This is the next post in Plan Proponent’s series on the plan confirmation-related recommendations in the ABI Commission Report (and, in particular, its Exiting the Case piece). In this post, we’ll wrap-up Section F of the Report regarding “Plan Voting and Confirmation Issues.” Subsection 5, the focus of this post, addresses Discharge of Claims Upon Confirmation.
Overview of Section 1141
The focus of Subsection 5 is Section 1141 of the Bankruptcy Code which deals with the effect of confirmation. Specifically:
- § 1141(a) provides that a confirmed plan is binding on the debtor and everyone with a claim or interest against the debtor.
- § 1141(b) provides that, unless otherwise provided in the plan, a plan vests estate property back in the debtor.
- § 1141(c) provides that, subject to the plan and (d)(2) and (d)(3), property “dealt with by the plan” is free of all claims and interests.
- § 1141(d) provides that, subject to the limitations listed below, a plan discharges pre-confirmation debts and terminates interests not provided for in the plan.
The Commission focuses on the intersection of § 1141(c) and § 1141(d). However, it’s useful to remind ourselves about the discharge exceptions. Section 1141(d) doesn’t discharge:
- Claims not provided for in the plan or confirmation order.
- Individual debtors until plan payments are complete (with exceptions we won’t cover).
- Individual debtors from debts excepted under § 523.
- Corporate debtors under liquidating plans who don’t engage in post-confirmation business.
- Corporate debtors from certain tax and “qui tam” obligations.
- Debts covered by a discharge waiver that occurs after the filing.
[A quick aside: In 2012, I had the “pleasure” of having Judge Gerald Tjoflat (the longest serving federal appeals judge still in active service, says Wikipedia) “teach” me during an Eleventh Circuit oral argument about qui tam claims in an ERISA appeal that, except for Judge Tjoflat’s curious analogy, had nothing to do with qui tam claims. The term “qui tam” is an abbreviation for the Latin phrase “qui tam pro domino rege quam pro se ipso in hac parte sequitur” (“who pursues this action on our Lord the King’s behalf as well as his own”)–thanks again, Wikipedia. In particular, § 1141(d)(6) refers to the qui tam obligations that arise under the False Claims Act where a private citizen (a “relator” or whistleblower) sues on behalf of the government to remedy an injury incurred by the government (e.g., fraud on a government program). The private citizen receives a portion of any recovery. In turn, § 1141(d)(6) protects that recovery from being discharged by corporate debtors.]
Discharge and Successor Liability
The Commission focuses primarily on the impact of § 1141(c) on potential successor liability claims. Although § 1141(c) renders all property “dealt with under the plan” free and clear of claims and interests, the Commission points out that some courts have limited § 1141(c)’s reach in the successor liability context on Constitutional due process grounds. Under non-bankruptcy law, a transferee can, in limited circumstances, become liable for claims against a transferor that arose prior to a given transfer. That liability is known as “successor liability.” The requirements for successor liability differ across jurisdictions, but it can arise in a number of different ways (e.g., an express or implied assumption of liability; a merger or consolidation; when the transferee is really just a “continuation” of the transferor; when fraud is premised on avoiding the liability, etc.).
In bankruptcy, the issue of successor liability often arises in 2 contexts: (1) free and clear assets sales under § 363 and (2) asset transfers pursuant to a confirmed plan. In other words, to what extent will § 363 (for asset sales) or § 1141(c) (for confirmed plans) avoid successor liability? Product liability (as in the GM case) is a common issue. What if the claim only arose after confirmation? What if it arose before confirmation, but the claimant wasn’t aware of the claim or even the bankruptcy case until after confirmation?
Resolution of the issue generally boils down to (1) sufficiency of notice and (2) extraordinary facts (e.g., fraud and/or collusion) that demand a recognition of successor liability.
Essentially, the Commission recommends for § 1141 what it recommended for § 363:
“In the context of a section 363x sale, a trustee should be able to sell assets free and clear of any successor liability claims (including tort claims) other than those specifically excluded from free and clear sales by these principles.”
Basically, that means that when we’re in the § 1141(c) context, successor liability can only be stripped to the extent that it’s consistent with the U.S. Constitution, as a threshold matter, and then only to the extent that it’s consistent with the following Commission recommendations regarding § 363(f):
- Items that can be transferred free and clear: civil rights liabilities; successor liability in tort; and successor liability in contract.
- Items that cannot be transferred free and clear: easements, covenants, use restrictions, usufructs, or equitable servitudes that run with the land; environmental liabilities and related social policies that run with the land; successor liability under federal labor laws; and, subject to § 363(h) or (i), partial, competing, or disputed ownership interests.
- Police/Regulatory Power Limitation: § 363(f) sales can’t violate or impede the “police or regulatory power of the federal government or a state government” if such government could, despite § 362(a), “enforce those rights against” the debtor or the estate during the case.
In other words, the claim protection provided in Chapter 11 plans should be as broad as the protections recommended by the Commission for § 363 sales. That’s consistent with the Commission’s recommendation that, in some circumstances, § 363 sales should be subject to the same level of notice and scrutiny that plans are subject to under § 1129. We discussed that in more detail here. The Commission concludes that the ability to sell free and clear shouldn’t depend on whether the debtor chooses to sell via 363 or via a plan. And by keeping them similar, reasons the Commission, we can avoid the debtor choosing a 363 sale over a plan when a plan is more feasible or the better alternative (and vice-versa).
Our local judges tend to be wary of free and clear sales for reasons dealing with notice and due process. That’s likely less a comment about their view of the limitations of 363 and 1141 and more a comment about bankruptcy attorneys’ tendency to be complacent and lazy about issues of notice and due process. “We served a few folks, judge. No one objected. Can you wipe the title clean for all of mankind, and do it on an expedited basis so we can close this afternoon?” And that really is the gist of it: How good’s the notice?
Finally, the General Motors “Ignition Switch” litigation is probably the very best immediate example of the successor liability issue. In a nutshell, the issue in that case was whether “New GM,” which bought the assets of “Old GM” in GM’s 2009 Chapter 11 “free and clear” pursuant to § 363, is subject to claims arising from an ignition switch defect that resulted in the recall of 2.6 million vehicles. On April 15, 2015, Judge Gerber issued a 134 page order upholding the original sale order and confirming that successor liability claims were barred.
We’ll leave you with 3 links about the GM case (among many possible links):
- A Reuters article summarizing the case and the most recent order. (Here’s a bonus Wall Street Journal article if you have access.)
- The order itself, which is now on appeal in the Second Circuit.
- A related $200M+ class action complaint filed earlier this month by pre-petition GM claimants against the United States on the basis of the Takings Clause of the Fifth Amendment.
[Steve Jakubowski, of Robbins, Salomon & Patt, Ltd. and founder of The Bankruptcy Litigation Blog (the first bankruptcy blog), represents the claimants. Steve has always been friendly to our blog when he didn’t have to, and we appreciate that.]
In our next and final post on the ABI Commission Report, we’ll discuss Chapter 11 Exit Orders.
And now, as The Daily Show likes to say, your 2-part “Moment of Zen” on the GM issue: