Case brief on the In re: Motors Liquidation Co., case.

February 6, 2023

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  • Case brief on the In re: Motors Liquidation Co., case.

Case name

In Matter of Motors Liquidation Co., 829 F.3d 135 (2d Cir. 2016).

Brief facts 

General Motors Corporation (Hereafter Old GMC) filed for bankruptcy on June 1, 2009. It had been a leader in the automobile manufacturing industry for a long time. The company faced hard times during the 2007-2008 financial crisis. This was due t the fact that consumer spending had greatly diminished. The situation was so bad that Old GMC reported a net loss of $70 billion over the course of 18 months. In a bid to save the company, the government through the Department of Treasury loaned funds to acquire the company and overhaul the company. This would be the New GMC.  

The private efforts of Old GMC to salvage the situation failed and they resorted to filing a Chapter 11 Bankruptcy protection petition. The New GMC was formed about 40 days after this petition. Later on in 2014, they started a move that saw the recall of many of their vehicles. The reason for this was that there was a defect with the ignition systems. The defect would mean that whilst in motion, a driver would suddenly have the engine switched off, airbags and brakes disabled and power steering turned off. There was a high probability of fatal accidents and as such even drivers who had bought cars during Old GMC’s time brought cars in. 

The Old GMC had been protected under 11 U.S.C. § 363 of the Bankruptcy Code, making it free from liability. Under its terms for sale, the New GMC was also made essential free and clear from all liability arising out of the Old GMC’s assets. Therefore, these claims could not, in theory, be brought against the New GMC. 

Issue

Whether the court that granted the Bankruptcy order erred in holding that all claims that arose under the scope of the “free and clear” provision

Answer

Yes

Rule

The debtor in possession has the right to usage, trade or rent the assets of the estate. (11 U.S.C. § 363 (b)(1)) A sale under this can be free and clear of any claims arising out of the possessions (Id. § 363 (f)). There is no definition for interest in the code and this would require courts to carry out an interpretation of the terms. The interpretation should be broad and encompassing all other obligations arising out of ownership. Successor liability claims in this regard still fall under Chapter 11 interests. Claims are defined under Chapter 11 as the right to compensation if this right is reduced to a ruling, has been settled or unliquidated. (11U.S.C.§101(5)). 

Reasoning

The court assessed the two conflicting cases. The petitioners claimed that the New GMC be held liable for the defects under the doctrine of successor’s liability. This would essentially mean that the New GMC inherited the liabilities of the Old GMC. The respondents on their part sought to argue that the Sale Order did not compensate the liabilities arising out of those particular cases and liabilities. 

The court also noted that, the lower bankruptcy court had the jurisdiction to construe the Sale Order in terms of Sale Order and the terms “free and clear” in a broad manner. This is based on the fact that the provision should be broad enough to include the accident compensation claims and financial losses that related to the ignition faults. Thus, the New GMC enforced the Sale Order but the plaintiffs claiming compensation from Old GMC were not bound to the sale order. The court was satisfied that the free and clear clause did not cover individual claims. Thus, Old GMC could not be liable for not having reasonable care n the defect. Enforcing the order in that regard would lead to an abuse of the procedural due process. 

Disposition

Hence, the court affirmed the judgement in part, reversed in part and vacated in part. It held that the court had erred in holding that all claims arising out of the defect were under the definition of free and clear provision. It affirmed that the court was right in finding that the debtor needed to have given a notice to the vehicle owners about the defect.

  • Arguments in Chase’s case for a petition for rehearing en banc to the full Court of Appeals for the Second Circuit

Arguments for Chase

In the present the issue is whether Chase has met the grounds required for a petition for rehearing en banc to the full Court of Appeals for the Second Circuit. 

The reason one files a rehearing petition en banc is to seek the superior court to re-examine the facts of the case and the findings made by the previous bench. As provided in Rule 35 of the FRAP, the grounds for seeking such a petition are that: first, the decision of the court was against what has been held in superior courts thus tainting uniformity of court decision and second, that the case raises an issue of exceptional importance. 

To meet the first requirement the petitioner has to prove that there was a deviation by the trial court from well-established precedent. The decision made by the trial court was in this case a threat to the consistency followed by courts. To meet the second requirement the petitioner has to show that there is in fact a matter of exceptional importance. Here an issue of exceptional importance is one where the panel or trial court’s findings conflict with those of an authoritative body. As such the claimant’s decision conflicts with those found in other panels or tribunals (Bonner v. City of Prichard, Alabama., 661 F.2d 1206 (11th Cir. 1981)). 

As such the petitioners in this case Chase, argues that there is a deviation from precedent set and followed in previous decisions. This precedent was established in superior courts and the lower courts, the trial court in this case included, is bound to that precedent. There were already existing principles that have guided the determination of the matter and the trial court deviated from this. To allow the holding of the trial court to take effect would in essence taint the existing uniformity and consistency.

Secondly, the trial failed to follow existing uniform rules of procedure presents an issue of exceptional importance. First, the panel decision in this case does create a conflict. As argued earlier, there is need to promote and protect the consistency in a case. The same should be maintained as it was in authoritative decisions (Rule 35(b)(1)(B)). However, the ruling of the panel in favour of the creditors in this case was against the principles laid out in superior courts and authoritative bodies. This creates a conflict in the law and does merit a rehearing of the case with the properly laid out framework and principles implemented.

Second, were the panel to persist in its decision and a rehearing denied, there will be a danger of setting a dangerous precedent. The effect of this is that, future panels will be persuaded by this holding and create a long tenacious conflict. A conflict borne out of a principle that defies previously laid out law and authoritative principles. 

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