On July 13, the Second Circuit issued its decision in In re Motors Liquidation Co. and reversed the rulings of the bankruptcy court for the Southern District of New York barring litigants from suing “New General Motors” (the taxpayer financed purchaser of the assets of “Old General Motors”) for claims arising from faulty ignition switches installed in GM vehicles prior to the sale of Old GM’s assets in bankruptcy in 2009. The litigants claimed that ignition switches were defective and caused injuries both before and after the bankruptcy and resulted in numerous injury lawsuits against New GM for its failure to recall these vehicles despite its knowledge of the defect. After disclosing the defect in 2014, New GM moved the bankruptcy court to enforce the “free and clear” aspects of the sale order entered in 2009 and to enjoin litigants from pursuing successor liability claims against New GM.
Since the summer of 2014, Goodwin restructuring lawyers Bill Weintraub and Greg Fox served as designated counsel in these proceedings on issues related to restructuring and, specifically, how the court should treat claims related to accidents that occurred prior to the bankruptcy sale. In April 2015, in a highly fact specific opinion, the bankruptcy court determined that as a result of Old GM’s substantial knowledge of the defect and failure to give proper notice of sale to owners of the defective vehicles, the claimants’ due process rights were violated in connection with that sale. However, the bankruptcy court denied the claimants any relief, determining that they suffered no prejudice as a result of the due process violation because the court would have approved the free and clear sale regardless to avert a liquidation in 2009 that could have been catastrophic to the U.S. economy.
On direct appeal to the Second Circuit, Goodwin was victorious in overturning this portion of the decision. Specifically, the Second Circuit ruled:
“we reverse the bankruptcy court’s decision insofar as it enforced the Sale Order to enjoin claims relating to the ignition switch defect. Because enforcing the Sale Order would violate procedural due process in these circumstances, the bankruptcy court erred in granting New GM’s motion to enforce and these plaintiffs thus cannot be ‘bound by the terms of the [Sale] Order.’”
In so ruling, the court noted that “[d]ue process applies even in a company’s moment of crisis.”