New Bankruptcy Opinion: SAN FRANCISCO CITIZENS AGAINST EVICTION v. INNOCENTI, LLC – Dist. Court, ND California, 2016




Case No. 16-cv-02179-EMC.

United States District Court, N.D. California.

July 8, 2016.

San Francisco Citizens Against Eviction Sheila Bakhtiari, Appellant, represented by Anthony Ray Flores, Law Office of Anthony R. Flores.

Innocenti, LLC, Appellee, represented by Jennifer Connors Hayes, Dentons US LLP & Michael Adam Sweet, Fox Rothschild LLP.


Docket No. 14.

EDWARD M. CHEN, District Judge.

Currently pending before the Court is a second request for an extension of time filed by Appellant San Francisco Citizens Against Eviction (“SFCAE”).

SFCAE, along with Sheila Bakhtiari and Anthony Flores, initiated this bankruptcy appeal in or about April 2016. Appellants appealed an order from the bankruptcy court holding SFCAE and Mr. Flores in contempt and further holding them liable for monetary sanctions (more than $23,000). Appellants’ opening brief was due on June 16, 2016. On June 14, 2016 — i.e., only two days before the opening brief was to be filed — SFCAE and Mr. Flores asked for an extension of time to file the brief. SFCAE and Mr. Flores argued that the underlying matter would likely be settled or dismissed and so “the requested extension will promote judicial economy and the interests of justice by conserving the resources of the Court and the parties.” Docket No. 10 (Amended Mot. at 1). The bankruptcy trustee opposed the request for an extension, noting that, “[e]ven if the Bankruptcy Court were to dismiss the Innocenti bankruptcy case, there is nothing to suggest that the Bankruptcy Court would not retain jurisdiction to enforce the Sanctions Order.” Docket No. 11 (Opp’n at 2). The Court ultimately granted in part SFCAE and Mr. Flores’s request, giving them an additional two weeks (rather than the requested twenty-nine days) to file their brief.

On July 1, 2016 — i.e., the day the opening brief was due — Mr. Flores moved to voluntarily dismiss his appeal on the ground that it was premature. [1] See Docket No. 13 (motion). As for SFCAE, it asked for another extension to file its opening brief so that it would have “a little time to determine whether to dismiss its appeal [on the basis that it was premature] or to retain new counsel to pursue its appeal.” Docket No. 14 (Mot. at 1). According to SFCAE, its current counsel — Mr. Flores — “is seeking to voluntarily dismiss his appeal and he will no longer be representing SFCAE if it intends to pursue its appeal now.” Docket No. 14 (Mot. at 1). SFCAE’s request for an extension is the motion currently pending before the Court.

The Court hereby DENIES SFCAE’s motion. As the bankruptcy trustee points out, the motion was filed on SFCAE’s behalf by Mr. Flores, and, even though SFCAE and/or Mr. Flores claim that Mr. Flores is the organization’s current counsel, there is evidence to the contrary. For example, in an e-mail dated March 26, 2016, Mr. Flores stated to the bankruptcy trustee that “I no longer represent SFCAE due to contempt and client conflicts.” Docket No. 18 (Hayes Decl., Ex. 1) (e-mail).

Because the Court is denying SFCAE’s motion, its opening brief is now overdue and, in light of that situation, the Court now orders SFCAE to show cause as to why its appeal should not be dismissed for failure to prosecute. SFCAE shall have three weeks from the date of this order to file a response. SFCAE is advised that it must have counsel make an appearance and file the response on its behalf. See Civ. L.R. 3-9(b) (providing that “[a] corporation, unincorporated association, partnership or other such entity may appear only through a member of the bar of this Court”). Because the Court does not have direct contact information for SFCAE, it orders Mr. Flores to serve a copy of this order on SFCAE within two court days (by mail and e-mail). Mr. Flores shall also give telephone notice (i.e., of the contents of this order) to SFCAE within two court days. Mr. Flores shall file a proof of service within four court days certifying that service was made and notice given as required by this order.

Finally, the Court orders Mr. Flores to clarify whether Ms. Bakhtiari is an appellant in this case. The notice of appeal indicates that she is, but subsequent papers filed by Mr. Flores do not identify her as an appellant. Also, the bankruptcy court’s order is directed to SFCAE and Mr. Flores, not Ms. Bakhtiari. Mr. Flores shall file a declaration clarifying Ms. Bakhtiari’s status within four court days of this order.

This order disposes of Docket No. 14.


[1] Because the bankruptcy trustee did not oppose the motion, the Court ultimately granted it. See Docket No. 20 (order).

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New Bankruptcy Opinion: RSH LIQUIDATING TRUST v. MAGNACCA – Bankr. Court, ND Texas, 2016



Joseph C. Magnacca, Robert E. Abernathy, Frank J. Belatti, Julie A. Dobson, Daniel R. Feehan, H. Eugene Lockhardt, Jack L. Messman, and Edwina D. Woodbury, Defendants.

Adversary No. 15-04076-rfn.

United States Bankruptcy Court, N.D. Texas, Fort Worth Division.

June 8, 2016.


RUSSELL F. NELMS, Bankruptcy Judge.

In this case, the plaintiff, a trust created for the benefit of RadioShack’s creditors, alleges that chief executive officer and director Joseph Magnacca engineered a transaction that delivered RadioShack into the hands of Standard General, its largest shareholder, in order to further Magnacca’s personal ambitions. It also alleges that RadioShack’s independent directors were fully aware of Magnacca’s conflicted loyalties and yet permitted him to pursue his personal agenda, knowing that it likely would spell disaster for the company.

According to the Trust, Standard General’s attempts to co-opt Magnacca’s loyalty manifested themselves both in actions and assurances. First, Standard General and its chief investment officer, Soohyung Kim, caused Magnacca to be appointed to the board of American Apparel, a struggling affiliate of Standard General. Then, they led him to believe that other opportunities awaited him. In return, Magnacca allegedly guided RadioShack into an ill-fated recapitalization transaction with Standard General and away from other alternatives that would have brought more value to the company.

The Trust alleges that the independent directors breached their duty of loyalty when they approved Magnacca’s appointment to the board of American Apparel, and then made him the point man to negotiate with Standard General with respect to the financing that allegedly led to RadioShack’s demise.

The complaint raises two nagging questions. First, why would Magnacca sacrifice his position as head of one of America’s most “iconic” retailers in exchange for such paltry and illusory consideration? Second, why would the independent directors knowingly sacrifice the company so that Magnacca could achieve his personal agenda? It never answers these questions.

One might say that it is not the plaintiff’s job to explain the personal motivations of men and women; that the facts speak for themselves. But, where, as here, the directors are said to have breached their duty of loyalty, it is fair to ask why. That is because if there is no satisfactory answer, it suggests that the duty at issue is not loyalty, but care.

I find no cognizable claim that any of the directors of RadioShack, including Magnacca, breached his or her duty of loyalty. It is possible that the directors may have breached their duty of care. But, duty-of-care claims are exculpated by RadioShack’s charter. So, all claims against parties in their capacities as directors must be dismissed. But, Delaware law provides no exculpation for claims against officers. Count two states a claim for breach of the duty of care against Magnacca in his capacity as CEO. So, the motion to dismiss that claim is denied.

I. Principals and Parties

A. RadioShack

RadioShack Corporation was a well-established retailer of consumer electrical goods for almost a century. (AC ¶ 23) Based in Fort Worth, Texas, it operated more than 4,100 stores throughout the United States. (Id.) On February 5, 2015, RadioShack filed for voluntary relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. (AC ¶ 15) RadioShack operated its business for less than 60 days following its bankruptcy filing. (Id.) Those operations ceased when the company closed more than half its operations, and sold substantially all of its remaining locations to Standard General. (Id.)

B. Standard General

Standard General is an investment firm that manages “event driven” opportunity funds. (AC ¶ 36) Its managing partner and chief investment officer is Soohyung Kim. (Id.) Standard General and Kim beneficially owned 9.8 percent of RadioShack’s common stock. (AC ¶ 37)

C. The Trust

The plaintiff, RSH Liquidating Trust, was created by RadioShack’s plan of reorganization, which was confirmed on October 2, 2015. (AC ¶ 19) The Trust was empowered by the plan to continue this lawsuit, which originally was filed by the Official Committee of Unsecured Creditors for RadioShack. (AC ¶ 17) The principal beneficiaries of the Trust are creditors of RadioShack. (AC ¶ 20)

D. The Defendants

Joseph C. Magnacca is the former chief executive officer and a former member of the board of RadioShack. (AC ¶ 21) The complaint alleges that Magnacca had conflicted loyalties when he negotiated the transaction that is the subject of this lawsuit.

Defendants Robert E. Abernathy, Frank J. Belatti, Julie A. Dobson, Daniel R. Feehan, H. Eugene Lockhardt, Jack L. Messman, and Edwina D. Woodbury are former members of RadioShack’s board. (AC ¶ 22) While the complaint alleges that these directors breached their fiduciary duties to RadioShack, it does not challenge their disinterestedness or independence.

II. Facts

In early 2013 RadioShack hired Magnacca as CEO to lead the company in a hoped-for turnaround of its business. (AC ¶ 25) To assist Magnacca, the company hired AlixPartners to provide restructuring advice and Peter J. Solomon Company (“PJSC”) to assist in raising capital. (AC ¶ 26) In December 2013 RadioShack entered into two new loan facilities: a 5-year, $585 million secured credit agreement with G.E. Capital (the “G.E. Capital Loan”); and a $250 million term loan with Salus Capital Partners (the “Salus Loan”). (AC ¶¶ 27-28) Significantly, the Salus Loan prohibited RadioShack from closing more than 200 stores in a year without Salus’s consent. (AC ¶ 29)

Notwithstanding the new financing, in February 2014 the directors were advised that the company’s liquidity prospects were so dire that they needed to consider “strategic alternatives such as joint ventures, partnership, investments and/or a sale . . . to maximize value for [the company’s] stockholders.” (AC ¶ 31) In March 2014 RadioShack announced that it would close approximately 1,100 of its 4,300 stores. (AC ¶ 32) These closures would reduce working capital needs from $200-$250 million to $100-$150 million. (Id.) But Salus refused to consent to the closures. (AC ¶ 33) Because of that refusal, in April 2014 the directors expanded the scope of PJSC’s engagement by directing it to follow a parallel path of raising capital or pursuing a sale transaction. (AC ¶ 34)

By July 2014 the company’s liquidity prospects still had not improved. (AC ¶¶ 45-46) But, instead of pursuing a sale or other alternative, the directors began to consider a recapitalization plan led by Standard General, the company’s largest shareholder. (AC ¶¶ 36, 37)

Standard General had “standing to push things.” (AC ¶ 37) According to the Trust, this was due in part to the relationship between Magnacca and Kim. (AC ¶ 39) Magnacca and Kim communicated frequently by text message. In those messages, Magnacca assured Kim that, “I’m there for you” and that “I’m all in with you. Let me know what you need. I’ll be anyplace anytime.” (Id.)

According to the Trust, Kim reciprocated Magnacca’s loyalty. He caused Standard General to appoint Magnacca to the board of directors of American Apparel, a struggling company in which Standard General had a substantial interest. (AC ¶ 40) Kim advised Magnacca that it was an “important time for [Magnacca] to begin to establish [himself] beyond [RadioShack]” because given what was happening at RadioShack “having something else going on might be healthy.” (Id.)

The board of RadioShack approved Magnacca’s request to serve on American Apparel’s board. (AC ¶ 43) And, knowing that Magnacca served in that capacity, it nevertheless advised Kim to work directly with Magnacca to negotiate the recapitalization. (Id.)

Even though RadioShack’s financial condition was fragile, Kim opposed a bankruptcy alternative. (AC ¶ 48) To him, bankruptcy was “a dead-end road” that would lead to RadioShack’s total liquidation. (Id.) Instead, Kim proposed that Standard General purchase a participation in the G.E. Capital Loan. (AC ¶ 49) The new participation would provide temporary liquidity by freeing up discretionary borrowing base reserves that were hamstringing the company. (Id.)

RadioShack’s management and advisors worked to assess whether this proposal was viable. (AC ¶ 51) Standard General first presented its recapitalization plan to the board on August 28, 2014. (AC ¶ 57) As discussions progressed, Standard General and Magnacca allegedly marginalized or worked around company advisors who wanted the company to explore other turnaround opportunities. (AC ¶¶ 58-60)

Standard General’s plan to purchase a participation interest in the G.E. Capital Loan failed to materialize because G.E. Capital refused to sell an interest to Standard General. (AC ¶ 62) So, Standard General changed its strategy to acquire the entire G.E. Capital Loan. (AC ¶ 63) Under this plan, Standard General and certain hedge funds would convert the original $535 million asset-based revolver into separate components: a term loan of $275 million; a $120 million letter of credit; and new revolving loans up to $140 million. (Id.) The existing $50 million asset-based term loan would remain intact. (Id.) Standard General and the hedge fund lenders would also agree to forbear from imposing discretionary borrowing base reserves until March 15, 2015. (Id.) This would allow RadioShack to purchase inventory for the 2014 holiday season, although, in fact, that never happened. (Id.)

A critical component of Standard General’s plan was the “Recapitalization and Investment Agreement.” (AC ¶ 64) Under that agreement, Standard General would be entitled to convert funded obligations of $120 million into a majority interest in RadioShack of between 50 to 80 percent of the company’s stock. (Id.)

The amended credit agreement would replace discretionary borrowing base reserves with additional events of default if certain steps did not occur before March 16, 2015. (AC ¶ 65) Those steps included: giving Standard General the right to nominate four people to RadioShack’s seven-member board; amending or replacing RadioShack’s contract with Sprint; completing a rights offering for new preferred shares in RadioShack; and the company having a minimum liquidity of $100 million in January 2015. (Id.)

At a two-hour board meeting on October 2, 2014, all of the independent directors approved the Standard General proposal. (AC ¶85) However, Magnacca did not participate in the vote. (Trust Br. at n. 7, p. 24) The transaction became effective immediately. (AC ¶ 85)

Unfortunately, the transaction with Standard General (which I refer to herein as the “Transaction”) did nothing to reverse RadioShack’s insolvency. (AC ¶ 97) On February 2, 2015, the New York Stock Exchange delisted RadioShack’s common stock. (AC ¶ 98) Three days later, RadioShack filed for bankruptcy. (Id.)

III. Procedural Background

The unsecured creditors’ committee of RadioShack filed this lawsuit in the United States District Court for this district and division on August 31, 2015. Immediately thereafter, the District Court referred the lawsuit to me.

When it was commenced, the lawsuit also named Kim, Standard General and Wells Fargo Bank as defendants. Those claims have been settled. (AC ¶ 12) On October 29, 2015, the Trust filed its Amended Complaint, [1] wherein, among other things, it substituted itself as plaintiff. The defendants have moved to dismiss the complaint in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6).

The defendants have agreed that I may enter a final judgment in this case. The Trust has not yet agreed to trial in my court or the entry of a final judgment by me. But, it does agree that I may enter a final order on this dispositive motion. [2]

IV. The Complaint

In count one, the Trust alleges that all defendants breached their fiduciary duties by abdicating their responsibilities as directors. It alleges that, even though RadioShack was undergoing a change of control, the directors made no attempt to survey available alternatives or seek out the best price for the company, steps they should have taken under the Delaware Supreme Court’s ruling in Revlon v. McAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) . Next, it alleges that even though they knew that Magnacca was conflicted by his relationship with Standard General, the directors nevertheless permitted him to act as chief negotiator on behalf of RadioShack. And, despite knowing that Magnacca was pushing aside and undermining other professionals hired by RadioShack, the directors yielded their responsibilities to him and followed him down the only path he would permit the company to pursue. That path led to the Transaction, a refinancing that the directors not only knew would not solve RadioShack’s liquidity problem, but which was, in fact, reverse-engineered by Standard General to ensure RadioShack’s failure and Standard General’s control of the company when that failure occurred.

In count two, the Trust alleges that Magnacca breached his fiduciary duty as an officer of RadioShack. Relying on essentially the same facts as in count one, the Trust contends that as chief negotiator of the Transaction, Magnacca acted under a conflict of interest and allowed RadioShack to enter into a transaction that he knew favored Standard General and operated to the detriment of RadioShack.

In count three, the Trust alleges that the directors received a fraudulent transfer. Under the Recapitalization and Investment Agreement, RadioShack purported to release the directors from any claims related to the Transaction. The Trust alleges that the release was constructively fraudulent because RadioShack received no consideration for the release. It also alleges that the release was procured by actual fraud because the directors bargained for the release with the intent to hinder, delay and defraud creditors. The Trust does not seek damages against the directors in count three, but requests that the release be avoided.

V. The Motion To Dismiss

In their motion to dismiss count one, the defendants contend that: the Transaction is not a Revlon transaction, thus negating the application of enhanced judicial scrutiny; the directors are protected by the business judgment rule; the complaint does not allege facts supporting a claim for breach of the duty of loyalty or its subsidiary duty of good faith, thus negating an entire fairness review; and any claims for breach of the duty of care are fully exculpated.

Magnacca moves to dismiss count two because even though it is directed at his actions as an officer, it fails to allege facts that distinguish his actions as an officer from those where he acted as a director.

All defendants move to dismiss count three as moot because inasmuch as they have no liability under count one, they have no need to rely on the release provision.

VI. Standard for Motions To Dismiss

The defendants have moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), which applies to this adversary proceeding pursuant to Rule 7012 of the Federal Rules of Bankruptcy Procedure. To survive the motion, the complaint must contain sufficient factual allegations, which, if accepted as true, state a claim for relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) . When considering a motion to dismiss, I accept all well-pleaded facts as true and view them in the light most favorable to the plaintiff. Vanderbrook v. Unitrin Preferred Ins. Co. (In re Katrina Canal Breaches Litig.), 495 F.3d 191, 205 (5th Cir. 2007) . But I do not accept conclusory allegations or legal conclusions as true. R2 Invs. LDC v. Phillips, 401 F.3d 638, 642 (5th Cir. 2005) .

VII. Analysis

A. Duties, Presumptions and Burdens Under Delaware Law

Because RadioShack is a Delaware corporation, Delaware law governs the duties of the directors with respect to the Transaction. Under Delaware law, directors owe two fiduciary duties — care and loyalty. Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989) . But, directors of Delaware corporations enjoy the protections of the business judgment rule. As such, they are presumed to have “acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) . So strong is this presumption that its application is often outcome determinative. Mills, 559 A.2d at 1279 .

A plaintiff who alleges that directors have breached their fiduciary duties can overcome the business of judgment rule in one of two ways. First, it can allege facts showing that the transaction is one as to which the business judgment rule does not apply in the first place. Or, it can allege facts that overcome the very presumptions that underlie the rule. Here, the Trust purports to do both.

First, the Trust contends that the business judgment rule does not apply because the Transaction is governed by the Delaware Supreme Court’s ruling in Revlon, which requires that in a sale of control transaction, the directors must act “reasonably to seek the transaction offering the best value reasonably available to the stockholders.” Paramount Comm., Inc. v. QVC Network, Inc., 637 A.2d 34, 43 (Del. 1994) . If Revlon applies, a court must apply enhanced scrutiny to ensure that the directors acted reasonably. Id. at 45. Once enhanced judicial scrutiny is applied, it is the directors who have the burden of establishing the reasonableness of their actions. Unitrin, Inc. v. American General Corp., 651 A.2d 1361, 1374 (Del. 1994) .

