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  • Writer's pictureKirk Hartley

SCOTUS Denies Cert for GM in the Ignition Switch Cases – Due Process in Bankruptcy Gets Reboot

Due process in bankruptcy has been rebooted to some degree. How? Through SCOTUS’ April 24, 2017 denial of GM’s cert petition from the Second Circuit’s ruling against GM in the intersection between GM’s chapter 11 proceedings and the ignition switch cases. GM’s cert petition had been supported by the U.S. Chamber of Commerce and the National Association of Manufacturers.

The Second Circuit ruling by Judge Chin was plainly correct, in my book, as explained back in 2016. Going further back, in a blog post back on April 16, 2010, I opined that the product liability aspects of the GM chapter 11 were unconstitutional.  As I explained back then, the mass tort chapter 11 outcomes often deprive co-defendants and future claimants of their state law rights. Some co-defendants still in the tort system may want to look afresh at the issues. Indeed,  in a June 26, 2016 article in LAW360, lawyers at McDermott Will made the point that the 2d Circuit ruling is a big deal. I’d guess other big firm lawyers will do so again.

If I say so only by myself, my comments of 2010 are worth repeating today:

“Apparently I missed an important day in law school. That is, I assume there was a day in which some professor explained when and how it is that bankruptcy courts were granted the power to do anything that’s expedient towards allowing the debtor to declare victory in a chapter 11 case. And, apparently that power expands exponentially if some well-paid pro-debtor partisan will put in a reed thin, practically untestable declaration asserting, in effect:

The debtor really needs this injunction to be issued to block some state law rights of other companies and people because gosh darn it, the debtor messed things up to the point it’s in a self-created crisis. The way we can do something that appears maybe useful in the short term is to just take the deal on the table, not ask too many questions, and move forward fast.  It’s just too darned slow, expensive and annoying to conduct a chapter 11 case any other way.

A really candid declarant also would go on to say:

Due process is a nice concept,  but it doesn’t work well in chapter 11. Providing due process takes too long, and it costs too much. The debtor is so darned messed up from its past mistakes and promises that it just can’t afford to honor them. The debtor messed up really badly and so it can’t afford the  time, expense , uncertainty and cash flow hiccups of a chapter 11 case that would provide due process  that respects and protects the state law rights of the tort victims and the co-defendants in the thousands of pending tort cases. That’s especially true for the rights of thousands of tort victims who we cannot quickly  cut a deal with because the victims are spread out around the country, some are grievously hurt and want lots of money, and these darned claimants have not been kind enough to all hire Wall Street lawyers we like to work with to cut quick deals towards achieving the goals of the well-capitalized masters of the universe. Worse yet, the tort cases all include thousands of co-defendants who’ve made cross-claims against the debtor. They are even harder to deal with in some ways. For example, lots of those defendants have insurance company lawyers, and the insurance companies almost never let them do anything important in less than a couple of years. And, some of the insurers have annoying reinsurance treaties that offer them an excuse to claim that each case is unique instead of just a fungible commodity, even though at the end of the day we all know that the insurers only care about the money.

In short, judge, our Excel spreadsheet deal calculations depend on people being paid based on multiples of free cash flow, and those calculations produce much lower numbers if we have to factor in uncertainty. So, please help us get our deal done and earn our administrative priority fees by  holding your nose, issuing that injunction, and dumping all the uncertainty onto the victims and the co-defendants. Somewhere out there there must be rule that says we should provide a fast chapter 11 process – and ignore the constitution – in order to help out the purported financial geniuses who messed up the most, and we should not worry too much about some people who have suffered crippling injuries. Besides, there are trade creditors out there, not to mention all those busy, busy hedge fund traders who are arbitraging the bonds and want to get a deal done now so they can lock in their profits on the trades and move on to the next opportunity to make some money by using chapter 11 to subvert state law and due process.  The debtor really would appreciate  you giving the value of certainty to the 363 sale buyer and the creditors who are easier to deal with than all these creditors involved in all those darned tort claims pending in state and federal courts around our nation.    

The reason behind the above ? The opinion this week in the legal farce commonly known as the General Motors chapter 11 case.  The opinion is by district judge Kaplan, and affirms the bankruptcy court’s order enjoining prosecution of tort claims pending as of the petition for chapter 11.  Susan Beck’s summary article kindly includes links to the opinion and some of the briefs.  Read them at your peril – the results are absurd and the reasoning has nothing to do with real due process.”

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