Limiting Successor Liability for Future Tort Claims

By: Stephanie Y. Lin

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Old Carco,[1] the Bankruptcy Court for the Southern District of New York held that the plaintiffs’ pre-petition claims were barred by a sale order entered following a sale pursuant to section 363 of the Bankruptcy Code (a “363 Sale”) because the court found that the sale order’s “free and clear of any interest in such property” language included the plaintiffs’ claims.  The plaintiffs had filed a class action suit in Delaware state court against Chrysler Group LLC (“New Chrysler”) alleging that their vehicles, which were manufactured and sold by Old Carco LLC (“Old Chrysler”), suffered from a design flaw known as “fuel spit back.”[2]  After the case was removed to the Delaware federal district court, New Chrysler moved to dismiss the class action on the grounds that the plaintiffs’ claims were barred by the sale order that approved the sale of Old Chrysler’s assets to New Chrysler during Old Chrysler’s chapter 11 reorganization (the “Sale Order”).[3]  The Delaware district court then transferred the dispute to the New York bankruptcy court solely to determine the effect of the Sale Order on the plaintiffs’ claims.[4]  Under the Sale Order, New Chrysler assumed liability for only three types of claims that could be brought by future plaintiffs.[5]  The bankruptcy court found that while the sale order did not prevent the plaintiffs’ claims that arose under these three types of liabilities, all other claims that arose prior to the Closing Date were barred.[6]  Specifically, the bankruptcy court found that the plaintiffs or their predecessors (if the plaintiff had bought a used car) had a “pre-petition relationship” with Old Chrysler, and the “fuel spit back” design flaw existed pre-petition.[7]  Because of this, the bankruptcy court determined that the plaintiffs’ claims existed pre-petition, and thus, were barred by the Sales Order.[8]

Section 363(f) of the Bankruptcy Code allows a purchaser to take property of a bankruptcy estate “free and clear of any interest in such property.”[9]  The Second Circuit has recognized that “interests in property” includes “claims” arising from the assets being sold.[10]  In In re Grumman Olson Industries, Inc, however, the Bankruptcy Court for the Southern District of New York limited the scope of the term “claims” by holding that a sales order would not bar post-petition tort claims against successors.[11]  There, the plaintiff, Denise Frederico (“Frederico”), suffered personal injuries when driving a defective truck that was manufactured and sold by the debtor prior to bankruptcy.[12]  The bankruptcy court determined that Frederico’s claims arose post-petition because she had no “contact” with the debtor prior to the accident, which occurred years after the bankruptcy.[13]  Therefore, a sale order did not preclude Frederico’s claims against the purchaser of the debtor’s assets in the 363 Sale.[14]  The District Court for the Southern District of New York affirmed the bankruptcy court’s decision on the grounds that Frederico would be denied due process if her claims were barred when she was not given meaningful notice of the bankruptcy, and thus could not participate in the bankruptcy proceedings.[15]  Unlike Grumman, the Old Carco court found that the plaintiffs or their predecessors had a “pre-petition relationship” with Old Chrysler.[16]  Moreover, the Old Carco court determined that the plaintiffs’ due process rights had not been violated since the plaintiffs had adequate notice of Old Chrysler’s “well-publicized” bankruptcy proceedings and the “fuel spit back” defect.[17] 

The Grumman court’s decision demonstrates that plaintiffs can, in certain circumstances, assert future tort claims against any entity that buys a debtor’s assets.  However, Old Carco limits the scope of successor liability and reinforces the principle that a sale order approving a 363 Sale will still preclude claims where the claimant (or her predecessor) had a pre-petition relationship with the debtor and the product defect existed pre-petition, provided that due process was met.[18]  Although the circuits are split as to when a claim arises,[19] the decision in Old Carco is aligned with the current trend that a claim arises pre-petition if the claimant had a relationship with the debtor’s alleged tortious conduct or defective product prior to the petition date, even though the resulting injury occurred post-petition.[20] 

[20] See, e.g., Jeld-Wen, Inc. V. Van Brunt (In re Grossman’s, Inc.), 607 F.3d 114, 121, 123–25 (3d Cir. 2010), overruling In re M. Frenville Co., 744 F.2d 332 (3d Cir. 1984); Ocean Marine Services Partnership No. 1 v. Digicon, Inc. (In re Digicon, Inc.), 71 F. App’x 442, at *7-8 (5^th Cir. 2003); In re Hoffinger Indus., Inc., 307 B.R. 112, 121–23 (Bankr. E.D. Ark. 2004).