The negation of the business judgment rule by a well-pleaded Revlon claim is not necessarily dispositive when it comes to duty-of-care claims. If the company’s charter has an exculpation provision as permitted by Delaware law, [3] the directors are shielded from liability for a breach of their duty of care. Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 239 (Del. 2009) . RadioShack’s charter has such a provision. So, even if Revlon applies, it is not sufficient as an initial matter for the Trust to plead only duty-of-care claims. Instead, it must plead facts demonstrating that the directors breached their duty of loyalty. That is because loyalty breaches are not subject to exculpation. Id. Here, the Trust alleges that the directors breached their duty of loyalty by abdicating their responsibilities when they approved the Transaction.

But, the Trust does not rely exclusively on Revlon. It also argues that even if Revlon does not apply, it has pleaded facts that demonstrate that the directors breached their duty of good faith in approving the Transaction. The duty of good faith is a subsidiary of the duty of loyalty. Stone ex. rel . AmSouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del. 2006) .

A failure to act in good faith may be shown where “a fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation” or “intentionally fails to act in the face of a known duty to act.” In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 64-67 (Del. 2006) . But in the transactional context, “[an] extreme set of facts is required to sustain a disloyalty claim . . . .” Lyondell, 970 A.2d at 243 . [4]

If the Trust alleges facts that state a claim for a breach of the duty of loyalty, then the Transaction is reviewed under the entire fairness standard. Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1164 (Del. 1995) . And, once that standard is triggered, even duty-of-care claims cannot be dismissed at the pleadings stage as long as the facts supporting those claims are intertwined with duty-of-loyalty claims. Bridgeport Holdings Inc. Litig. Tr. v. Boyer (In re Bridgeport Holdings, Inc.), 388 B.R. 548, 565 (Bankr. D. Del. 2008) ; Aldina v. Corp., 2002 Del. Ch. Lexis 156 (Del. Ch., Nov. 8, 2002) .

B. The Directors Did Not Breach Their Duty of Loyalty

1. The Trust Has Standing To Pursue Claims on Behalf of Creditors

In Lyondell Chemical Company v. Ryan , the Delaware Supreme Court held that there is only one Revlon duty — “to `[get] the best price for the stockholders at a sale of the company.'” 970 A.2d at 242 quoting Revlon, 506 A.2d at 182 . This articulation of the Revlon duty presents two initial problems for the Trust, the first of which is easily disposed of. Revlon and Lyondell speak in terms of procuring the best price for the benefit of stockholders. But here, the primary beneficiaries of this suit are RadioShack’s creditors. The Delaware Supreme Court has laid to rest any doubt about this issue. It has held that when a company is insolvent, Revlon’s protection extends to the company itself, thus making creditors its primary beneficiaries. N. Am. Catholic Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) . The Trust alleges that RadioShack was insolvent at all relevant times. So, if Revlon applies, it is of no moment that no recovery may reach stockholders.

2. Even Though the Transaction Contemplated the Possibility of a Merger, Revlon Scrutiny Is Not Automatically Mandated

The second hurdle presented by Lyondell’s articulation of Revlon’s “one” duty is not so easily surpassed. Because Lyondell explains that Revlon’s one duty is to get the best price “at a sale of the company,” the defendants argue that Revlon only applies when the company is sold. The Trust disagrees. As it notes, Lyondell itself says that the duty applies “when a company embarks on a transaction . . . that will result in a change of control.” Lyondell, 970 A.2d at 242 .

The Trust is correct that Revlon has been applied outside the confines of traditional sales. For example, the Delaware Supreme Court has applied Revlon not just to stock sales, but to mergers as well. See, e.g., QVC, 637 A.2d at 34-39 ; Lyondell, 970 A.2d at 235 ; C & J Energy Services, Inc. v. Miami Gen’l. Employees’ and Sanitation Employees’ Ret. Tr., 107 A.3d 1049 (Del. 2014) .

Here, the Transaction did at least contemplate the possibility of a merger. (RadioShack Form 8-K, October 3, 2014 at 5 (“Under the Recapitalization Agreement, the Company is obligated to enter into a merger agreement with a newly formed, wholly owned subsidiary of the company and seek stockholder approval of the merger promptly after the consummation of the Rights Offering.”)) [5]

So, does the fact that the Transaction contemplated the possibility of a merger between RadioShack and a newly-formed, wholly-owned subsidiary automatically require me to apply Revlon scrutiny? I do not think so. “It is too often forgotten that Revlon, and later cases like QVC, primarily involved board resistance to a competing bid after the board had agreed to a change of control, which threatened to impede the emergence of another higher-priced deal.” C & J Energy, 107 A.3d at 1053 . Indeed, Revlon’s concern was that “when a board implements anti-takeover measures there arises `the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation . . . .'” Revlon, 506 A.2d at 180, quoting Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985) .

While I acknowledge that Revlon scrutiny can apply to mergers, I consider it lazy jurisprudence to focus on the mere possibility that a merger might have occurred and permit that to be the tail that wags the dog when it comes to applying Revlon scrutiny. Instead, I must examine the “specific circumstances” of the Transaction to see if it is the type of transaction that raises the concerns that Revlon was intended to address. Paramount v. QVC, 637 A.2d at 46 .

I find few such concerns in this case. First, there is no allegation that any director other than Magnacca was acting in his or her own interest. Indeed, there is no suggestion as to why any disinterested director was motivated to elevate Magnacca’s self-interest over the best interest of the company. Yet, Delaware law is clear that “each director has a right to be considered individually when [he faces] claims for damages in a suit challenging board action.” In re Cornerstone Therapeutics Inc., 115 A.3d 1173, 1182 (Del. 2015) . That “individualized consideration does not start with the assumption that each director was disloyal.” Id.

3. Standard General’s Right To Foreclose Under the Amended Credit Agreement Did Not Constitute a Change of Control Under Revlon

Next, I examine how the change of control was to be effectuated in this case. After all, Revlon only applies when a company embarks on a transaction that “will result in a change of control.” Lyondell, 970 A.2d at 242 (emphasis supplied). According to the Trust, the “cornerstone” of Standard General’s scheme was acquiring control of RadioShack’s senior debt. (AC ¶ 4) By doing so, Standard General “could capture the potential turnaround value for itself through a foreclosure in bankruptcy at a fire sale price.” (Id.)

The notion that capturing control of a corporation via foreclosure constitutes a change of control under Revlon is novel. I know of no authority for such a position. But, more troubling than any lack of precedent is the fact that the right to foreclose in the event of default is a right that exists in every secured transaction. If Revlon can be extended to secured transactions because “control” can be transferred via foreclosure, then the presumptions of the business judgment rule would be eliminated from so many routine transactions that the exceptions would swallow the rule itself.

Moreover, the basis to apply Revlon to the secured financing here is even more attenuated. After all, the Transaction substituted Standard General as the lender under an existing loan facility with G.E. Capital. If the “control” sought by Standard General was the control it could exercise by right of foreclosure, then it is the exact same type of control exercised by G.E. Capital. So, arguably, no “change” of control occurred because that right already existed.

But, according to the Trust, the Standard General facility was more insidious than the G.E. Capital facility because it amended the credit agreement to replace discretionary borrowing base reserves with new events of default. (AC ¶ 65) Under those amendments, if certain steps that would “realize Standard General’s change in control” did not occur by March 16, 2015, any such failure would be considered to be an event of default. (Id.)

Setting aside temporarily the question of whether foreclosure can ever be the type of change of control envisioned by Revlon, the suggestion that these changes to the credit agreement were more likely to lead to foreclosure than the borrowing base reserves is belied by the complaint itself. After all, the reserves were part of a package that “presaged the company’s collapse.” (AC ¶ 29) They permitted G.E. Capital to require RadioShack to set aside collateral to provide G.E. Capital with comfort that RadioShack could cover its obligations. (Id.) That in turn not only restricted RadioShack’s ability to use those earmarked amounts, but removed those assets from its borrowing base, thus limiting its access to revolving loans. (Id.) All of this exacerbated RadioShack’s liquidity problem. (Id.) Indeed, so dire was the company’s condition that only months after completing the G.E. Capital transaction, RadioShack was scrambling to revise its business plan. (AC ¶ 31)

If the Trust is suggesting that the amended credit agreement with Standard General was more likely to lead to foreclosure than the credit agreement with G.E. Capital, then any such allegation is speculative at best. I need not accept it as true. So, while I resist the notion that a secured transaction can be a change-of-control transaction in the first place, I fail to see how the alleged change-of-control aspects of the amended credit agreement effected a change of control here.

4. The Possibility That a Portion of Standard General’s Debt Might Be Converted to Equity Does Not Mandate Revlon Scrutiny

The Transaction did have one feature that is not common to most secured financings. The parties agreed that under certain conditions Standard General could convert funded obligations of $120 million into a new series of RadioShack preferred stock. (AC ¶ 76) The effect of this conversion would be to permit Standard General to own 50% to 80% of the equity of the company. (AC ¶¶ 4, 86) According to the Trust, this conversion feature mandates Revlon review.

It is true that lower courts in Delaware have employed a Revlon analysis in the context of loan transactions where part of the consideration was convertible notes or warrants. Binks v., Inc., 2010 Del. Ch. Lexis 98 (Del. Ch., April 29, 2010) ; Equity-Linked Investors, L.P. v. Adams, 705 A.2d 1040 (Del. Ch. 1997) . However, in both of those cases the courts assumed, without deciding, that Revlon applied. Binks, 2010 Del. Ch. Lexis 98 at * 24 ; Equity-Linked, 705 A.2d at 1055 . In neither case was the application of Revlon outcome determinative because the courts ruled for the defendants even under the enhanced judicial scrutiny standard.

Applying Revlon here could be outcome-determinative. In the context of a motion to dismiss, shifting the burden to demonstrate reasonableness to the directors is significant. Because the directors must rely solely on allegations that tend to cast their actions in the dimmest light, it is challenging for them to meet this initial burden. So, I cannot simply assume that Revlon applies and leave the issue for another day. I must decide whether the conversion feature gives rise to Revlon review. I conclude that it does not.

First, in order for the conversion right to be operative, RadioShack had to have $100 million in liquidity on January 15, 2015 and successfully renegotiate its contract with wireless supplier Sprint. (AC ¶ 76) The conditions to the conversion of debt to equity belie the notion that the Transaction implicates Revlon scrutiny. The Delaware Supreme Court has held that Revlon’s one duty does not arise simply because a company is “in play.” Lyondell, 970 A.2d at 242 . Instead, it arises when a company embarks on a transaction that “will result” in a change of control. Id.; see also Arnold v. Soc’y for Savings Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994) (holding that there is no change in control when control “remains in a large, fluid, changeable and changing market”). Here it was not certain that a conversion of debt to equity would ever occur.

But, there’s more. As if these patently conditional aspects of the transaction were not enough, the Trust alleges that the conditions to conversion (for example, the liquidity condition) would never be met. (AC ¶ 77) Indeed, the Trust alleges that the business forecasts underlying the assumptions for conversion were “fanciful.” (AC ¶ 90) Moreover, according to the Trust, the directors knew that these conditions would never be met. (AC ¶¶ 76, 77) For his part, Magnacca knew the “contingencies . . . were impossible to achieve.” (AC ¶ 110) The direct (or at least reasonable) inference to be drawn from these allegations is that in approving the Transaction, the directors knew they were approving nothing more than a secured financing which, as I have noted, should not mandate Revlon scrutiny. [6]

5. The Possibility That Standard General Might Control the Board Did Not Signal a Change of Control

A third alleged change-of-control feature in the Transaction was the provision under the Recapitalization and Investment Agreement that RadioShack’s board would be reconstituted to give Standard General control of RadioShack’s board. (AC ¶ 65) But, again, this reconstitution was conditioned upon the debt-to-equity conversion, an event that might never happen and that the Trust alleges never would. [7]

6. The Cumulative Elements of the Transaction Did Not Presage a Change of Control

As the foregoing analysis reveals, each element of control to be exercised by Standard General as part of the Transaction was either not subject to Revlon review to begin with (the right to foreclose), or was so conditional that it might never occur (the debt-to-equity conversion and board control).

But, the Trust argues that I must consider the cumulative effect of these features. The argument is that one way or the other Standard General would end up owning or controlling RadioShack. It attempts to bolster this argument by noting that shortly after RadioShack filed for bankruptcy, Standard General finalized its scheme by credit bidding its debt for the company’s most profitable stores, thereby executing the foreclosure it planned all along. (AC ¶ 100)

It is tempting to adopt this holistic approach to change of control and simply move on to scrutinizing the transaction under Revlon. But, I cannot do so. According to the Trust, gaining control of RadioShack through its secured debt was the “cornerstone” of Standard General’s plan. (AC ¶ 4) Because both Standard General and the directors allegedly knew that the conversion of debt to equity would never occur (AC ¶¶ 76, 77), that aspect of the transaction was merely ancillary to the secured financing. And, as I have previously noted, I know of no authority or sound policy that would cause me to extend Revlon to financing transactions in general or this one in particular.

Finally, if it is appropriate to employ hindsight to determine if, in fact, a particular transaction was a change-of-control transaction, then hindsight tells us that the conversion feature of the Transaction had nothing to do with RadioShack’s failure. If RadioShack’s failure can be ascribed in whole or part to the Transaction, it is because it failed as a financing, not as an equity play. (See AC ¶¶ 77-79) Indeed, the Trust agrees. Not one of the benchmarks that would have brought about a conversion of debt to equity ever occurred.

7. The Duties Proffered By the Trust Are Not Revlon Duties

Next, the very nature of the duties sought to be imposed by the Trust causes me to question whether these are Revlon claims. As I have noted, Revlon’s one duty is to get the best price at a sale of the company. Lyondell, 970 A.2d at 242 . But, because the Transaction does not neatly fit the paradigm of a sale, the Trust asks me to extrapolate other duties from Revlon. These include the duty to maximize the “immediate value” of the company by aggressively auctioning the company to the highest and best bidder (AC ¶¶ 2, 4, 11, 91) or the duty to stop, file for bankruptcy and liquidate the company (AC ¶¶ 11, 93, 94).

It is edifying to articulate these proffered duties as affirmative duties in the context of the facts of this case. According to the Trust, when a company enters into a secured financing that could result in foreclosure or converting debt to enough equity to give the lender a majority ownership in the company, then the board must aggressively auction the company to maximize immediate value or file for bankruptcy and liquidate.

As an initial matter, the proffered duties do not logically flow from the transaction itself. The assertion that embarking on a secured financing that might transfer equity control to the lender compels the board to put the company up for auction or file for bankruptcy is flawed logic. This is so even if the company is in dire financial straits.

Moreover, the duties proffered by the Trust are not Revlon duties in any event. Even in the context of a classic sale of a company’s stock, a board is not required to conduct an active auction of the company’s stock. Lyondell, 970 A.2d at 242 . If this is so, how does such a duty arise in the context of a secured financing with conversion rights?

The Trust’s alternative assertion that the board should have placed the company in bankruptcy in order to preserve the “immediate value” of the company is a permutation of the argument that a board has a duty to avoid deepening a company’s insolvency. But, no such cause of action exists under Delaware law. Trenwick Am. Litig. Tr. v. Ernst & Young, 906 A.2d 168, 175 (Del. Ch. 2006), aff’d sub. nom. Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438 (Del. 2007) .

In summary, the Transaction is not a Revlon-type transaction. The duties the Trust would have me ascribe to the Transaction are not Revlon duties. I can only conclude that Revlon does not apply.

C. The Complaint Does Not Allege Facts That Rebut the Business Judgment Rule

1. The Transaction Can Be Explained On Grounds Other Than Bad Faith

If Revlon does not apply, then the Transaction is not subject to enhanced judicial scrutiny. So, to survive a motion to dismiss, the Trust must allege well-pleaded facts to overcome the business judgment rule. That is, it must allege facts that belie the presumption that the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company. Parnes v. Bally Entertainment Corp., 722 A.2d 1243, 1246 (Del. 1996) . That presumption may be rebutted only in “rare cases where the decision under attack is `so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.'” Id. quoting In re J. P. Stevens & Co., 542 A.2d 770, 780-81 (Del. Ch. 1988) . “The decision must be `egregious,’ `lack any rational business purpose,’ [8] constitute a `gross abuse of discretion,’ or be `so thoroughly defective that it carries a `badge of fraud.'” Aldina v. Corp., 2002 Del. Ch. Lexis 156, * 13 (Del. Ch., Nov. 8, 2002) (citation omitted). The Trust argues that this is such a case. I disagree.

The Trust points to Parnes v. Bally as authority for its position. In Parnes, the plaintiff, a shareholder of Bally, challenged the fairness of the process pursuant to which Bally was merged into Hilton, as well as the price that the merger produced. 722 A.2d at 1245 . According to the plaintiff, as a condition to his support for the merger, Bally’s chairman and chief executive officer, Arthur Goldberg, demanded that he personally receive millions of dollars in cash and other assets. Id. at 1246. Parnes alleged that other interested acquirers would have paid more for Bally, but were discouraged from doing so due to Goldberg’s illegal demands. Id. The chancery court characterized Goldberg’s demands as egregious. The Delaware Supreme Court called them a bribe.

Here, according to the Trust, Standard General arranged for Magnacca to be appointed to the board of American Apparel, an affiliate of Standard General. Magnacca’s appointment to the board of American Apparel was a “possible relationship build” with Standard General and a chance to establish himself beyond RadioShack. (AC ¶ 40) RadioShack’s board not only was aware of Magnacca’s appointment to the American Apparel board, it approved it. And, notwithstanding the relationship between Kim and Magnacca, the board made him the point man in the negotiations leading up to the Transaction.

In contrast to Goldberg, who allegedly engineered the sale of Bally for less money so that he personally could receive millions in compensation from Hilton, Magnacca received from Kim the appointment to the American Apparel board and “the promise of future opportunities” with Standard General. (AC ¶ 5) But normally the mere “hope of better employment opportunities” is not the type of interest that calls into question one’s loyalty. Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1170 (Del. 1995) .

In Parnes, Bally allegedly was sold for less money because other suitors refused to match the bribes Hilton agreed to pay to Goldberg. It is easy to characterize Goldberg’s actions and the board’s acquiescence to them as transgressions of bad faith. But, here, the decision to refinance rather than liquidate is not a choice that can only be explained on the grounds of bad faith. “Even when a firm is insolvent, its directors may, in the appropriate exercise of their business judgment, take action that might, if it does not pan out, result in the firm being painted in a deeper hue of red.” Trenwick, 906 A.2d at 174 .

Moreover, the complaint itself alleges facts that support the decision to approve the Transaction. Those include: improving the liquidity of the company; eliminating borrowing base reserves that were “hamstringing” the company; and bridging RadioShack from its immediate cash crunch in October 2014 through the Christmas season when its financial condition hopefully would improve. These facts belie the notion that the Transaction had no rational business purpose. [9]

2. The Trust’s Bad Faith Claims Strain Credulity

The Trust complains that Magnacca gave special deference to Standard General. It alleges that he and Standard General worked around RadioShack’s other advisors, that he gave Standard General “unprecedented access” to RadioShack, and that he refused to consider or develop alternatives to Standard General’s plan. These allegations might appear less sinister if Magnacca had not built a close relationship with Kim. But, even viewed in the light of that relationship and accepting the allegations as true, it is difficult to make the leap that the Trust would have me take. Fairly construed, the complaint alleges that Magnacca led the board to approve the Transaction knowing that it would lead to Standard General foreclosing on RadioShack’s most valuable assets. The Trust suggests this was a price Magnacca was willing to pay in return for a directorship on another failing company [10] and the vague promise of a soft landing with Standard General. By itself, that is a bold claim.

But, the boldness does not end there. The Trust alleges that the independent and disinterested directors not only were aware of Magnacca’s conflict, but that they knew that the Transaction would never bring about a conversion of debt to equity. (AC ¶¶ 76, 77) So, shockingly, they allegedly knew Magnacca was self-dealing, and that the Transaction would lead to foreclosure. And, yet, the Trust never purports to explain why the independent directors would knowingly sacrifice RadioShack to foreclosure. And, given that they had nothing to gain from foreclosure, the Trust should at least try to explain their motivations. See Miramar Firefighters Pension Fund v. Abovenet, Inc., 2013 Del. Ch. Lexis 200 at * 22, n. 58 (Del. Ch., July 31, 2013); In re BJ’s Wholesale Club, Inc., 2013 Del. Ch. Lexis 28 at * 10 (Del. Ch., Jan. 31, 2013). The fact that the Trust does not — or perhaps, cannot — explain why the independent directors would willingly surrender RadioShack to such a fate suggests a fatal flaw in count one: the allegations against the independent directors are speculative and conclusory and, as such, are entitled to no weight in the context of a motion to dismiss.

We now know that the Transaction did not save RadioShack. In hindsight, we might say that the directors could have done more. But, if the directors failed to do all that they should have done, they breached their duty of care, not their duty of loyalty. Lyondell, 970 A.2d at 242 . And, they are exculpated from liability for any breach of the duty of care.

In sum, Magnacca’s and the board’s actions were not egregious. The terms of the Transaction were not so outrageous that they can only be explained as being the product of bad faith. The complaint fails to state a claim for breach of loyalty as to Magnacca and the independent directors. Count one must be dismissed.

D. The Complaint States a Claim

Against Magnacca as an Officer of RadioShack

In count two the Trust alleges that Magnacca breached his fiduciary duty as an officer of RadioShack. Magnacca moves to dismiss this claim on one ground — that the Trust has failed to plead facts showing that he acted solely in his capacity as an officer when he negotiated and recommended approval of the Transaction.

In Arnold v. Soc’y for Sav. Bancorp, the Delaware Supreme Court held that when a defendant is sued as both an officer and a director, the petition must specify actions taken by a defendant in his capacity as an officer “as distinct from his actions as a director.” 650 A.2d 1270, 1288 (Del. 1994) But, more recently, it held that the same facts that make it reasonable to infer that a defendant violated his duty as a director can establish the violation of the same duty as an officer. Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009) . It may be possible to reconcile Arnold and Gantler [11] but I do not attempt to do so here. That is because the complaint states a claim that Magnacca breached his duty of care in his capacity as an officer in any event. The board delegated to Magnacca the responsibility of negotiating the Transaction with Kim. It is not clear whether in doing so Magnacca acted in his capacity as CEO or director. See In re Plains Expl. & Prod. Co., 2013 Del. Ch. Lexis 118 at * 18 (Del. Ch., May 9, 2013) (“Delaware law is clear that in certain circumstances it is appropriate [for the board] to enlist the efforts of management in negotiating a sale of control.”) (emphasis supplied). But, in the context of a motion to dismiss, reasonable inferences must be drawn in favor of the plaintiff. It is reasonable to infer that at least some of Magnacca’s actions were taken in his capacity as an officer.

In my ruling on count one, I found that the Trust had not stated a claim against Magnacca for breach of the duty of loyalty. Because of the exculpation provision in RadioShack’s charter, I had no need to examine his or the other directors’ duty of care. But, while the exculpation provision shields directors from liability for a breach of their duty of care, it does not shield officers from such liability. 8 Del. C. § 102(b)(7). So, Magnacca, as an officer, cannot assert exculpation as a defense to duty-of-care claims.

Magnacca has not moved to dismiss count two on the ground that it fails to state a claim for breach of the duty of care. He also has not moved to dismiss it on the basis of the business judgment rule. [12] I cannot interpose these defenses on his behalf in his capacity as an officer. [13]

Because the motion to dismiss count two rests solely on Arnold, and I conclude that the Trust has met its pleading burden even if Arnold controls, I deny the motion to dismiss count two.

E. Count Three Fails To State a Claim for Actual or Constructive Fraud

In count three the Trust seeks to avoid a release that RadioShack gave the directors in the Recapitalization and Investment Agreement. According to the Trust, in section 11.13 of that agreement, RadioShack released the directors from claims relating to the Transaction. (AC ¶ 113) The Trust seeks to avoid the release under sections 544 and 548 of the Bankruptcy Code as the product of actual or constructive fraud.

The defendants premise their motion to dismiss this claim on the same grounds that support their motion to dismiss count one. In essence, they argue that because the complaint fails to state a claim as to count one they have no need to rely upon the release, and it is premature for the Trust to foreclose that reliance. In a footnote in their reply brief they also argue that the Trust has failed to allege facts that state a claim for actual fraud.

I grant the motion to dismiss the actual fraud claim because the Trust has not alleged facts supporting such a claim with particularity as required by Federal Rule of Civil Procedure 9(b). In light of my ruling on count one, it would be difficult, if not impossible, to allege such facts. So, I see no need to dismiss with leave to amend.

Also, I will grant the motion to dismiss the constructive fraud claim. A key element of any such claim is that the defendants received something of value. 11 U.S.C. § 548(a)(1)(B); TEX. BUS. COMM. CODE §§ 24.005(a)(2), 24.006(a). Based upon my conclusion that the directors did not breach their duty of loyalty and are exculpated against liability for any duty-of-care claim, I can only conclude that they received nothing of value by way of the release. For these reasons, I dismiss count three. [14]

VIII. Conclusion

Judges are naturally and rightly reluctant to dismiss cases at the pleadings stage before meaningful discovery has occurred. This reluctance is due in part to a concern that fuller discovery might lead to a cognizable claim. It is also due to the judge’s concern that if he is wrong, injured parties will be denied their day in court. These concerns are only compounded where, as here, thousands have been injured by the collapse of an iconic retailer.

But extraordinary injury does not justify a court setting aside its own judgment as to what is right under the law. Moreover, directors are entitled to the same protections under the law as all other litigants. If the claims against them lack merit, it is of little comfort to them that other injured parties had their day in court. One who has suffered the expense, indignity, and stress of defending his name and reputation in a public forum may find that eventual exoneration is somewhat hollow. That is why judges are not free to defer making hard decisions out of concern that there may be “something more.”

It is safe to say that RadioShack’s directors did not employ a perfect process in approving the Transaction. But they did not breach their duty of loyalty. The claims against them in count one must be dismissed.

The Trust has stated a claim against Magnacca in his capacity as an officer for breach of the duty of care. The motion to dismiss count two is denied.

The directors received no value from the release in the Recapitalization and Investment Agreement. Count three fails to state a claim for constructive or actual fraud. It must be dismissed.

[1] For the sake of expediency, I refer to the Amended Complaint as the “complaint.”

[2] Stated differently, the Trust agrees that I need not submit proposed findings and conclusions to the District Court pursuant to 28 U.S.C. § 157(c)(1). This consent is sanctioned by Wellness Int’l. Net. Ltd. v. Sharif, 135 S.Ct. 1932 (2015) .

[3] 8 Del. C. § 102(b)(7).

[4] This standard applies even when Revlon is implicated. Lyondell, 970 A.2d at 243 .

[5] The defendants introduced into the record certain S.E.C. documents relating to the Transaction. (see Aff. of A. Perez, dkt. # 20).

[6] Another feature of the Transaction that allegedly signaled a change of control was its requirement that RadioShack establish a six-person “Transaction Committee” consisting of three members designated by a Standard General affiliate. (AC ¶ 64) This committee was entrusted with overseeing and coordinating discussions regarding recapitalization transactions and the implementation of an interim operating plan for RadioShack. (Id.) But, I fail to see how “coordinating discussions” is an exercise of control. Likewise, I fail to see how implementing an interim operating plan is the type of activity that Revlon was intended to address.

[7] If the conversion occurred, the newly constituted board would consist of RadioShack’s CEO, two independent directors reasonably satisfactory to RadioShack and Standard General, and four people nominated by Standard General, but at least two of whom were required to satisfy NYSE listing requirements for director independence. (RadioShack Form-3 Registration Statement, Dec. 12, 2014 at p. 2) Because the transaction essentially called for the appointment of four independent directors (even assuming Magnacca was not independent), reasonable minds can differ on whether Standard General would “control” the board.

[8] “Rationality” is a lower standard of review than “reasonableness.” In re Toys “R” Us, Inc., 877 A.2d 975, 1000 (Del. Ch. 2005) .

[9] The facts of this case are also significantly different from those in Aldina v., 2002 Del. Ch. Lexis 156 . In Aldina, the plaintiff alleged that the CEO of the acquired company in a merger negotiated for himself a majority ownership of a valuable subsidiary of the acquired company. The plaintiffs alleged that the CEO received the shares at a grossly unfair price in exchange for his recommendation and approval of the transaction. Id. at * 18. This in turn may have led to the diversion of company funds to the CEO and the shareholders receiving a grossly unfair price for their shares. Id. Again, if true, these allegations are difficult to explain on any grounds other than bad faith. But, they are a far cry from the allegations in this case.

[10] American Apparel filed its own bankruptcy case in 2015.

[11] The two decisions may be explained by the fact that prior to Gantler the Delaware Supreme Court had not explicitly held that the duties owed by officers are identical to those owed by directors. Gantler, 965 A.2d at 709 .

[12] The business judgment rule protects officers just as it does directors. Cede & Co. Cinerama, Inc. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) .

[13] I also cannot raise a causation defense on his behalf. Magnacca points to the fact that the Transaction required board approval as proof that he could only have been acting in his capacity as a director. In doing so, he suggests that because he could not have caused any injury as an officer, he could only have been acting as a director. But Magnacca does not assert causation itself as a defense to liability.

[14] The Trust does not allege that officers were released under section 11.13. So, even though I have not dismissed the duty-of-care claims against Magnacca in his capacity as an officer, I do not construe count three to assert a claim against Magnacca in that capacity.

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New Bankruptcy Opinion: RANDOLPH STAIR AND RAIL COMPANY v. WEAVER COOKE CONSTRUCTION, LLC – Dist. Court, North Carolina, 2016




No. 5:15-CV-254-BR.

United States District Court, E.D. North Carolina, Western Division.

June 28, 2016.


W. EARL BRITT, Senior District Judge.

This matter is before the court on Randolph Stair and Rail Company’s (“Randolph Stair”) appeal from the 27 August 2014 and 28 May 2015 orders of United States Bankruptcy Judge Stephani W. Humrickhouse. The issues have been fully briefed and are ripe for disposition.

The procedural and general factual background of the underlying proceeding has been set forth in prior orders of the court, see, e.g., E. Carolina Masonry, Inc. v. Weaver Cooke Constr., LLC, No. 5:15-CV-252-BR, DE # 77 (E.D.N.C. Jan. 20, 2016), and the court will not repeat them here. Appellant Randolph Stair is a party with whom appellee Weaver Cooke Construction, LLC (“Weaver Cooke”) subcontracted to furnish and install the floor line relief angles (also referred to as shelf angles [1] ) at the subject construction project. Weaver Cooke’s claims against Randolph Stair arise out of shelf angles allegedly missing from areas of the project.

On 27 August 2014, the bankruptcy court denied Randolph Stair’s motion for summary judgment to the extent it was based on the statute of limitations defense as to Weaver Cooke’s negligence and breach of express warranty claims. Applying the three-year statute of limitations under N.C. Gen. Stat. § 1-52, with the discovery rule in N.C. Gen. Stat. § 1-50(a)(5)f, the bankruptcy court determined that the existence of issues of material fact precluded it from concluding as a matter of law that Weaver Cooke was, or should have been, aware of the missing shelf angles more than three years prior to the filing of its claims against Randolph Stair in June 2012. Specifically, the bankruptcy court concluded that “[t]he condition Weaver Cooke complains of was likely latent and difficult to detect,” (DE # 1-1, at 8), and that “conflicting testimony exists as to whether Weaver Cooke instructed Randolph Stair to omit shelf angles from certain locations,” (id. at 9.) On 28 May 2015, the bankruptcy court denied Randolph Stair’s motion for reconsideration of the 27 August 2014 order, finding that Randolph Stair had not established any basis for reconsideration. The bankruptcy court has certified these orders as final, and this court has likewise done so.

This court will review de novo the bankruptcy court’s legal conclusions and mixed questions of law and facts and will review for clear error its factual findings. See E. Carolina Masonry, Inc., DE # 77, at 3-4. The court also reviews de novo the bankruptcy court’s order denying summary judgment. See Nader v. Blair, 549 F.3d 953, 958 (4th Cir. 2008) .

Having reviewed the briefs and record in this case, the court concludes that genuine issues of material fact exist as to (1) whether Weaver Cooke instructed Randolph Stair (or was otherwise involved in the decision) to omit shelf angles at certain locations and (2) whether Weaver Cooke was or should have been aware of the missing shelf angles in or before November 2007 [2] based on its inspection/supervision of Randolph Stair’s work or not until March 2012 when it received the report of expert George Barbour identifying omitted shelf angles as defects in construction of the project. [3] Given these issues, the bankruptcy court did not err in denying Randolph Stair’s motion for summary judgment based on the statute of limitations defense. Accordingly, there is no reason to disturb the bankruptcy court’s denial of Randolph Stair’s motion for reconsideration of its earlier order.

The 27 August 2014 and 28 May 2015 orders of the bankruptcy court are AFFIRMED.

[1] “Shelf angles are steel angles that resemble the shape of a capital `L’ and are attached to a building’s floor slabs and integrated into the brick veneer to provide both support for the load of the brick veneer and to allow for a gap, or space, between the building and the brick veneer.” (8/27/14 Order, DE # 1-1, at 7.)

[2] According to Randolph Stair, despite its initial contention that it completed work on the project by July 2008, its work on the project was actually completed in November 2007. (Reply Br., DE # 53, at 13-14 n.4.) For purposes of this court’s analysis, whether the correct date is in 2007 or 2008 is irrelevant.

[3] Resolution of this issue pertains to whether the defects allegedly caused by Randolph Stair were latent or patent.

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New Bankruptcy Opinion: PNC BANK, NA v. COMMERCIAL STRUCTURES, INC. – Dist. Court, MD Florida, 2016

PNC BANK, N.A., as successor by merger to RBC BANK (USA) as successor in interest to FLORIDA CHOICE BANK Plaintiff,



Case No. 5:13-cv-105-Oc-10PRL.

United States District Court, M.D. Florida, Ocala Division.

June 1, 2016.


PHILIP R. LAMMENS, Magistrate Judge.

This matter is before the Court on the Plaintiff’s motion to compel production of documents to aid in its efforts to collect on the judgment previously entered against the defendants — Commercial Structures, Inc., and Sandra and David Register. (Doc. 34). On May 19, 2016, however, Sandra L. Register and David L. Register filed a Suggestion of Bankruptcy advising the Court that they have filed a petition for relief under the United States Bankruptcy Code, in the United States Bankruptcy Court for the Middle District of Florida, as Case No. 16-01879. (Doc. 35). Accordingly, these proceedings have been automatically stayed as to the Registers pursuant to 11 U.S.C. § 362(a) of the Bankruptcy Code.

Generally, the protections of the automatic stay do not apply to a codefendant not in bankruptcy. A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir. 1986) . Courts, however, have extended the automatic stay to non-bankrupt co-defendants in “unusual circumstances” such as “when there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.” Id. at 999. On or before June 15, 2016, PNC Bank, N.A. and the Judgment Debtors shall file a memorandum, limited to 7 pages with citation to legal authority, addressing whether the stay should apply to Commercial Structures, Inc.


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Case No. 15-cv-05325-DMR.

United States District Court, N.D. California.

July 18, 2016.

Pension Plan for Pension Trust Fund for Operating Engineers, Plaintiff, represented by Shaamini Babu, Saltzman & Johnson Law Corporation, Anne M. Bevington, Saltzman & Johnson Law Corporation & Anjuli Maria Cargain, Saltzman and Johnson Law Corporation.

Trustee Richard Piombo, Plaintiff, represented by Anne M. Bevington, Saltzman & Johnson Law Corporation, Shaamini Babu, Saltzman & Johnson Law Corporation & Anjuli Maria Cargain, Saltzman and Johnson Law Corporation.

Trustee Russell E. Burns, Plaintiff, represented by Anne M. Bevington, Saltzman & Johnson Law Corporation, Shaamini Babu, Saltzman & Johnson Law Corporation & Anjuli Maria Cargain, Saltzman and Johnson Law Corporation.

Donald Rose, Defendant, Pro Se.

Donald G. Rose, Defendant, Pro Se.


DONNA M. RYU, Magistrate Judge.

Plaintiffs brought this action pursuant to the Employee Retirement Income Security Act, as amended by the Multiemployer Pension Plan Amendments Act of 1980, 29 U.S.C. §§ 1001-1461, to collect withdrawal liability assessed against Defendant Construction Materials Testing, Inc. (“CMT”) and Does 1 through 10. Complaint at 2. CMT did not respond to the complaint and Plaintiffs moved for default judgment against CMT. Plaintiffs’ Motion for Default Judgment [Docket No. 20] at 1.

On July 18, 2016, Plaintiffs filed a notice of automatic stay under 11 U.S.C. § 362. [Docket No. 47.] CMT filed for protection under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court, Northern District of California, on June 29, 2016. Pursuant to 11 U.S.C. § 362, Plaintiffs are stayed from proceeding with this action until the automatic bankruptcy stay is no longer in effect.

It is hereby ordered that:

1. This action is stayed.

2. The hearing previously set on Plaintiffs’ motion for default judgment on July 28, 2016 is hereby vacated. All case management deadlines are hereby vacated.

3. The Clerk shall administratively close the file.

4. Plaintiffs shall reopen the case by filing a status report within seven days of the lifting of the automatic bankruptcy stay.

Plaintiffs shall serve a copy of this order on Defendant and file proof of service with the court.


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New Bankruptcy Opinion: NORTH DAKOTA DEVELOPMENTS, LLC v. CASCATA HOMES, LLC – Dist. Court, D. North Dakota, 2016

North Dakota Developments, LLC, Plaintiff,


Cascata Homes, LLC, Cascata Homes Holdings, LLC, Chris Cuzalina, J. Chris Quinn and Phillip Watson, Defendants.

Case No. 4:14-cv-151.

United States District Court, D. North Dakota.

July 26, 2016.

North Dakota Developments, LLC, Plaintiff, represented by Charles L. Neff, Neff Eiken & Neff PC.

Cascata Homes, LLC, Defendant, represented by Michael L. Forman, Brown Pruitt Wambsganss Ferrill & Dean, P.C., Heather N. Sutton, Brown Pruitt Wambsganss Ferrill & Dean, P.C., pro hac vice & Misty M. Pratt, Brown Pruitt Wambsganss Ferrill & Dean, P.C., pro hac vice.

Cascata Homes Holdings, LLC, Defendant, represented by Michael L. Forman, Brown Pruitt Wambsganss Ferrill & Dean, P.C..

Chris Cuzalina, Defendant, represented by Michael L. Forman, Brown Pruitt Wambsganss Ferrill & Dean, P.C..

J Chris Quinn, Defendant, represented by Michael L. Forman, Brown Pruitt Wambsganss Ferrill & Dean, P.C..

Phillip Watson, Defendant, Pro se.


CHARLES S. MILLER, Jr., Magistrate Judge.

Defendant Cascata Homes, LLC filed a Chapter 11 bankruptcy petition on April 2, 2015, with the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. It subsequently filed a “Suggestion of Bankruptcy” with this court on May 7, 2015. Consequently, on June 10, 2015, the court issued an order staying the action in its entirety.

On July 21, 2016, Defendant J. Chris Quinn filed a “Motion to Lift Bankruptcy Stay.” He requests that the court lift the stay, advising that Cascata Homes, LLC’s bankruptcy case was dismissed on February 23, 2016, and closed on March 9, 2016. See Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.3d 1194, 1206 (3d Cir. 1991) (Automatic stay “continues until the bankruptcy case is closed, dismissed, or discharge is granted or denied, or until the bankruptcy court grants some relief from the stay.”).

The court GRANTS Quinn’s motion (Docket No. 39) and lifts the stay of this action.


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New Bankruptcy Opinion: MOUNTAIN GLACIER LLC v. NESTLE’WATERS NORTH AMERICA, INC. – Dist. Court, MD Tennessee, 2016




Case No. 3-16-0996.

United States District Court, M.D. Tennessee, Nashville Division.

July 18, 2016.

Mountain Glacier LLC, Plaintiff, represented by William L. Norton, III, Bradley Arant Boult Cummings LLP.

Nestle Waters North America, Inc., Defendant, represented by John H. Rowland, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC & Robert S. Hertzberg, Pepper, Hamilton LLP.


TODD J. CAMPBELL, District Judge.

Pending before the Court is Nestle’ Waters North America, Inc.’s (“Nestle”) Motion to Withdraw the Reference (Docket No. 1). For the reasons stated herein, the Motion to Withdraw the Reference is DENIED.


Prior to the commencement of Mountain Glacier LLC’s (“Debtor”) Chapter 11 bankruptcy case, the Debtor and Nestle were parties to an arbitration administered by the Judicial Arbitration and Mediation Services in Chicago, Illinois (“the Arbitration”). After confirmation of the Debtor’s Chapter 11 Plan by the U.S. Bankruptcy Court, the Debtor sought to pursue further its claims asserted against Nestle in the Arbitration. Nestle has argued that the Arbitration should be dismissed because the Confirmation Order was res judicata on determination of the claims in the Arbitration.

This adversary proceeding seeks a declaratory judgment as to whether the Debtor retains a cause of action against Nestle following confirmation of the Debtor’s Reorganization Plan or whether its cause of action against Nestle is subject to res judicata by entry of the Confirmation Order by the U.S. Bankruptcy Court. In other words, the issue is whether the Debtor’s claims against Nestle are preserved in the Debtor’s Confirmation Plan.


The district court shall withdraw an adversary proceeding “if the court determines that resolution of the proceeding requires consideration of both Title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.” 28 U.S.C. § 157(d). The district court may withdraw, in whole or in part, any adversary case or proceeding from the bankruptcy court on its own motion or on timely motion of any party, for cause shown. Id.

The “cause” standard in the non-mandatory withdrawal provision is a high one. In re Washington Mfg. Co., 133 B.R. 113, 116 (M.D. Tenn. 1991) . In addition, the district court retains ample discretion in making the decision to withdraw the reference. Nukote Int’l, Inc. v. Office Depot, Inc., 2009 WL 3840382 at * 3 (M.D. Tenn. (Nov. 16, 2009) (citing In re Enron Corp., 295 B.R. 21, 25 (S.D. N.Y. 2003) ). In other words, the Movant “must meet a high bar in order to justify permissively removing a matter from the capable hands of the Bankruptcy Court.” In re Church Street Health Mgmt. Corp., 2012 WL 403591 at * 2 (M.D. Tenn. Sept. 10, 2012).

In In re White Motor Corp., 42 B.R. 693, 703 (N.D. Ohio 1984), the court held that the motion to withdraw the reference would be granted only if the current proceedings before the bankruptcy court could not be resolved without “substantial and material consideration” of non-Code provisions. Id. at 704. In In re Southern Industrial Mechanical Corp., 266 B.R. 827 (W.D. Tenn. 2001), the court held that withdrawal is mandatory only when substantial and material consideration of non-bankruptcy code law is necessary for resolution of the case. “The mere fact that a bankruptcy court must consider non-bankruptcy statutes in order to resolve a dispute is not grounds for mandatory withdrawal.” Id. at 831 and 833; see also In re Maynard, 2016 WL 1449459 at * 2 (S.D. Ohio April 13, 2016) (same). In Prince v. Countrywide Home Loans, Inc., 2008 WL 4572545 (M.D. Tenn. Oct. 8, 2008), this Court held that to withdraw the reference, the plaintiffs must show that substantial and material consideration of non-bankruptcy statutes is necessary for resolution of the dispute.

Nestle asserts that this matter is a “non-core” proceeding; the Debtor disagrees. [1] The Court finds that this matter is a “core proceeding” because it involves interpretation of the Chapter 11 Reorganization Plan and Confirmation Order to determine whether the Debtor’s claims against Nestle are preserved. [2] In other words, deciding this dispute would require the Court to interpret another court’s Order, which this Court, under these circumstances, declines to do.

For this reason, the Court is not required to withdraw the reference under the mandatory provision of Section 157(d), and the Court declines to withdraw the reference under the non-mandatory provision of Section 157(d). Nestle’s Motion to Withdraw the Reference (Docket No. 1) is DENIED.


[1] Although the Debtor’s Complaint for Declaratory Judgment asserted that the matter was non-core, its Amendment to Complaint for Declaratory Judgment corrected that “inadvertent error.”

[2] In any event, the statute provides that the bankruptcy judge shall determine whether a proceeding is a core proceeding or a proceeding otherwise related to a case under Title 11. 28 U.S.C. § 157(b)(3).

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New Bankruptcy Opinion: LIBERTY BANK, FSB v. DJ CHRISTIE, INC. – Dist. Court, D. Kansas, 2016

LIBERTY BANK, F.S.B., Appellant,


D.J. CHRISTIE, INC., et al., Appellees.

Case No. 15-4861-CM.

United States District Court, D. Kansas.

June 15, 2016.


CARLOS MURGUIA, District Judge.

In January 2016, this court affirmed the decision of the bankruptcy court to approve a settlement agreement between bankruptcy debtor D.J. Christie, Inc. (“Debtor”), David J. Christie, and Alexander Glenn (collectively “the Christie Parties”); and Alan E. Meyer and John R. Pratt (“Settlement Agreement”). Intervenor, party-in-interest, and appellant Liberty Bank filed a motion for rehearing under Fed. R. Bankr. P. 8022 (Doc. 16). In that motion, Liberty Bank claims that this court overlooked or misapprehended the law and/or facts. The court disagrees, and denies Liberty Bank’s motion for the following reasons.

Fed. R. Bankr. P. 8022 provides the sole mechanism for requesting a rehearing from a district court sitting as an appellate court in a bankruptcy case. In re Motors Liquidation Co., No. 09 Civ. 7794, 2010 WL 3565494, at *1 (S.D.N.Y. Sept. 10, 2010) (citation omitted) (referring to Rule 8015, which is the predecessor for Rule 8022). Because the rule itself does not provide a legal review standard, courts have imported the standards of Fed. R. App P. 40. Id. (citations omitted); In re Heath Global, Inc., No. 12 Civ. 8966(RA), 2013 WL 6722773, at *1 (S.D.N.Y. Oct. 9, 2013) (citation omitted). A movant must demonstrate that the court overlooked or misapprehended the law or a fact that would have changed the result of the case. In re CBI Holding Co., Nos. 94 B. 43819(BRL), 01 Civ. 0131(KMW), 2010 WL 2287013, at *1 (S.D.N.Y. June 7, 2010) (citation omitted). The standard is strict. Id. And a movant may not reargue his case, offer new evidence, or make new arguments. In re Motors Liquidation Co., 2010 WL 3565494, at *1 (citations omitted); In re Spiegel, Inc., Nos. 03-11540(BRL), 06-CV-13477(CM), 2007 WL 2609966, at *2 (S.D.N.Y. Aug. 22, 2007) (citations omitted).

Liberty Bank claims that this court misapprehended or overlooked the following point of law and/or fact:

As a matter of law, the procedure to approve a compromise under Federal Rule of Bankruptcy Procedure 9019(a) cannot be used to deny [Liberty Bank]’s legal rights against either (a) the Debtor, D.J. Christie, Inc.; or (2) the non-bankrupt individual, David J. Christie, because the Settlement Agreement in this case unlawfully disposes of [Liberty Bank]’s valid garnishment liens.

(Doc. 16 at 1.) Liberty Bank then discusses at length the case In re Sportstuff, Inc., 430 B.R. 170 (B.A.P. 8th Cir. 2010) . Liberty Bank argues that In re Sportstuff is directly on point with the instant case and requires reversal of the bankruptcy court’s approval of the settlement agreement.

Liberty Bank’s arguments are not new. The court already rejected Liberty Bank’s arguments, distinguishing In re Sportstuff in its opinion. (Doc. 15 at 6-7.) Liberty Bank is now rearguing the same grounds previously rejected by the court. The court neither overlooked nor misapprehended In re Sportstuff, and Liberty Bank has offered no valid basis for relief under Rule 8022. Cf. Tenth Cir. R. 40.1(a) (“A petition for rehearing should not be filed routinely. Rehearing will be granted only if a significant issue has been overlooked or misconstrued by the court.”); United States v. Vasquez, 985 F.2d 491, 497 (10th Cir. 1993) (considering a Rule 40 petition for rehearing and stating that “reiteration of previously rejected legal theories will not prompt a change of mind”) (citation omitted). For these reasons, the court denies Liberty Bank’s motion.

IT IS THEREFORE ORDERED that Appellant’s Motion for Rehearing (Doc. 16) is denied.

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New Bankruptcy Opinion: KYLE BUSCH MOTORSPORTS, INC. v. ZLOOP, INC. – Dist. Court, WD North Carolina, 2016

KYLE BUSCH MOTORSPORTS, INC., Plaintiff and Counter-Defendant,



Civil Action No. 5:15-CV-00121-RLV-DCK.

United States District Court, W.D. North Carolina, Statesville Division.

July 6, 2016.

Kyle Busch Motorsports, Inc., Plaintiff, represented by Laura Gray Barringer, Hamilton Stephens Steele & Martin, PLLC & Rebecca Karen Cheney.

Justin Boston, Defendant, represented by Matthew Kyle Rogers.

Justin Boston Racing, LLC, Defendant, represented by Matthew Kyle Rogers.

Justin Boston, Counter Claimant, represented by Matthew Kyle Rogers.

Justin Boston Racing, LLC, Counter Claimant, represented by Matthew Kyle Rogers.

Kyle Busch Motorsports, Inc., Counter Defendant, represented by Laura Gray Barringer, Hamilton Stephens Steele & Martin, PLLC & Rebecca Karen Cheney.


RICHARD L. VOORHEES, District Judge.

THIS MATTER IS BEFORE THE COURT on Defendants’ Motion to Change Venue and Plaintiff’s Motion to Remand. [Doc. No. 2]; [Doc. No. 4]. These matters are now ripe for review and decision. After reviewing the parties’ respective briefs, the record as a whole, and applicable law, the Motion to Change Venue is hereby DENIED-AS-MOOT, and the Motion to Remand is hereby GRANTED.


Plaintiff Kyle Busch Motorsports, Inc. is a company incorporated under the laws of North Carolina, and with its principal place of business located in Iredell County, North Carolina. [Doc. No. 1-1] at p. 2 (¶ 1). Justin Boston (hereinafter, “Defendant Boston”) is a citizen and domiciliary of North Carolina. Id. at p. 2 (¶ 2). Justin Boston Racing, LLC (hereinafter, “Boston LLC”) is a limited liability company incorporated under the laws of Delaware, but with its principal place of business in North Carolina. [Doc. No. 1-1] at p. 2 (¶ 4). Zloop, Inc. (hereinafter, “Zloop”) is incorporated under the laws of Delaware, but maintains its principal place of business in North Carolina. Id. at p. 3 (¶ 5).

The instant lawsuit arises out of an alleged breach of contract dispute between the Plaintiff and the Defendants. On November 11, 2014, Defendant Boston, Boston LLC, and Zloop entered into a “Driver Contract” (hereinafter, the “Contract”) with Plaintiff. [Doc. No. 1-1] at p. 3 (¶ 11). Under the Contract, Defendants jointly and severally agreed to pay the Plaintiff over three million dollars in exchange for certain sponsorship rights afforded by Plaintiff. Id. at p. 3 (¶ 13). This sum was required to be paid according to a payment calendar during the first ten months of 2015. Id. The Contract also called for the Defendants to pay the Plaintiff an additional sum of approximately three million dollars over the course of the first ten months of 2016. Id. at p. 4 (¶ 14). Eventually, the parties’ contractual relationship broke down when the Defendants’ failed to remit payment for sums due under the Contract. See [Doc. No. 1-1] at pp. 4-6 (¶¶ 16-35). Plaintiff claims that Defendants’ breached the Contract, resulting in damages of at least $4,025,061.20.

In August 2015, Plaintiff filed suit against the Defendants in the Superior Court of Iredell County, North Carolina. See [Doc. No. 1-1]. Plaintiff’s complaint asserts only a claim for breach of contract under North Carolina law. See id. at pp. 6-7. On September 24, 2015, Defendants filed a notice of removal with this Court. See [Doc. No. 1]. In the notice of removal, the Defendants claim that this Court has subject matter jurisdiction to hear this matter pursuant to 28 U.S.C. § 1452(a) and 28 U.S.C. § 1334. Defendants claim jurisdiction pursuant to these statutes because, on August 9, 2015, Zloop “and two affiliates . . . filed petitions for relief under title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. . . .” [Doc. No. 1] at p. 2. Defendants claim no other basis for subject matter jurisdiction. Plaintiff filed its Motion to Remand soon thereafter, claiming that, inter alia, this Court should abstain from exercising jurisdiction and remand this purely state law claim to the North Carolina state court system for adjudication. [Doc. No. 4].

On October 28, 2015, Defendant Zloop was voluntarily dismissed from this lawsuit, and a claim for approximately four million dollars was filed by Plaintiff against Zloop in Zloop’s bankruptcy case. See [Doc. No. 13]; [Doc. No. 18-1].


This matter was removed from the state court system pursuant to 28 U.S.C. § 1452(a) and 28 U.S.C. § 1334. Section 1452(a) provides that “[a] party may remove any claim or cause of action in a civil action . . . to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title.” 28 U.S.C. § 1452(a). Section 1334 contains three subsections that are relevant here. Section 1334(a) provides that “the district courts shall have original and exclusive jurisdiction of all cases under title 11.” 28 U.S.C. § 1334(a) (emphasis added). While Section 1334(a) grants district courts “original and exclusive” jurisdiction, subsection (b) grants district courts original but concurrent jurisdiction over cases that may otherwise be brought in the state courts. See 28 U.S.C. § 1334(b) (“[T]he district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.”). While a federal court may not ordinarily decline to hear a case over which it is vested with original jurisdiction, see Ohio v. Wyandotte Chemicals Corp., 401 U.S. 493, 496-97 (1971) (“[I]t is a time-honored maxim of the Anglo-American common-law tradition that a court possessed of jurisdiction generally must exercise it.”), Section 1334(c)(1) overrides that general rule by granting the district courts the discretion to either exercise or refuse to exercise jurisdiction over certain cases removed under Section 1334(b) “in the interest of justice, or in the interest of comity with State courts or respect for State law[.]” See 28 U.S.C. § 1334(c)(1).

This case was removed pursuant to Section 1334(b) and concerns only a claim for breach of contract under North Carolina law. See id. at pp. 6-7. The alleged debtor, whose bankruptcy action allegedly supported removal to this Court, has been dismissed from this action. See [Doc. No. 13]. Because the debtor has been voluntarily dismissed from this lawsuit, the claims at issue are alleged against only non-debtors. It is beyond dispute that Plaintiff’s cause of action is not a bankruptcy case; therefore, it is not one “under title 11,” and Section 1334(a)’s mandatory jurisdiction requirement is inapplicable. Under these facts, and for purposes of Section 1334(b), the claims asserted by the Plaintiff’s complaint also do not “arise under title 11” or “arise in” a case under title 11. See 28 U.S.C. § 1334(b); accord Barge v. Western Southern Life Ins. Co., 307 B.R. 541, 544 (N.D. W. Va. 2004) (“[C]ivil proceedings arising under Title 11 include those created by Title 11 such as a claim for exemptions under §522 or the exercise by the trustee of an avoiding power under §544(b). . . . Those arising in a case under Title 11 include administrative matters, allowance or disallowance of claims, determination of liens and other matters that take place as part of the administration of the bankruptcy estate.” (citations omitted)). Rather, the claims brought by Plaintiff arise from state law and not a bankruptcy matter brought under title 11. [1]

At most, this case can only be construed to “relate[]to [a] case[] under title 11.” See 28 U.S.C. § 1334(b). The title 11 case to which this case allegedly relates is former-Defendant Zloop’s bankruptcy, which is ongoing in the District Court of Delaware. See In re ZLOOP, Inc., No. 15-11660-KJC (Bankr. Del. 2015). However, that relation existed most strongly only when Zloop was a party. Since Zloop was dismissed as a party-defendant, the relation of this action to the bankruptcy has become further attenuated, and the Court is unaware of any federal interest that is maintained by retaining jurisdiction over this action. Indeed, the Court assumes that any federal interest that does exist is now properly before the Delaware bankruptcy court for consideration, because the Plaintiff has filed a claim against Zloop in the bankruptcy case. See [Doc. No. 18-1]; see also In re ZLOOP, Inc., No. 15-11660-KJC (Bankr. Del. 2015) (Claim No. 16-1). Thus, the Court believes the remaining pure questions of state law should be properly resolved by a state court of appropriate jurisdiction.

Defendants attempt to argue that a federal interest still exists here because they can seek indemnification from Zloop should Plaintiff prevail against them. See [Doc. No. 18]. Moreover, Defendants argue that a remand will increase the risk of inconsistent judgments between the state court (in adjudicating this case) and the bankruptcy court (in adjudicating the claim against Zloop). However, the Court is not persuaded. First, the alleged risk of inconsistent judgments is a red-herring. Zloop and the Defendants are different parties, and therefore may have different liabilities to the Plaintiff. A judgment against Defendants, even in the same case, would not necessarily demand a judgment against Zloop, and vice-versa.

Second, a Plaintiff is presumptively entitled to the venue of its choice, and that choice should not be overridden simply because of the case’s tangential and attenuated connection to the bankruptcy of a party that is not even a defendant in the case. See Glamorgan Coal Corp. v. Ratners Grp., PLC, 854 F. Supp. 436, 437 (W.D. Va. 1993) (“[A] plaintiff’s choice of forum is entitled to a degree of deference, especially when, as in this case, it chooses to file suit in the district and division in which it resides.” (citing Koster v. Lumbermen’s Mut. Cas. Co., 330 U.S. 518, 524 (1947) )); accord [Doc. No. 1-1] at p. 2 (¶ 1) (alleging that Plaintiff is a North Carolina corporation with a principal place of business in Iredell County, North Carolina). Third, Defendants’ argument overlooks the fact that any claim against Zloop, either directly or for contribution/indemnification, will necessarily require the attention of the bankruptcy estate. Such is not the case here, and therefore no federal interest is served by this Court retaining jurisdiction.

Finally, much ado is made out of the fact that this case allegedly “related to” a case under title 11. See, e.g., [Doc. No. 1] at pp. 4-5. However, this argument glosses over the Court’s permissive and concurrent jurisdiction over those cases that merely “relate[] to” a title 11 case. See 28 U.S.C. § 1334(c)(1). Defendants have pointed this Court to no authority which mandates that it exercise jurisdiction over such a case, and the Court has found none.

Therefore, the Court finds that the “interest[s] of justice,” “interest[s] of comity with State courts,” and “respect for State law” favor abstention. See 28 U.S.C. § 1334(c)(1). Under these circumstances, the Court may equitably remand the action to the North Carolina state court system. See 28 U.S.C. § 1452(b). Accordingly, the Court does hereby REMAND this action to the Superior Court of Iredell County, North Carolina.


(1) Defendants’ Motion to Change Venue (Doc. No. 2) is hereby DENIED-AS- MOOT;

(2) Plaintiff’s Motion to Remand (Doc. No. 4) is hereby GRANTED;

(3) This matter is hereby REMANDED to the Superior Court of Iredell County, North Carolina pursuant to 28 U.S.C. § 1452(b); and

(4) The Clerk shall administratively terminate this case.


[1] Even if Plaintiff’s claims do “arise under” or “arise in” a “case[] under title 11,” the Court is still granted permissive authority to abstain from exercising such jurisdiction. See 28 U.S.C. § 1334(b)-(c). Because this case is not one “under title 11,” the Court does not have mandatory jurisdiction. See 28 U.S.C. § 1334(a). Thus, the Court exercises its discretion to abstain even under this alternative analysis.

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New Bankruptcy Opinion: IN THE MATTER OF MOTORS LIQUIDATION CO. – Court of Appeals, 2nd Circuit, 2016






GENERAL MOTORS LLC, Appellee-Cross-Appellant,

WILMINGTON TRUST COMPANY, Trustee-Appellee-Cross-Appellant,

PARTICIPATING UNITHOLDERS, Creditors-Appellees-Cross-Appellants. [1]

Docket Nos. 15-2844-bk(L), 15-2847-bk(XAP), 15-2848-bk(XAP).

United States Court of Appeals, Second Circuit.

Argued: March 15, 2016.
Decided: July 13, 2016.


Appeal from a judgment of the United States Bankruptcy Court for the Southern District of New York (Gerber, J.), enforcing a “free and clear” provision of a sale order to enjoin claims against a debtor’s successor corporation and concluding under the equitable mootness doctrine that assets of the debtor’s unsecured creditors’ trust would be protected from late-filed claims. On appeal, plaintiffs challenge the bankruptcy court’s rulings that: (1) it had jurisdiction, (2) the sale order covered their claims, (3) enforcement of the sale order would not violate procedural due process, and (4) relief for any late-filed claims would be barred as equitably moot.


GARY PELLER, Washington, D.C., for Creditors-Appellants-Cross-Appellees Celestine Elliott, Lawrence Elliott, and Berenice Summerville, and Appellants-Cross-Appellees Sesay and Bledsoe Plaintiffs.

STEVEN W. BERMAN (Andrew M. Volk, on the brief), Hagens Berman Sobol Shapiro LLP, Seattle, Washington, and Elizabeth J. Cabraser, Lieff Cabraser Heimann & Bernstein, LLP, San Francisco, California, and Rachel J. Geman, Lieff Cabraser Heimann & Bernstein, LLP, New York, New York, and Edward S. Weisfelner, David J. Molton, Howard S. Steel, Brown Rudnick LLP, New York, New York, and Sandra L. Esserman, Stutzman, Bromberg, Esserman & Plifka, P.C., Dallas Texas, for Appellants-Cross-Appellees Ignition Switch Plaintiffs.

WILLIAM P. WEINTRAUB (Gregory W. Fox, on the brief), Goodwin Procter LLP, New York, New York, for Appellants-Cross-Appellees Ignition Switch Pre-Closing Accident Plaintiffs.

Joshua P. Davis, Josh Davis Law Firm, Houston, Texas, for Appellant-Cross-Appellee Doris Powledge Phillips.

ALEXANDER H. SCHMIDT, Wolf Haldenstein Adler Freeman & Herz LLP, New York, New York, and Jonathan L. Flaxer, Golenbock Eiseman Assor Bell & Peskoe LLP, New York, New York, for Appellants Groman Plaintiffs.

ARTHUR J. STEINBERG (Scott Davidson, on the brief), King & Spalding LLP, New York, New York, and Merritt E. McAlister, King & Spalding LLP, Atlanta, Georgia, and Edward L. Ripley, King & Spalding LLP, Houston, Texas, and Richard C. Godfrey, Andrew B. Bloomer, Kirkland & Ellis LLP, Chicago, Illinois, for Appellee-Cross-Appellant General Motors LLC.

Adam H. Offenhartz, Aric H. Wu, Lisa H. Rubin, Gabriel K. Gillett, Gibson, Dunn & Crutcher LLP, New York, New York, for Trustee-Appellee-Cross-Appellant Wilmington Trust Company.

PRATIK A. SHAH, Akin Gump Strauss Hauer & Feld LLP, Washington, D.C., and Daniel H. Golden, Deborah J. Newman, Akin Gump Strauss Hauer & Feld LLP, New York, New York, for Creditors-Appellees-Cross-Appellants Participating Unitholders.

Before: STRAUB, CHIN, and CARNEY, Circuit Judges.

CHIN, Circuit Judge.

On June 1, 2009, General Motors Corporation (“Old GM”), the nation’s largest manufacturer of automobiles and the creator of such iconic American brands as Chevrolet, Cadillac, and Jeep, filed for bankruptcy. During the financial crisis of 2007 and 2008, as access to credit tightened and consumer spending diminished, Old GM posted net losses of $70 billion over the course of a year and a half. The U.S. Department of the Treasury (“Treasury”) loaned billions of dollars from the Troubled Asset Relief Program (“TARP”) to buy the company time to revamp its business model. When Old GM’s private efforts failed, President Barack Obama announced to the nation a solution — “a quick, surgical bankruptcy.” [2] Old GM petitioned for Chapter 11 bankruptcy protection, and only forty days later the new General Motors LLC (“New GM”) emerged.

This case involves one of the consequences of the GM bankruptcy. Beginning in February 2014, New GM began recalling cars due to a defect in their ignition switches. The defect was potentially lethal: while in motion, a car’s ignition could accidentally turn off, shutting down the engine, disabling power steering and braking, and deactivating the airbags.

Many of the cars in question were built years before the GM bankruptcy, but individuals claiming harm from the ignition switch defect faced a potential barrier created by the bankruptcy process. In bankruptcy, Old GM had used 11 U.S.C. § 363 of the Bankruptcy Code (the “Code”) to sell its assets to New GM “free and clear.” In plain terms, where individuals might have had claims against Old GM, a “free and clear” provision in the bankruptcy court’s sale order (the “Sale Order”) barred those same claims from being brought against New GM as the successor corporation.

Various individuals nonetheless initiated class action lawsuits against New GM, asserting “successor liability” claims and seeking damages for losses and injuries arising from the ignition switch defect and other defects. New GM argued that, because of the “free and clear” provision, claims could only be brought against Old GM, and not New GM.

On April 15, 2015, the United States Bankruptcy Court for the Southern District of New York (Gerber, J.) agreed and enforced the Sale Order to enjoin many of these claims against New GM. Though the bankruptcy court also determined that these plaintiffs did not have notice of the Sale Order as required by the Due Process Clause of the Fifth Amendment, the bankruptcy court denied plaintiffs relief from the Sale Order on all but a subset of claims. Finally, the bankruptcy court invoked the doctrine of equitable mootness to bar relief for would-be claims against a trust established in bankruptcy court to pay out unsecured claims against Old GM (“GUC Trust”). [3]

The bankruptcy court entered judgment and certified the judgment for direct review by this Court. [4] Four groups of plaintiffs appealed, as did New GM and GUC Trust. We affirm, reverse, and vacate in part the bankruptcy court’s decision to enforce the Sale Order against plaintiffs and vacate as advisory its decision on equitable mootness.


I. Bailout

In the final two quarters of 2007, as the American economy suffered a significant downturn, Old GM posted net losses of approximately $39 billion and $722 million. General Motors Corp., Annual Report (Form 10-K) 245 (Mar. 5, 2009). In 2008, it posted quarterly net losses of approximately $3.3 billion, $15.5 billion, $2.5 billion, and $9.6 billion. Id. In a year and a half, Old GM had managed to hemorrhage over $70 billion.

The possibility of Old GM’s collapse alarmed many. Old GM employed roughly 240,000 workers and provided pensions to another 500,000 retirees. Id. at 19, 262. The company also purchased parts from over eleven thousand suppliers and marketed through roughly six thousand dealerships. A disorderly collapse of Old GM would have far-reaching consequences.

After Congress declined to bail out Old GM, President George W. Bush announced on December 19, 2008 that the executive branch would provide emergency loans to help automakers “stave off bankruptcy while they develop plans for viability.” [5] In Old GM’s case, TARP loaned $13.4 billion on the condition that Old GM both submit a business plan for long-term viability to the President no later than February 17, 2009 and undergo any necessary revisions no later than March 31, 2009. If the President found the business plan unsatisfactory, the TARP funds would become due and payable in thirty days, rendering Old GM insolvent and effectively forcing it into bankruptcy.

On March 30, 2009, President Obama told the nation that Old GM’s business plan was not viable. [6] At the same time, the President provided Old GM with another $6 billion loan and sixty more days to revise its plan along certain parameters. President Obama also reassured the public:

But just in case there’s still nagging doubts, let me say it as plainly as I can: If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always. Your warranty will be safe. In fact, it will be safer than it’s ever been, because starting today, the United States Government will stand behind your warranty. [7]

As the President stood behind the reliability of GM cars, pledging another $600 million to back all warranty coverage, bankruptcy remained a stark possibility. [8]

II. Bankruptcy

The federal aid did not succeed in averting bankruptcy. Old GM fared no better in the first quarter of 2009 — posting on May 8, 2009 a $5.9 billion net loss. General Motors Corp., Quarterly Report (Form 10-Q) 57 (May 8, 2009). But entering bankruptcy posed a unique set of problems: Old GM sought to restructure and become profitable again, not to shut down; yet if Old GM lingered in bankruptcy too long, operating expenses would accumulate and consumer confidence in the GM brand could deteriorate, leaving Old GM no alternative but to liquidate and close once and for all. On June 1, 2009, with these risks in mind, Old GM petitioned for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York.

A. Mechanics of the § 363 Sale

The same day, Old GM filed a motion to sell itself to New GM (also dubbed “Vehicle Acquisition Holdings LLC” or “NGMCO, Inc.”), complete with a 103-page draft sale agreement and 30-page proposed sale order.

Through this proposed sale, Old GM was attempting not a traditional Chapter 11 reorganization, but a transaction pursuant to 11 U.S.C. § 363 — a less common way of effecting a bankruptcy. See, e.g., In re Lionel Corp., 722 F.2d 1063, 1066-70 (2d Cir. 1983) (explaining the history of § 363). The usual Chapter 11 reorganization follows set procedures: the company entering bankruptcy (the “debtor”) files a reorganizationn plan disclosing to creditors how they will be treated, asks those creditors to vote to accept the plan, and then emerges from bankruptcy with its liabilities restructured along certain parameters. See 11 U.S.C. §§ 1121-1129. [9] This jostling can take years. [10] In contrast, in a § 363 sale of substantially all assets, the debtor does not truly “reorganize.” Instead, it sells its primary assets to a successor corporation, which immediately takes over the business. See Fla. Dep’t of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 37 n.2 (2008) . As evidenced by the GM bankruptcy, a § 363 sale can close in a matter of weeks.

The proposed sale was, in effect, a complex transaction made possible by bankruptcy law. GM’s sale would proceed in several parts. First, Old GM would become a “debtor-in-possession” under the Code. See 11 U.S.C. § 1101. Where a trustee might otherwise be appointed to assert outside control of the debtor, id. § 1104, a debtor-in-possession continues operating its business, id. §§ 1107, 1108. See In re Smart World Techs., LLC, 423 F.3d 166, 174 n.10 (2d Cir. 2005) (“In a chapter 11 case, . . . the debtor usually remains in control of the estate as the `debtor in possession.'”). Still in control, Old GM could seek the bankruptcy court’s permission to sell portions of its business. See 11 U.S.C. § 363(b)(1).

Second, there would be New GM, a company owned predominantly by Treasury (over sixty percent). As proposed, New GM would acquire from Old GM substantially all of its business — what one might commonly think of as the automaker “GM.” But New GM would not take on all of Old GM’s liabilities. The Code allows a § 363 sale “free and clear of any interest in such property.” U.S.C. § 363(f). The proposed sale order provided that New GM would acquire Old GM assets “free and clear of all liens, claims, encumbrances, and other interests of any kind or nature whatsoever, including rights or claims based on any successor or transferee liability.” J. App. 276. Other than a few liabilities that New GM would assume as its own, this “free and clear” provision would act as a liability shield to prevent individuals with claims against Old GM from suing New GM. Once the sale closed, the “bankruptcy” would be done: New GM could immediately begin operating the GM business, free of Old GM’s debts.

Third, Old GM would remain. The proposed sale would leave Old GM with some assets, including $1.175 billion in cash, interests in the Saturn brand, and certain real and personal property. Old GM would also receive consideration from New GM, including a promise to repay Treasury and Canadian government loans used to finance the business through bankruptcy and a ten-percent equity stake in New GM. Old GM would retain, however, the bulk of its old liabilities.

Fourth, Old GM would liquidate. Though liquidation is not formally part of a § 363 sale, the sale would result in two GM companies. Old GM would disband: it would rename itself “Motors Liquidation Company” and arrange a plan for liquidation that addressed how its remaining liabilities would be paid. See 11 U.S.C. § 1129(a)(11). Thus, while New GM would quickly emerge from bankruptcy to operate the GM business, Old GM would remain in bankruptcy and undergo a traditional, lengthy liquidation process.

B. Sale Order

One day after Old GM filed its motion, on June 2, 2009, the bankruptcy court ordered Old GM to provide notice of the proposed sale order. Old GM was required to send direct mail notice of its proposed sale order to numerous interested parties, including “all parties who are known to have asserted any lien, claim, encumbrance, or interest in or on [the to-be-sold assets],” and to post publication notice of the same in major publications, including the Wall Street Journal and New York Times. J. App. 385-86. The sale notice specified that interested parties would have until June 19, 2009 to submit to the bankruptcy court responses and objections to the proposed sale order.

The bankruptcy court proceeded to hear over 850 objections to the proposed sale order over the course of three days, between June 30 and July 2, 2009. On July 5, 2009, after addressing and dismissing the objections, the bankruptcy court approved the § 363 sale. In re General Motors Corp. (“GM”), 407 B.R. 463 (Bankr. S.D.N.Y. 2009) (Gerber, J.). Among those objections were arguments against the imposition of a “free and clear” provision to bar claims against New GM as the successor to Old GM made by consumer organizations, state attorneys general, and accident victims.

Next, the bankruptcy court issued the Sale Order, which entered into effect the final sale agreement between Old GM and New GM (the “Sale Agreement”). In the Sale Agreement, New GM assumed fifteen categories of liabilities. As relevant here, New GM agreed to assume liability for accidents after the closing date for the § 363 sale and to make repairs pursuant to express warranties issued in connection with the sale of GM cars — two liability provisions present in the initial draft sale agreement. The Sale Agreement also provided a new provision — resulting from negotiations among state attorneys general, the GM parties, and Treasury during the course of the sale hearing — that New GM would assume liability for any Lemon Law claims. [11] With these exceptions, New GM would be “free and clear” of any and all liabilities of Old GM.

On July 10, 2009, the § 363 sale officially closed, and New GM began operating the automaker business. As a matter of public perception, the GM bankruptcy was over — the company had exited bankruptcy in forty days. [12]

C. Liquidation of Old GM

Meanwhile, Old GM remained in bankruptcy. Over the next several years, the bankruptcy court managed the process of satisfying liabilities that remained with Old GM (i.e., not taken on by New GM).

The bankruptcy court set November 30, 2009 as the “baar date” for any individual or entity to file a proof of claim — that is, to assert a claim as to Old GM’s remaining assets. Old GM filed its first Chapter 11 liquidation plan on August 31, 2010, and amended it on December 8, 2010 and again on March 29, 2011. The proposed plan provided how claims against Olld GM would be paid: secured claims, other priority claims, and environmental claims made by the government would be paid in full; unsecured claims (claiims without an assurance of payment, such as in the form of a lien on property) would not.

Instead, under the plan, Old GM would establish GUC Trust, which would be administered by the Wilmington Trust Company. Once GUC Trust (and other like trusts) was established, Old GM would dissolve.

GUC Trust would hold certain Old GM assets — including New GM stock and stock warrants that could be used to purchase shares at fixed prices, along with other financial instruments. Creditors with unsecured claims against Old GM would receive these New GM securities and “units” of GUC Trust (the value of which would be pegged to the residual value of GUC Trust) on a pro rata basis in satisfaction of their claims. The Sale Agreement also imposed an “accordion feature” to ensure that GUC Trust would remain adequately funded in the event that the amount of unsecured claims grew too large. The accordion feature provided that if “the Bankruptcy Court makes a finding that the estimated aggregate allowed general unsecured claims against [Old GM’s] estates exceed $35 [billion], then [New GM] will . . . issue 10,000,000 additional shares of Common Stock . . . to [Old GM].” J. App. 1699.

On March 29, 2011, the bankruptcy court confirmed this liquidation plan. GUC Trust made quarterly distributions of its assets thereafter. The initial distribution released more than seventy-five percent of the New GM securities.

On February 8, 2012, the bankruptcy court ordered that no further claims against Old GM and payable by GUC Trust would be allowed unless the claim amended a prior claim, was filed with GUC Trust’s consent, or was deemed timely filed by the bankruptcy court. As of March 31, 2014, GUC Trust had distributed roughly ninety percent of its New GM securities and nearly 32 million units of GUC Trust; the expected value of unsecured claims against Old GM totaled roughly $32 billion, not enough to trigger the accordion feature and involve New GM in the bankruptcy. The GM bankruptcy that began five years earlier appeared to be approaching its end.

III. Ignition Switch Defect

On February 7, 2014, New GM first informed the National Highway Traffic Safety Administration (“NHTSA”) that it would be recalling, among other vehicles, the 2005 Chevrolet Cobalt. A defect in the ignition switch could prevent airbags from deploying.

A later congressional staff report, which followed four days of testimony by New GM CEO Mary Barra before committees of the House of Representatives and Senate, described what could happen by referring to an actual tragic accident caused by the defect: [13] In October 2006, three teenagers were riding in a 2005 Chevrolet Cobalt when the driver lost control and the car careened off the side of the road. The vehicle flew into a telephone utility box and several trees. The airbags did not deploy, and two of the teenagers died.

From February until October 2014, New GM would issue over 60 recalls, with the number of affected vehicles in the United States alone surpassing 25 million. New GM hired attorney Anton Valukas of the law firm Jenner & Block to investigate; he did so and prepared an extensive report (the “Valukas Report”). [14]

In 1997, Old GM sold three out of ten cars on the road in North America. See General Motors Corp., Annual Report (Form 10-K) 60 (Mar. 20, 1998). Engineers began developing a new ignition switch that could be used in multiple vehicles across the GM brand, first by setting technical specifications for the switch and then by testing prototypes against those specifications.

Throughout testing, which lasted until 2002, prototypes consistently failed to meet technical specifications. In particular, a low amount of torque could cause the ignition switch to switch to “accessory” or “off.” [15] A low torque threshold on an ignition switch would mean that little force — perhaps even the bump of a stray knee — would be needed to rotate the key in the switch from the “on” position to the “accessory” or “off” position.

Near the end of testing, an engineer commented on the ignition switch’s lingering problems in an email: he was “tired of the switch from hell.” J. App. 9696. Three months later, in May 2002, the ignition switch was approved for production, despite never having passed testing.

In the fall of 2002, Old GM began producing vehicles with the faulty ignition switch. Almost immediately, customers complained of moving stalls, sometimes at highway speeds — instances where the engine and power steering and braking cut off while the car was in motion, leaving drivers to manually maneuver the vehicle, that is, without assistance of the car’s power steering and braking systems.

Despite customer complaints, and grumblings in the press, Old GM classified the moving stall as a “non-safety issue.” Id. at 9711. As Valukas put it, “on a scale of 1 (most severe) to 4 (least severe) . . . the problem could have been designated a severity level 1 safety problem, [but] it was not.” Id. Instead, the moving stall was assigned a severity level of 3. Old GM personnel considered the problem to be a matter of customer satisfaction, not safety. These personnel apparently also did not then fully realize that when a car shuts off, so does its airbags. But as early as August 2001, at least some Old GM engineers understood that turning off the ignition switch could prevent airbags from deploying.

Complaints about the ignition switch continued. Between 2004 and 2005, NHTSA began asking questions about engine stalls. In 2005, several media outlets also reported on the stalls. See, e.g., Jeff Sabatini, Making a Case for Keyless Ignitions, N.Y. Times (June 19, 2005). Senior attorneys studied the stalls, but considered the risk to be “remote[].” J. App. 9734. At the same time, Old GM’s product investigations unit recreated the ignition switch’s issues by using only a heavy keychain to generate torque. Finally, in December 2005, Old GM issued a bulletin to dealers, but not to customers, warning them that “low ignition key cylinder torque” could cause cars to turn off. Id. at 9740. The bulletin did not mention that, as a result, cars could stall on the road.

Then came reports of fatalities. In late 2005 through 2006, news of deaths from airbag non-deployments in crashes where airbags should have deployed reached the desks of Old GM’s legal team. Around April 2006, Old GM engineers decided on a design change of the ignition switch to increase the torque. Old GM engineers did so quietly, without changing the ignition switch’s part number, a change that would have signaled that improvements or adjustments had been made.

In February 2007, a Wisconsin state trooper’s report made its way into the files of Old GM’s legal department: “The two front seat airbags did not deploy. It appears that the ignition switch had somehow been turned from the run position to accessory prior to the collision with the trees.” Id. at 9764. NHTSA similarly brought to Old GM’s attention reported airbag non-deployments. See Transportation Research Center, Indiana University, On-Site Air Bag Non-Deployment Investigation 7 (Apr. 25, 2007, rev. Mar. 31, 2008). As more incidents with its cars piled up, Old GM finally drafted an updated bulletin to dealers warning them of possible “stalls,” but never sent it out.

Old GM internally continued to investigate. By May 2009, staff had figured out that non-deployment of airbags in these crashes was attributable to a sudden loss of power. They believed that one of the two “most likely explanation[s] for the power mode signal change was . . . a problem with the Ignition Switch.” J. App. 9783. By June 2009, Old GM engineers had implemented a change to the ignition key, hoping to fix the problem once and for all. One engineer lamented that “[t]his issue has been around since man first lumbered out of [the] sea and stood on two feet.” Id. at 9781.

Later, the Valukas Report commented on the general attitude at Old GM. For eleven years, “GM heard over and over from various quarters — including customers, dealers, the press, and their own employees — that the car’s ignition switch led to moving stalls, group after group and committee after committee within GM that reviewed the issue failed to take action or acted too slowly. Although everyone had responsibility to fix the problem, nobody took responsibility.” J. App. 9650.

The Valukas Report recounted aspects of GM’s corporate culture. With the “GM salute,” employees would attend action meetings and literally cross their arms and point fingers at others to shirk responsibility. With the “GM nod,” employees would (again) literally nod in agreement to endorse a proposed plan, understanding that they and others had no intention of following through. Finally, the Report described how GM employees, instead of taking action, would claim the need to keep searching for the “root cause” of the moving stalls and airbag non-deployments. This “search for root cause became a basis for doing nothing to resolve the problem for years.” Id. at 9906.

Indeed, New GM would not begin recalling cars for ignition switch defects until February 2014. Soon after New GM’s initial recall, individuals filed dozens of class actions lawsuits, claiming that the ignition switch defect caused personal injuries and economic losses, both before and after the § 363 sale closed. [16] New GM sought to enforce the Sale Order, invoking the liability shield to hold New GM “free and clear” of various claims. This meant that when it came to Old GM cars New GM would pay for post-closing personal injuries, make repairs, and follow Lemon Laws, but nothing else. The amount of purportedly barred liabilities was substantial — an estimated $7 to $10 billion in economic losses, not to mention damages from pre-closing accidents.

IV. Proceedings Below

On April 21, 2014, Steven Groman and others (the “Groman Plaintiffs”) initiated an adversary proceeding against New GM in the bankruptcy court below, asserting economic losses arising from the ignition switch defect. The same day, New GM moved to enforce the Sale Order to enjoin those claims, as well as claims in other ignition switch actions then being pursued against New GM.

Other plaintiffs allegedly affected by the Sale Order included classes of individuals who had suffered pre-closing injuries arising from the ignition switch defect (“Pre-Closing Accident Plaintiffs”), economic losses arising from the ignition switch defect in Old GM cars (“Ignition Switch Plaintiffs”), and damages arising from defects other than the ignition switch in Old GM cars (“Non-Ignition Switch Plaintiffs”). [17] Included within the Ignition Switch Plaintiffs were individuals who had purchased Old GM cars secondhand after the § 363 sale closed (“Used Car Purchasers”).

On appeal, several orders are before us. First, the Non-Ignition Switch Plaintiffs filed a motion, asserting, among other things, that the bankruptcy court lacked jurisdiction to enforce the Sale Order. On August 6, 2014, the bankruptcy court denied that motion. In re Motors Liquidation Co. (“MLC I”), 514 B.R. 377 (Bankr. S.D.N.Y. 2014) (Gerber, J.).

Second, after receiving further briefing and hearing oral argument on the motion to enforce, on April 15, 2015 the bankruptcy court decided to enforce the Sale Order in part and dismiss any would-be claims against GUC Trust because relief would be equitably moot. In re Motors Liquidation Co. (“MLC II”), 529 B.R. 510 (Bankr. S.D.N.Y. 2015) (Gerber, J.). The bankruptcy court first determined plaintiffs lacked notice consistent with procedural due process. Id. at 540-60. In particular, the bankruptcy court found that the ignition switch claims were known to or reasonably ascertainable by Old GM prior to the sale, and thus plaintiffs were entitled to actual notice, as opposed to the mere publication notice that they received. Id. at 556-60. The bankruptcy court found, however, that with one exception plaintiffs had not been “prejudiced” by this lack of notice — the exception being claims stemming from New GM’s own wrongful conduct in concealing defects (so-called “independent claims”). Id. at 560-74. In other words, the bankruptcy court held that New GM could not be sued — in bankruptcy court or elsewhere — for ignition switch claims that otherwise could have been brought against Old GM, unless those claims arose from New GM’s own wrongful conduct. Id. at 574-83.

In the same decision, the bankruptcy court addressed arguments by GUC Trust that it should not be held as a source for relief either. Applying the factors set out in In re Chateaugay Corp. (“Chateaugay III”), 10 F.3d 944 (2d Cir. 1993), the bankruptcy court concluded that relief for any late claims against GUC Trust was equitably moot, as the plan had long been substantially consummated. MLC II, 529 B.R. at 583-92. Finally, the bankruptcy court outlined the standard for any future fraud on the court claims. Id. at 592-97. With these issues resolved, the bankruptcy court certified its decision for appeal to this Court pursuant to 28 U.S.C. § 158. Id. at 597-98.

Third, the bankruptcy court issued another decision after the parties disagreed on the form of judgment and other ancillary issues. On May 27, 2015, the bankruptcy court clarified that the Non-Ignition Switch Plaintiffs would be bound by the judgment against the other plaintiffs, but would have seventeen days following entry of judgment to object. In re Motors Liquidation Co. (“MLC III”), 531 B.R. 354 (Bankr. S.D.N.Y. 2015) (Gerber, J.). The bankruptcy court left open the question of whether Old GM knew of other defects.

On June 1, 2015, the bankruptcy court entered judgment against all plaintiffs and issued an order certifying the judgment for direct appeal. Following briefing by the Non-Ignition Switch Plaintiffs, on July 22, 2015, the bankruptcy court rejected their objections to the judgment.

New GM, GUC Trust, and the four groups of plaintiffs described above — the Groman Plaintiffs, Ignition Switch Plaintiffs, Non-Ignition Switch Plaintiffs, and Pre-Closing Accident Plaintiffs — appealed. [18] We turn to these appeals.


The Code permits a debtor to sell substantially all of its assets to a successor corporation through a § 363 sale, outside of the normal reorganization process. Here, no party seeks to undo the sale of Old GM’s assets to New GM, as executed through the Sale Order. [19] Instead, plaintiffs challenge the extent to which the bankruptcy court may absolve New GM, as a successor corporation, of Old GM’s liabilities. See generally 3 Collier on Bankruptcy ¶ 363.02 (Alan N. Resnick & Harry J. Sommer eds., 16th ed. 2013) [hereinafter “Collier on Bankruptcy”] (noting that “use of a section 363 sale probably reached its zenith” with the GM bankruptcy). In particular, they dispute whether New GM may use the Sale Order’s “free and clear” provision to shield itself from claims primarily arising out of the ignition switch defect and other defects.

The decisions below generate four issues on appeal: (1) the bankruptcy court’s jurisdiction to enforce the Sale Order, (2) the scope of the power to sell assets “free and clear” of all interests, (3) the procedural due process requirements with respect to notice of such a sale, and (4) the bankruptcy court’s ruling that would-be claims against GUC Trust are equitably moot.

I. Jurisdiction

We first address the bankruptcy court’s subject matter jurisdiction. New GM argued below that successor liability claims against it should be enjoined, and the bankruptcy court concluded as a threshold matter that it had jurisdiction to enforce the Sale Order. See MLC I, 514 B.R. at 380-83. The Non-Ignition Switch Plaintiffs challenge jurisdiction: (1) as a whole to enjoin claims against New GM, (2) with respect to independent claims, which stem from New GM’s own wrongful conduct, and (3) to issue a successive injunction. We review de novo rulings as to the bankruptcy court’s jurisdiction. See In re Petrie Retail, Inc., 304 F.3d 223, 228 (2d Cir. 2002) .

First, as to jurisdiction broadly, “[t]he jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.” Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995) ; see 28 U.S.C. § 1334. Bankruptcy courts may exercise jurisdiction, through referral from the district court, over three broad categories of proceedings: those “arising under title 11” of the Code, those “arising in . . . a case under title 11,” and those “related to a case under title 11.” 28 U.S.C. § 157(a). Proceedings “arising under title 11, or arising in a case under title 11,” are deemed “core proceedings.” Stern v. Marshall, 564 U.S. 462, 476 (2011) (quoting 28 U.S.C. § 157(b)). In those proceedings, bankruptcy courts retain comprehensive power to resolve claims and enter orders or judgments. See In re Millenium Seacarriers, Inc., 419 F.3d 83, 96 (2d Cir. 2005) .

“[T]he meaning of the statutory language `arising in’ may not be entirely clear.” Baker v. Simpson, 613 F.3d 346, 351 (2d Cir. 2010) . At a minimum, a bankruptcy court’s “arising in” jurisdiction includes claims that “are not based on any right expressly created by [T]itle 11, but nevertheless, would have no existence outside of the bankruptcy.” Id. (quoting In re Wood, 825 F.2d 90, 97 (5th Cir. 1987) ).

A bankruptcy court’s decision to interpret and enforce a prior sale order falls under this formulation of “arising in” jurisdiction. An order consummating a debtor’s sale of property would not exist but for the Code, see 11 U.S.C. § 363(b), and the Code charges the bankruptcy court with carrying out its orders, see id. § 105(a) (providing that bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title”). Hence, a bankruptcy court “plainly ha[s] jurisdiction to interpret and enforce its own prior orders.” Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009) ; see Millenium Seacarriers, 419 F.3d at 96 (“A bankruptcy court retains post-confirmation jurisdiction to interpret and enforce its own orders, particularly when disputes arise over a bankruptcy plan of reorganization.” (quoting Petrie Retail, 304 F.3d at 230 )). That is what happened here. The bankruptcy court first interpreted the “free and clear” provision that barred successor liability claims — a provision that was integral to resolving Old GM’s bankruptcy — and then determined whether to enforce that provision.

Second, the Non-Ignition Switch Plaintiffs specify that the bankruptcy court lacked jurisdiction over independent claims. Even though the bankruptcy court ultimately did not enjoin independent claims, we address this argument because it implicates subject matter jurisdiction. In any event, the argument is misguided. The Sale Order, on its face, does not bar independent claims against New GM; instead, it broadly transfers assets to New GM “free and clear of liens, claims, encumbrances, and other interests . . ., including rights or claims . . . based on any successor or transferee liability.” J. App. 1621. By making the argument that the bankruptcy court could not enjoin independent claims through the Sale Order, the Non-Ignition Switch Plaintiffs already assume that the bankruptcy court indeed has jurisdiction to interpret the Sale Order to determine whether it covers independent claims and to hear a motion to enforce in the first place.

Third, the Non-Ignition Switch Plaintiffs argue that the bankruptcy court lacked power to issue a so-called successive injunction. In certain parts of the Sale Order, the bankruptcy court had included language that successor liability claims would be “forever prohibited and enjoined.” J. App. 1649. But New GM was not seeking an injunction to stop plaintiffs from violating that prior injunction; New GM wanted the bankruptcy court to confirm that the Sale Order covered these plaintiffs. In other words, New GM “did not seek a new injunction but, rather, `[sought] to enforce an injunction already in place.'” In re Kalikow, 602 F.3d 82, 93 (2d Cir. 2010) (quoting In re Texaco Inc., 182 B.R. 937, 945 (Bankr. S.D.N.Y. 1995) ). In such situations, bankruptcy courts have jurisdiction to decide a “motion s[eeking] enforcement of a pre-existing injunction issued as part of the bankruptcy court’s sale order.” Petrie Retail, 304 F.3d at 230 .

Accordingly, we agree that the bankruptcy court had jurisdiction to interpret and enforce the Sale Order. See MLC I, 514 B.R. at 380-83.

II. Scope of “Free and Clear” Provision

We turn to the scope of the Sale Order. The Sale Order transferred assets from Old GM to New GM “free and clear of liens, claims, encumbrances, and other interests . . ., including rights or claims . . . based on any successor or transferee liability.” J. App. 1621. The bankruptcy court did not explicitly address what claims were covered by the Sale Order. [20]

We address the scope of the Sale Order because it implicates our procedural due process analysis that follows. If the Sale Order covers certain claims, then we would have to consider whether plaintiffs’ due process rights are violated by applying the “free and clear” clause to those claims. If the Sale Order did not cover certain claims, however, then those claims could not be enjoined by enforcing the Sale Order and due process concerns would not be implicated. We interpret the Sale Order de novo to determine what claims are barred. See In re Duplan Corp., 212 F.3d 144, 151 (2d Cir. 2000) ; see also Petrie Retail, 304 F.3d at 229 (noting instance where enforcement first requirred interpretation of prior order).

A. Applicable Law

The Code allows the trustee or debtor-in-possession to “use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11 U.S.C. § 363(b)(1). A sale pursuant to § 363(b) may be made “free and clear of any interest in such property” if any condition on a list of conditions is met. Id. § 363(f). “Yet the Code does not define the concept of `interest,’ of which the property may be sold free and clear,” 3 Collier on Bankruptcy ¶ 363.06, nor does it express the extent to which “claims” fall within the ambit of “interests.”

New GM asserts that In re Chrysler LLC, 576 F.3d 108, 126 (2d Cir. 2009), resolved that successor liability claims are interests. New GM Br. 75. [21] But Chrysler was vacated by the Supreme Court after it became moot during the certiorari process and remanded with instructions to dismiss the appeal as moot. See Ind. State Police Pension Tr. v. Chrysler LLC, 558 U.S. 1087 (2009) . The Supreme Court vacated Chrysler pursuant to United States v. Munsingwear, Inc., 340 U.S. 36, 41 (1950), which “prevent[s] a judgment, unreviewable because of mootness, from spawning any legal consequences.” See Russman v. Bd. of Educ. of Enlarged City Sch. Dist., 260 F.3d 114, 121-22 n.2 (2d Cir. 2001) (“[V]acatur eliminates an appellate precedent that would otherwise control decision on a contested question throughout the circuit.”). We had not addressed the issue before Chrysler, and now that case is no longer controlling precedent. [22] See 576 F.3d at 124 (“We have never addressed the scope of the language `any interest in such property,’ and the statute does not define the term.”).

Rather than formulating a single precise definition for “any interest in such property,” courts have continued to address the phrase “on a case-by-case basis.” In re PBBPC, Inc., 484 B.R. 860, 867 (B.A.P. 1st Cir. 2013) . At minimum, the language in § 363(f) permits the sale of property free and clear of in rem interests in the property, such as liens that attach to the property. See In re Trans World Airlines, Inc., 322 F.3d 283, 288 (3d Cir. 2003) . But courts have permitted a “broader definition that encompasses other obligations that may flow from ownership of the property.” 3 Collier on Bankruptcy ¶ 363.06. Sister courts have held that § 363(f) may be used to bar a variety of successor liability claims that relate to ownership of property: an “interest” might encompass Coal Act obligations otherwise placed upon a successor purchasing coal assets, In re Leckie Smokeless Coal Co., 99 F.3d 573, 581-82 (4th Cir. 1996), travel vouchers issued to settle an airline’s discrimination claims in a sale of airline assets, Trans World Airlines, 322 F.3d at 288-90, or a license for future use of intellectual property when that property is sold, FutureSource LLC v. Reuters Ltd., 312 F.3d 281, 285 (7th Cir. 2002) . See generally Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 545 (7th Cir. 2003) (“[T]he term `interest’ is a broad term no doubt selected by Congress to avoid `rigid and technical definitions drawn from other areas of the law.'” (quoting Russello v. United States, 464 U.S. 16, 21 (1983) )). In these instances, courts require “a relationship between the[] right to demand . . . payments from the debtors and the use to which the debtors had put their assets.” Trans World Airlines, 322 F.3d at 289 .

