(d)(3) and 727(a)(1) by improperly allowing the Debtors to circumvent these Code provisions under the guise of a Section 363 sale.

13. Furthermore, the Sale Order purports to allow the Debtors to sell substantially all of their assets free and clear of “claims.” However, successor liability is not a “claim,” but rather is a status a purchaser has under applicable state law. Thus, Section 363 cannot apply to strip a purchaser of that status.”

The Goodman case is a chapter 7 case, not a chapter 11 case, so GM presumably will argue it does not apply. Goodman, however, is a fairly compelling case for the product liability claimants. In Goodman, a businessman and his wife over a period of years created a series of three businesses to do essentially the same work. The first company was party to labor contracts the later companies did not want to honor because the obligations had become inconvenient and expensive, and the first company had tried to discharge the obligations through chapter 7.

The Second Circuit held that the bankruptcy court order could not oust the jurisdiction of the NLRB to determine if the later entities were in fact successors to the old business regardless of the corporate niceties that purported to create differences between the different entities. So, in GM, the argument for the claimants runs that just as the bankruptcy court in Goodman could not deprive the NLRB of its power to consider whether the new entities should suffer successor liability under labor laws, the bankruptcy court in GM can not oust state courts of their traditional jurisdiction to decide whether and when to impose state law tort liability on alleged successor entities. The issues could be decided as matters of statutory construction grounds or constitutional law grounds (due process, 5th amendment takings , and maybe even equal protection under Bush v. Gore), but standard legal rules urge courts to resolve issues as a matter of statutory construction before reaching constitutional issues.

(Ironically, by the way, the Goodman case was argued and lost by Mr. Bruce Zirinsky while at Weil, Gotschal. Today, Mr. Zirinsky is with Greenberg Traurig and is the lead lawyer for the debtor in the Thompson -Hayward Chemical Co. asbestos chapter 11 case for which a chapter 11 plan was recently approved by the same Judge Gerber. Thompson-Hayward is a former manufacturer of Agent Orange and seller of asbestos fibers that is using chapter 11 to end its asbestos litigation issues and to settle out hundreds of millions of dollars of insurance policies that might otherwise be available to future claimants who could file direct actions against insurers.)

Meanwhile, the Individual Accident Litigants in GM also have sought a direct appeal to the 2d Circuit; the papers are here (Docket No. 2990). The accident litigants point out that the 2d Circuit still has not issued an opinion in Chrysler to explain the reasoning behind its judgment to approve the 363 asset sale. The accident litigants argue that this appeal in GM may also inform the Chrysler opinion the 2d Circuit said it would issue in due course, thus sharpening the issues for ultimate appeals to the Supreme Court in both Chrysler and GM.

The Individual Accident Victims further frame the issue in broad societal terms, arguing that society has a real stake in whether Code section 363 can be used to indestructible asset sales followed by de facto liquidations, a technique Wall Street can and does use to cause the bankruptcy code to cause immediate distributions of remaining assets before long tail tort claims emerge and are compensable. The Accident Victims frame the 363 issue as follows:

Indeed, this issue is one of the most important issues facing bankruptcy practitioners and distressed debtors generally.Satisfactory uniform resolution of the scope of Section 363 is critical for the entire nation, particularly since, as Professors Baird and Rasmussen wrote in The End of Bankruptcy, 55 Stan. L. Rev. 751, 752 (2003):

“Corporate reorganizations have all but disappeared. Giant corporations make head-lines when they file for Chapter 11, but they are no longer using it to rescue a firm from imminent failure. Many use Chapter 11 merely to sell their assets and divide up the proceeds…. Rarely is Chapter 11 a forum where the various stakeholders in a publicly held firm negotiate among each other over the firm’s destiny”

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