We agree that successor liability claims can be “interests” when they flow from a debtor’s ownership of transferred assets. See 3 Collier in Bankruptcy ¶¶ 363.06, [7]; Trans World Airlines, 322 F.3d at 289 . But successor liability claims must also still qualify as “claims” under Chapter 11. Though § 363(f) does not expressly invoke the Chapter 11 definition of “claims,” see 11 U.S.C. § 101(5), it makes sense to “harmonize” Chapter 11 reorganizations and § 363 sales “to the extent permitted by the statutory language.” Chrysler, 576 F.3d at 125 ; see Lionel, 722 F.2d at 1071 (“[S]ome play for the operation of both § 363(b) and Chapter 11 must be allowed for.”). [23] Here, the bankruptcy court’s power to bar “claims” in a quick § 363 sale is plainly no broader than its power in a traditional Chapter 11 reorganization. Compare 11 U.S.C. § 363(f) (“free and clear of any interest in such property”), with § 1141(c) (“free and clear of all claims and interests”). We thus consider what claims may be barred under Chapter 11 generally.

Section 101(5) defines “claim” as any “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” 11 U.S.C. § 101(5). A claim is (1) a right to payment (2) that arose before the filing of the petition. See Pension Ben. Guar. Corp. v. Oneida Ltd., 562 F.3d 154, 157 (2d Cir. 2009) . If the right to payment is contingent on future events, the claim must instead “result from pre-petition conduct fairly giving rise to that contingent claim.” In re Chateaugay Corp. (“Chateaugay I”), 944 F.2d 997, 1005 (2d Cir. 1991) (internal quotation marks omitted).

This Court has not decided, however, “the difficult case of pre-petition conduct that has not yet resulted in detectable injury, much less the extreme case of pre-petition conduct that has not yet resulted in any tortious consequence to a victim.” Id. at 1004. Chateaugay I considered a hypothetical bankrupt bridge building company, which could predict that out of the 10,000 bridges it built, one would one day fail, causing deaths and other injuries. Id. at 1003. If that bridge did fail, the individuals might have tort claims resulting from pre-petition conduct, namely the building of the bridge.

Recognizing these claims would engender “enormous practical and perhaps constitutional problems.” Id. Thus, “`claim’ cannot be extended to include . . . claimants whom the record indicates were completely unknown and unidentified at the time [the debtor] filed its petition and whose rights depended entirely on the fortuity of future occurrences.” Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1277 (5th Cir. 1994) ; see In re Chateaugay Corp. (“Chateaugay IV”), 53 F.3d 478, 497 (2d Cir. 1995) (stating that, in “common sense,” “claim” is “not infinite”). To avoid any practical and constitutional problems, courts require some minimum “contact,” Chateaugay I, 944 F.2d at 1003-04, or “relationship,” Chateaugay IV, 53 F.3d at 497, that makes identifiable the individual with whom the claim does or would rest.

To summarize, a bankruptcy court may approve a § 363 sale “free and clear” of successor liability claims if those claims flow from the debtor’s ownership of the sold assets. Such a claim must arise from a (1) right to payment (2) that arose before the filing of the petition or resulted from pre-petition conduct fairly giving rise to the claim. Further, there must be some contact or relationship between the debtor and the claimant such that the claimant is identifiable.

B. Application

We apply these principles to: (1) prre-closing accident claims, (2) economic loss claims arising from the ignition switch defect or other defects, (3) independent claims relating only to New GM’s conduct, and (4) Used Car Purchasers’ claims. The bankruptcy court assumed that thhe Sale Order’s broad language suggested that all of these claims fell within the scope of the “free and clear” provision. We hold, however, that the first two sets of claims are covered by the Sale Order but that the latter two sets of claims are not.

First, the pre-closing accident claims clearly fall within the scope of the Sale Order. Those claims directly relate to the ownership of the GM automaker’s business — Old GM built cars withh ignition switch defects. And those plaintiffs’ claims are properly thought of as tort claims that arose before the filing of the petition; indeed, the claims arise from accidents that occurred pre-closing involving Old GM cars. [24]

Second, the economic loss claims arising from the ignition switch defect or other defects present a closer call. Like the claims of Pre-Closing Accident Plaintiffs, these claims flow from the operation of Old GM’s automaker business. These individuals also, by virtue of owning Old GM cars, had come into contact with the debtor prior to the bankruptcy petition. Yet the ignition switch defect (and other defects) were only revealed some five years later.

GUC Trust thus asserts that there was no right to payment prior to the petition. We disagree. The economic losses claimed by these individuals were “contingent” claims. 11 U.S.C. § 101(5). That is, the ignition switch defect was there, but was not yet so patent that an individual could, as a practical matter, bring a case in court. The contingency standing in the way was Old GM telling plaintiffs that the ignition switch defect existed. In other words, Old GM’s creation of the ignition switch defect fairly gave rise to these claims, even if the claimants did not yet know. See Chateaugay I, 944 F.2d at 1005.

Third, however, the independent claims do not meet the Code’s limitation on claims. By definition, independent claims are claims based on New GM’s own post-closing wrongful conduct. Though the parties do not lay out the whole universe of possible independent claims, we can imagine that some claims involve misrepresentations by New GM as to the safety of Old GM cars. These sorts of claims are based on New GM’s post-petition conduct, and are not claims that are based on a right to payment that arose before the filing of petition or that are based on pre-petition conduct. Thus, these claims are outside the scope of the Sale Order’s “free and clear” provision.

Fourth, the Sale Order likewise does not cover the Used Car Purchasers’ claims. The Used Car Purchasers were individuals who purchased Old GM cars after the closing, without knowledge of the defect or possible claim against New GM. They had no relation with Old GM prior to bankruptcy. Indeed, as of the bankruptcy petition there were an unknown number of unknown individuals who would one day purchase Old GM vehicles secondhand. There could have been no contact or relationship — actual or presumed — between Old GM and these specific plaintiffs, who otherwise had no awareness of the ignition switch defect or putative claims against New GM. We cannot, consistent with bankruptcy law, read the Sale Order to cover their claims. See Chateaugay I, 944 F.2d at 1003-04 (calling such a reading “absurd”).

New GM argues that “modifying” the Sale Order would “knock the props out of the foundation on which the [Sale Order] was based” or otherwise be unlawful. New GM Br. 77 (internal quotation marks omitted). But we do not modify the Sale Order. Instead, we merely interpret the Sale Order in accordance with bankruptcy law. Indeed, by filing a motion to enforce, New GM in effect asked for the courts to interpret the Sale Order. See Petrie Retail, 304 F.3d at 229 .

In sum, the “free and clear” provision covers pre-closing accident claims and economic loss claims based on the ignition switch and other defects. It does not cover independent claims or Used Car Purchasers’ claims. Accordingly, we affirm the bankruptcy court’s decision not to enjoin independent claims, see MLC II, 529 B.R. at 568-70, and reverse its decision to enjoin the Used Car Purchasers’ claims, see id. at 570-72.

III. Procedural Due Process

The Sale Order covers the pre-closing accident claims and economic loss claims based on the ignition switch and other defects. The Sale Order, if enforced, would thus bar those claims. Plaintiffs contend on appeal that enforcing the Sale Order would violate procedural due process. We address two issues: (1) what notice plaintiffs were entitled to as a matter of procedural due process, and (2) if they were provided inadequate notice, whether the bankruptcy court erred in denying relief on the basis that most plaintiffs were not “prejudiced.”

We review factual findings for cleaar error and legal conclusions, including interpretations of the Constitution, de novo. In re Barnet, 737 F.3d 238, 246 (2d Cir. 2013) . Our clear error standard is a deferential one, and if the bankruptcy court’s “`account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.'” Amadeo v. Zant, 486 U.S. 214, 223 (1988) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573-74 (1985) ).

A. Notice

The bankruptcy court first concluded that plaintiffs were not provided notice as required by procedural due process. See MLC II, 529 B.R. at 555-60. The bankruptcy court held that because Old GM knew or with reasonable diligence should have known of the ignition switch claims, plaintiffs were entitled to actual or direct mail notice, but received only publication notice. See id. at 557-60. The parties dispute the extent of Old GM’s knowledge of the ignition switch problem.

1. Applicable Law

The Due Process Clause provides, “No person shall . . . be deprived of life, liberty, or property, without due process of law.” U.S. Const. amend. V. Certain procedural protections attach when “deprivations trigger due process.” Connecticut v. Doehr, 501 U.S. 1, 12 (1991) . Generally, legal claims are sufficient to constitute property such that a deprivation would trigger due process scrutiny. See N.Y. State Nat’l Org. for Women v. Pataki, 261 F.3d 156, 169-70 (2d Cir. 2001) .

Once due process is triggered, the question becomes what process is due. Morrissey v. Brewer, 408 U.S. 471, 481 (1972) . “An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950) . Courts ask “whether the state acted reasonably in selecting means likely to inform persons affected, not whether each property owner actually received notice.” Weigner v. City of New York, 852 F.2d 646, 649 (2d Cir. 1988) . Notice is adequate if “[t]he means employed [are] such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.” Mullane, 339 U.S. at 315 .

This requirement also applies to bankruptcy proceedings. See Martin v. Wilks, 490 U.S. 755, 762 n.2 (1989), superseded by statute on other grounds, Civil Rights Act of 1991, Pub.L. No. 102-166, 105 Stat. 1071. Indeed, a fundamental purpose of bankruptcy is to discharge, restructure, or impair claims against the debtor in an orderly fashion. See Lines v. Frederick, 400 U.S. 18, 19 (1970) . “The general rule that emerges . . . is that notice by publication is not enough with respect to a person whose name and address are known or very easily ascertainable and whose legally protected interests are directly affected by the proceedings in question.” Schroeder v. City of New York, 371 U.S. 208, 212-13 (1962) ; accord Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 800 (1983) . In other words, adequacy of notice “turns on what the debtor . . . knew about the claim or, with reasonable diligence, should have known.” DPWN Holdings (USA), Inc. v. United Air Lines, Inc., 747 F.3d 145, 150 (2d Cir. 2014) (citing Chemetron Corp. v. Jones, 72 F.3d 341, 345-46 (3d Cir. 1995) ). If the debtor knew or reasonably should have known about the claims, then due process entitles potential claimants to actual notice of the bankruptcy proceedings, but if the claims were unknown, publication notice suffices. Chemetron, 72 F.3d at 345-46 .

If a debtor reveals in bankruptcy the claims against it and provides potential claimants notice consistent with due process of law, then the Code affords vast protections. Both § 1141(c) and § 363(f) permit “free and clear” provisions that act as liability shield. These provisions provide enormous incentives for a struggling company to be forthright. But if a debtor does not reveal claims that it is aware of, then bankruptcy law cannot protect it. Courts must “limit[] the opportunity for a completely unencumbered new beginning to the `honest but unfortunate debtor.'” Grogan v. Garner, 498 U.S. 279, 286-87 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) ).

2. Application

The parties do not dispute that plaintiffs received only publication notice. The question is whether they were entitled to more. The bankruptcy court found that because Old GM knew or reasonably should have known about the ignition switch defect prior to bankruptcy, it should have provided direct mail notice to vehicle owners. We find no clear error in this factual finding.

As background, federal law requires that automakers keep records of the first owners of their vehicles. 49 U.S.C. § 30117(b)(1) (“A manufacturer of a motor vehicle . . . shall cause to be maintained a record of the name and address of the first purchaser of each vehicle. . . .”). This provision facilitates recalls and other consequences of the consumer-automaker relationship. Thus, to the extent that Old GM knew of defects in its cars, it would also necessarily know the identity of a significant number of affected owners.

The facts paint a picture that Old GM did nothing, even as it knew that the ignition switch defect impacted consumers. From its development in 1997, the ignition switch never passed Old GM’s own technical specifications. Old GM knew that the switch was defective, but it approved the switch for millions of cars anyway.

Once the ignition switch was installed, Old GM almost immediately received various complaints. News outlets reported about the faulty ignition switch. NHTSA approached Old GM about moving stalls and airbag non-deployments. A police report, which Old GM’s legal team possessed, linked these breakdowns to a faulty ignition switch. Old GM even considered warning dealers (but not consumers) about moving stalls. By May 2009, at the latest, Old GM personnel had essentially concluded that the ignition switch, moving stalls, and airbag non-deployments were related. Considering the airbag issues, they believed that one of the two “most likely explanation[s] for the power mode signal change was . . . a problem with the Ignition Switch.” J. App. 9783.

A bankruptcy court could reasonably read from this record that Old GM knew about the ignition switch defect. Old GM knew that the defect caused stalls and had linked the airbag non-deployments to the defect by May 2009.

Even assuming the bankruptcy court erred in concluding that Old GM knew, Old GM — if reasonably diligent — surely should have known about the defect. Old GM engineers should have followed up when they learned their ignition switch did not initially pass certain technical specifications. Old GM lawyers should have followed up when they heard disturbing reports about airbag non-deployments or moving stalls. Old GM product safety teams should have followed up when they were able to recreate the ignition switch defect with ease after being approached by NHTSA. If any of these leads had been diligently pursued in the seven years between 2002 and 2009, Old GM likely would have learned that the ignition switch defect posed a hazard for vehicle owners.

Such “reckless disregard of the facts [is] sufficient to satisfy the requirement of knowledge.” McGinty v. State, 193 F.3d 64, 70 (2d Cir. 1999) . In the face of all the reports and complaints of faulty ignition switches, moving stalls, airbag non-deployments, and, indeed, serious accidents, and in light of the conclusions of its own personnel, Old GM had an obligation to take steps to “acquire full or exact knowledge of the nature and extent” of the defect. United States v. Macias, 786 F.3d 1060, 1062 (7th Cir. 2015) . Under these circumstances, Old GM had a duty to identify the cause of the problem and fix it. Instead, the Valukas Report recounts a corporate culture that sought to pin responsibility on others and a Sisyphean search for the “root cause.”

Further, even if the precise linkage between the ignition switch defect and moving stalls and airbag non-deployments was unclear, Old GM had enough knowledge. At minimum, Old GM knew about moving stalls and airbag non-deployments in certain models, and should have revealed those facts in bankruptcy. Those defects would still be the basis of “claims,” even if the root cause (the ignition switch) was not clear.

New GM argues in response that because plaintiffs’ claims were “contingent,” those individuals were “unknown” creditors as a matter of law. But contingent claims are still claims, 11 U.S.C. § 101(5), and claimants are entitled to adequate notice if the debtor knows of the claims. Moreover, as discussed above, the only contingency was Old GM telling owners about the ignition switch defect — a contingency wholly in Old GM’s control and without bearing as to Old GM’s own knowledge. New GM essentially asks that we reward debtors who conceal claims against potential creditors. We decline to do so. See Grogan, 498 U.S. at 286-87 .

Finally, we address a theme in this case that the GM bankruptcy was extraordinary because a quick § 363 sale was required to preserve the value of the company and to save it from liquidation. See New GM Br. 34 (“Time was of the essence, and costs were a significant factor.”). Forty days was indeed quick for bankruptcy and previously unthinkable for one of this scale. While the desire to move through bankruptcy as expeditiously as possible was laudable, Old GM’s precarious situation and the need for speed did not obviate basic constitutional principles. Due process applies even in a company’s moment of crisis. Cf. Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398, 425 (1934) (“The Constitution was adopted in a period of grave emergency.”).

We find no clear error in the bankruptcy court’s finding that Old GM knew or should have known with reasonable diligence about the defect. See MLC II, 529 B.R. at 556-60. Individuals with claims arising out of the ignition switch defect were entitled to notice by direct mail or some equivalent, as required by procedural due process.

B. “Prejudice”

After concluding that Old GM did not provide adequate notice, the bankruptcy court nonetheless enforced the Sale Order. See id. at 565-73. The bankruptcy court held that “prejudice” is an “esssential elem ment” of procedural due process and that plaintiffs were not prejudiced — except as to independent claims — because the bankruptcy court would have approved the Sale Order even if plaintiffs were provided adequate notice. Id. at 565. The parties dispute whether “prejudice” is required and, if it is, whether there is prejudice here.

1. Applicable Law

The bankruptcy court held that “prejudice” is a requirement of the Due Process Clause and that even if inadequate notice deeprived an individual of property without a meaningful opportunity to be heard, there is no prejudice if in hindsight the outcome would have been the same with adequate notice. Id. Some courts have indeed held that “a party who claims to be aggrieved by a violation of procedural due process must show prejudice.” Perry v. Blum, 629 F.3d 1, 17 (1st Cir. 2010) . Other courts have held otherwise that “a due process violation cannot constitute harmless error.” In re New Concept Hous., Inc., 951 F.2d 932, 937 n.7 (8th Cir. 1991) ; see Fuentes v. Shevin, 407 U.S. 67, 87 (1972) (“The right to be heard does not depend upon an advance showing that one will surely prevail at the hearing.”). [25] Courts have concluded that a “free and clear” clause was unenforceable because of lack of notice and a hearing in accordance with procedural due process, without exploring prejudice. See In re Savage Indus., 43 F.3d 714, 721-22 (1st Cir. 1994) ; cf. Nolasco v. Holder, 637 F.3d 159, 164 (2d Cir. 2011) (“There may well be instances in which . . . failure to comply with [a procedural rule] results in a lack of notice or the denial of a meaningful opportunity to be heard such that . . . due process rights are violated.”).

The § 363 sale context presents unique challenges for due process analysis. As seen here — with over 850 objections filed — objections may often be duplicative. See GM, 407 B.R. at 500 (finding successor liability “most debatable” of issues); cf. Mullane, 339 U.S. at 319 (“[N]otice reasonably certain to reach most of those interested in objecting is likely to safeguard the interests of all, since any objections sustained would inure to the benefit of all.”). Many of the objections, especially those made against a “free and clear” provision, are not likely to be grounded in any legal right to change the terms of the sale, but rather will be grounded in a particular factual context. Section 363 sales are, in essence, private transactions. On one side, the debtor-in-possession “has ample administrative flexibility in the conduct of sales,” 3 Collier on Bankruptcy ¶ 363.02, and on the other side, the purchaser need not take on liabilities unless it wishes to do so, see id. ¶ 363.06[7]. A bankruptcy court reviews a proposed § 363 sale’s terms only for some minimal “good business reason.” Lionel, 722 F.2d at 1071 ; see also 3 Collier on Bankruptcy ¶ 363.02[e] (“One of the major policy decisions in drafting the Code was to separate the court from the day-to-day administrative activities in bankruptcy cases. . . .”). Many sale objections will thus sound in business reasons to change the proposed sale order, and not by reference to some legal requirement that the order must be changed. [26]

Assuming plaintiffs must demonstrate prejudice, the relevant inquiry is whether courts can be confident in the reliability of prior proceedings when there has been a procedural defect. See Lane Hollow Coal Co. v. Dir., Office of Workers’ Compensation Programs, 137 F.3d 799, 808 (4th Cir. 1998) (considering “fairness of the trial and its reliability as an accurate indicator of guilt”); see also Rose v. Clark, 478 U.S. 570, 577-78 (1986) (asking whether adjudication in the criminal context without procedural protections can “reliably serve its function as a vehicle for determination of” a case). In considering reliability, “[t]he entire record must be considered and the probable effect of the error determined in the light of all the evidence.” 11 Charles Alan Wright, Arthur R. Miller, et al., Federal Practice & Procedure § 2883 (3d ed. 2016) [hereinafter “Wright & Miller”]; see Matusick v. Erie Cty. Water Auth., 757 F.3d 31, 50-51 (2d Cir. 2014) . “[I]f [the court] cannot say, with fair assurance, after pondering all that happened without stripping the erroneous action from the whole, that the judgment was not substantially swayed by the error,” then it must find a procedural due process violation. Kotteakos v. United States, 328 U.S. 750, 765 (1946) .

2. Application

We need not decide whether prejudice is an element when there is inadequate notice of a proposed § 363 sale, for even assuming plaintiffs must demonstrate prejudice, they have done so here. After examining the record as a whole, we cannot say with fair assurance that the outcome of the § 363 sale proceedings would have been the same had Old GM disclosed the ignition switch defect and these plaintiffs voiced their objections to the “free and clear” provision. Because we cannot say with any confidence that no accommodation would have been made for them in the Sale Order, we reverse.

At the outset, it is difficult to evaluate in hindsight what the objections would have been had plaintiffs participated in the § 363 sale. Perhaps they would have tried to identify some legal defect in the Sale Order, asked that economic losses or pre-closing accidents arising from the ignition switch defect be exempted from the “free and clear” provision, or requested greater priority in any GUC Trust distribution. But this uncertainty about the content of plaintiffs’ objections is the natural result of the lack of any meaningful opportunity to be heard in the § 363 sale proceedings. Cf. Lane Hollow, 137 F.3d at 808 (“If there has been no fair day in court, the reliability of the result is irrelevant, because a fair day in court is how we assure the reliability of results.”). This lack of certainty in turn influences our degree of confidence in the outcome.

The bankruptcy court instead concluded that it would have reached the same decision — that it would have entered the Sale Order on the same terms — even if plaintiffs had been given an opportunity to be heard. The bankruptcy court concluded that these plaintiffs “offer no legally based arguments as to why they would have, or even could have, succeeded on the successor liability legal argument when all of the other objectors failed.” MLC II, 529 B.R. at 567; see GM, 407 B.R. at 499-506 (considering objections). The bankruptcy court found that other arguments were too “speculative.” MLC II, 529 B.R. at 567-68, 573.

We disagree. The bankruptcy court failed to recognize that the terms of this § 363 sale were not within its exclusive control. Instead, the GM sale was a negotiated deal with input from multiple parties — Old GM, New GM, Treasury, and other stakeholders. The Sale Order and Sale Agreement reflect this polycentric approach: it includes some fifteen sets of liabilities that New GM voluntarily, and without legal compulsion, took on as its own.

The process of how New GM voluntarily assumed liabilities is most apparent with its assumption of Lemon Law claims. [27] Following the proposed sale order, numerous state attorneys general objected that the proposed sale would bar claims based on state Lemon Laws. But their objections were not particularly legal in character — that is, no state attorney general focused on how a liability shield that barred Lemon Law claims would be illegal. Citing no law, the objection was that New GM should assume these liabilities “[i]n light of the relationship between [Old GM] and [New GM] . . ., as well as the statements by the United States government promising that all warranty obligations would be honored.” Bankr. ECF No. 2043, at 39; accord Bankr. ECF No. 2076, at 10. In other words, because President Obama had promised to back warranties, the state attorneys general argued that that Lemon Laws should be honored as well.

Following these objections, “Lemon Law claims were added as an assumed liability during the course of the 363 Sale hearing after negotiation with the [state attorneys general].” MLC II, 529 B.R. at 534 n.36. The state attorneys general had made a practical, business-minded argument, which brought Old GM, New GM, and Treasury to the negotiating table. At the sale hearing, counsel to the National Association of Attorneys General commented that the state attorneys general “have worked very hard since the beginning of the case with debtors’ counsel initially, with Treasury counsel, almost everybody in this room at some point or another.” J. App. 2084. The result of these negotiations was an understanding that “lemon laws were covered under the notion of warranty claims” and inclusion in the Sale Agreement of language reflecting this agreement. Id. at 2086.

Opportunities to negotiate are difficult if not impossible to recreate. We do not know what would have happened in 2009 if counsel representing plaintiffs with billions of dollars in claims had sat across the table from Old GM, New GM, and Treasury. Our lack of confidence, however, is not imputed on plaintiffs denied notice but instead bolsters a conclusion that enforcing the Sale Order would violate procedural due process. Indeed, for the following reasons, while we cannot say with any certainty that the outcome would have been different, we can say that the business circumstances at the time were such that plaintiffs could have had some negotiating leverage, and the opportunity to participate in the proceedings would have been meaningful.

First, it is well documented that one of the primary impetuses behind a quick § 363 sale was to “restore consumer confidence.” GM, 407 B.R. at 480. “The problem is that if the 363 Transaction got off track . . ., the U.S. Government would see that there was no means of early exit for GM; . . . customer confidence would plummet; and . . . the U.S. Treasury would have to keep funding GM.” Id. at 492. If consumer confidence dissipated, neither Treasury loans nor a § 363 sale could save GM: nobody would buy a GM car.

These concerns were reflected in President Obama’s $600 million guarantee of GM and Chrysler warranties. The business of cars is unique, dependent largely on the goodwill of consumers. Cars are owned for years and form the cornerstones of quintessentially American activities: dropping off and picking up children from school, drive-ins and drive-thrus, family vacations and road trips. “[T]he road and the automobile” are, in American history, “sanctuaries, hidden from the intrusive gaze of the state, [where] individuals live freely.” Sarah Seo, The New Public, 125 Yale L.J. 1616, 1620 (2016). The safety and reliability of a car are central to these activities. As the head of President Obama’s auto task force put it, in relation to Chrysler’s bankruptcy: “what consumer would buy another Chrysler if the company didn’t honor its warranties?” Rattner, supra note 8, at 181. In other words, plaintiffs could have tried to convince the bankruptcy parties that it made good business sense to spend substantial sums to preserve customer goodwill in the GM brand and, in turn, GM’s business value.

Second, New GM was not a truly private corporation. Instead, the President and Treasury oversaw its affairs during the bailout and Treasury owned a majority stake following the bankruptcy. While private shareholders expect their investments to be profitable, the government does not necessarily share the same profit motive. Treasury injected hundreds of billions of dollars into the economy during the financial crisis, not on the expectation that it would make a reasonable rate of return but on the understanding that millions of Americans would be affected if the economy were to collapse. If the ignition switch defect were revealed in the course of bankruptcy, plaintiffs could have petitioned the government, as the majority owner of New GM, to consider how millions of faultless individuals with defective Old GM cars could be affected. Indeed, during the later congressional hearings, Representatives and Senators questioned New GM’s CEO on her invocation of the liability shield when the government guided the process. See supra note 13. Senator Richard Blumenthal, for instance, indicated that he would have objected in bankruptcy had he known, because he “opposed it at the time, as Attorney General for the state of Connecticut, not [foreseeing] that the material adverse fact being concealed was as gigantic as this one.” April 2, 2014 Senate Hearing, supra note 13, at 22-23 (statement of Sen. Richard Blumenthal, Member, S. Subcomm. on Consumer Prot., Prod. Safety & Ins.).

Third, we must price in the real cost of disrupting the bankruptcy process. From the middle of 2007 through the first quarter of 2009, Old GM’s average net loss exceeded $10 billion per quarter; a day’s worth of delay would cost over $125 million, a week almost a billion dollars. We do not know whether the proceedings would have been delayed, but some delay was certainly possible. For instance, Congress called the GM CEO to testify over the course of four days. [28] Old GM likewise conducted a thorough internal investigation on the ignition switch defect, and the Valukas Report took more than two-and-a-half months to prepare. It seems unlikely that a bankruptcy court would have casually approved a “free and clear” provision while these investigations into the ignition switch defect’s precise nature were still ongoing.

Finally, there is the detriment of added litigation — had the class actions been filed in the midst of bankruptcy, the mere administration of those cases could have taken considerable resources. Had the government also brought criminal charges — such as the charges now suspended by a deferred prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York in which New GM forfeited $900 million — managing how to juggle bankruptcy with a criminal prosecution could have taken even longer. United States v. $900,000,000 in U.S. Currency, No. 15 Civ. 7342 (S.D.N.Y.), ECF No. 1; see 11 U.S.C. § 362(b)(1) (exempting from usual automatic stay criminal actions against debtor). The reasonable conclusion is that, with the likelihood and price of disruption to the bankruptcy proceedings being so high, plaintiffs at least had a basis for making business-minded arguments for why they should receive some accommodation in or carve-out from the Sale Order.

Under these circumstances, we cannot be confident that the Sale Order would have been negotiated and approved exactly as it was if Old GM had revealed the ignition switch defect in bankruptcy. The facts here were peculiar and are no doubt colored by the inadequate notice and plaintiffs’ lack of any meaningful opportunity to be heard. See Kotteakos, 328 U.S. at 765 (directing courts to consider “all that happened without stripping the erroneous action from the whole”). Given the bankruptcy court’s focus on consumer confidence, the involvement of Treasury, the financial stakes at the time, and all the business circumstances, there was a reasonable possibility that plaintiffs could have negotiated some relief from the Sale Order.

We address two further concerns. First, the bankruptcy court stated that it “would not have let GM go into the liquidation that would have resulted if [it] denied approval of the 363 Sale.” MLC II, 529 B.R at 567; see J. App. 1623. In other words, the bankruptcy court suggested that it would have approved the § 363 sale anyway, because the alternative was liquidation — and liquidation would have been catastrophic. While we agree that liquidation would have been catastrophic, we are confident that Old GM, New GM, Treasury, and the bankruptcy court itself would have endeavored to address the ignition switch claims in the Sale Order if doing so was good for the GM business. The choice was not just between the Sale Order as issued and liquidation; accommodations could have been made.

Second, many of the peculiar facts discussed apply with less force to the Non-Ignition Switch Plaintiffs, who assert claims arising from other defects. The bankruptcy court entered judgment against the Non-Ignition Switch Plaintiffs based on its opinion determining the rights of the other plaintiffs, but left as an open question whether Old GM knew of the Non-Ignition Switch Plaintiffs’ claims based in other defects. See MLC III, 531 B.R. at 360. Without factual findings relevant to determining knowledge, we have no basis for deciding whether notice was adequate let alone whether enforcement of the Sale Order would violate procedural due process as to these claims.

To conclude, we reverse the bankruptcy court’s decision insofar as it enforced the Sale Order to enjoin claims relating to the ignition switch defect. [29] See MLC II, 529 B.R. at 566-73. 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 re Johns-Manville Corp., 600 F.3d 135, 158 (2d Cir. 2010) . As to claims based in non-ignition switch defects, we vacate the bankruptcy court’s decision to enjoin those claims, see MLC III, 531 B.R. at 360, and remand for further proceedings consistent with this opinion.

IV. Equitable Mootness

Finally, we address the bankruptcy court’s decision that relief for any would-be claims against GUC Trust was equitably moot. MLC II, 529 B.R. at 583-92. We ordinarily review “dismissal on grounds of equitable mootness for abuse of discretion, under which we examine conclusions of law de novo and findings of fact for clear error.” In re BGI, Inc., 772 F.3d 102, 107 (2d Cir. 2014) (citation omitted). There were, however, no claims asserted against Old GM or GUC Trust in bankruptcy court or in the multi-district litigation. Under these circumstances, we exercise our “independent obligation” to ensure that the case “satisfies the `case-or-controversy’ requirement of Article III, Section 2 of the Constitution.” United States v. Williams, 475 F.3d 468, 478-9 (2d Cir. 2007) .

A. Applicable Law

The doctrine of equitable mootness allows appellate courts to dismiss bankruptcy appeals “when, during the pendency of an appeal, events occur” such that “even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.” In re Chateaugay Corp. (“Chateaugay II”), 988 F.2d 322, 325 (2d Cir. 1993). “[A] bankruptcy appeal is presumed equitably moot when the debtor’s reorganizatioon plan has been substantially consummated.” In re BGI, 772 F.3d at 108 . To obtain relief in these circumstances, a claimant must satisfy the so-called “Chateaugay factors.” See Chateaugay III, 10 F.3d at 952-53.

The equitable mootness doctrine has enigmatic origins, and the range of proceedings in which it applies is not well settled. See In re Continental Airlines, 91 F.3d 553, 567 (3d Cir. 1996) (en banc) (Alito, J., dissenting) (labeling it a “curious doctrine”). Our Circuit has acknowledged that the doctrine draws on “equitable considerations as well as the constitutional requirement that there be a case or controversy.” Chateaugay III, 10 F.3d at 952. Other courts have focused instead on the doctrine’s statutory underpinnings and role in “fill[ing] the interstices of the Code.” In re UNR Indus., Inc., 20 F.3d 766, 769 (7thh Cir. 1994) (explaining also difference between “inability to alter the outcome (real mootness) and unwillingness to alter the outcome (‘equitable mootness’)”). Indeed, several provisions of the Code prohibit modification of bankruptcy orders unless those orders are stayed pending appeal. See, e.g., 11 U.S.C. §§ 363(m), 364(e).

However broad the doctrine of equitable mootness, Article III requires a case or controversy before relief may be equitably mooted. [30] “[E]quitable mootness bears only upon the proper remedy, and does not raise a threshold question of our power to rule.” In re Metromedia Fiber Network, Inc., 416 F.3d 136, 144 (2d Cir. 2005) (emphasis added).

“The oldest and most consistent thread in the federal law of justiciability is that federal courts will not give advisory opinions.” 13 Wright & Miller § 3529.1. A controversy that is “appropriate for judicial determination . . . must be definite and concrete, touching the legal relations of parties having adverse legal interests.” Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-41 (1937) ; see Flast v. Cohen, 392 U.S. 83, 95 (1968) (“limit[ing] the business of federal courts to questions presented in an adversary context and in a form historically viewed as capable of resolution through the judicial process”). “[F]ederal courts are without power to decide questions that cannot affect the rights of litigants in the case before them.” North Carolina v. Rice, 404 U.S. 244, 246 (1971) (emphasis added). That is, courts may not give “an opinion advising what the law would be upon a hypothetical state of facts,” Aetna Life Ins., 300 U.S. at 241, for instance, where a party did not “seek the adjudication of any adverse legal interests,” S. Jackson & Son, Inc. v. Coffee, Sugar & Cocoa Exch. Inc., 24 F.3d 427, 432 (2d Cir. 1994) .

These limitations apply to bankruptcy courts. See Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1945 (2015) (“Bankruptcy courts hear matters solely on a district court’s reference [and]possess no free-floating authority to decide claims traditionally heard by Article III courts.”). In bankruptcy, moreover, the adjudication of claims may be subject to other preparatory steps. Bankruptcy courts will generally set a “bar date” that fixes the time to file a proof of claim against the bankruptcy estate. See Fed. R. Bankr. P. 3002(c)(3). If the bar date has passed, then the initial step for an individual seeking relief against the estate would be to seek permissiion to file a late proof of claim: only after permission is granted can that individual claim that she is entitled to relief. See Fed. R. Bankr. P. 9006(b)(1); see also Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd., 507 U.S. 380, 394-95 (1993) (setting forth standard for “excusable neglect” for late claims under Rule 9006(b)(1)).

B. Application

Here, the bankruptcy court held that any relief from GUC Trust would be equitably moot. But plaintiffs never sought relief from GUC Trust. The bankruptcy court’s ruling on equitable mootness was therefore advisory.

Neither GUC Trust nor Old GM are parties to the multi-district litigation now ongoing in district court. Only one defendant is named: New GM. Likewise, as GUC Trust confirmed at oral argument, plaintiffs have not filed any proofs of claim with GUC Trust, nor have they even asked the bankruptcy court for permission to file late proofs of claim or to lift the bar date, as would be required before relief could be granted. [31]

Instead, it appears from the record that GUC Trust became involved at New GM’s behest. New GM noted “well there is a GUC Trust” and suggested that because of the Sale Order’s bar on successor liability, any claims remained with Old GM and thus GUC Trust. J. App. 11038. But New GM has not sought to implead and bring cross-claims against GUC Trust in the multi-district litigation under Federal Rule of Civil Procedure 14 or to do the same in the Groman Plaintiffs’ adversary proceeding in bankruptcy under Federal Rule of Bankruptcy Procedure 7014.

Moreover, GUC Trust has protested its involvement in the case. At a May 2, 2014 hearing, GUC Trust notified the bankruptcy court that it was “frankly [a] stranger[] to these proceedings.” Id. at 11093. This was, according to GUC Trust’s uncontested representation, because:

No claimants, none of the plaintiffs, no claimants or potential claimants had raised this as a possibility. No one has filed a motion to lift the bar date. The only person that has raised it has been New GM, based upon, you know, some statements of fact in some pleadings. But the only person that has actually moved forward with it is New GM, and frankly, you know, it’s our view that this is essentially a way to deflect liability away, and you know, the attention away from New GM and put it on a third party.

Id. at 11090. At a July 2, 2014 hearing, GUC Trust continued to push that litigation of the equitable mootness issue was premature, and dependent on whether the Sale Order could be enforced. Id. at 8485. [32]

Nonetheless, the bankruptcy court asked the parties (including GUC Trust) to brief initially whether claims against New GM were really claims against Old GM’s bankruptcy estate or GUC Trust. As the bankruptcy court stated: “we’re going to consider as [a] threshold issue[] . . . the possibility that the claims now being asserted may be claims against Old GM or the GUC Trust.” J. App. 11103 (emphases added). Following a later hearing, the bankruptcy court added an issue of whether claims, if any, against GUC Trust should be “disallowed/dismissed on grounds of equitable mootness.” Id. at 5780.

GUC Trust was thus not a “litigant[] in the case before [the bankruptcy court],” Rice, 404 U.S. at 246, who “s[ought] the adjudication of any adverse legal interests,” S. Jackson & Son, Inc., 24 F.3d at 432 . GUC Trust sought not to be involved, but the bankruptcy court ordered otherwise. In doing so, the bankruptcy court was concerned with a “hypothetical” scenario, see Aetna Life Ins., 300 U.S. at 241 — the “possibility” that there “may be” late-filed claims against GUC Trust, J. App. 11103. The bankruptcy court’s decision on equitable mootness that followed essentially advised on this hypothetical controversy.

We acknowledge that the parties have expended considerable time arguing about equitable mootness. We are likewise cognizant that plaintiffs at one point sent a letter to GUC Trust suggesting that it should freeze its distributions pending the bankruptcy proceedings. See MLC II, 529 B.R. at 537-38. But plaintiffs did not pursue any claims. Ultimately, it is the parties, and not the court, that must create the controversy. See Dep’t of Envtl. Prot. & Energy v. Heldor Indus., Inc., 989 F.2d 702, 707 (3d Cir. 1993) (rendering advisory “an answer to a question not asked” by the parties).

We thus conclude that the bankruptcy court’s decision on equitable mootness was advisory and vacate that decision. See MLC II, 529 B.R. at 583-92.


For the reasons set forth above, with respect to the bankruptcy court’s decisions below, we:

(1) AFFIRM the decision not to enforce the Sale Order as to the independent claims;

(2) REVERSE the decision to enforce the Sale Order as to the Used Car Purchasers’ claims and claims relating to the ignition switch defect, including pre-closing accident claims and economic loss claims;

(3) VACATE the decision to enforce the Sale Order as to claims relating to other defects; and

(4) VACATE the decision on equitable mootness as advisory.

We REMAND the case for further proceedings consistent with this opinion.

[1] The Clerk of Court is respectfully directed to amend the official caption to conform to the above.

[2] Remarks on the United States Automobile Industry, 2009 Daily Comp. Pres. Doc. 2 (June 1, 2009).

[3] For ease of reference, in the context of this appeal, we also refer to Wilmington Trust Company (the administrator of GUC Trust) and the unitholders of GUC Trust collectively and singularly as “GUC Trust.”

[4] See 28 U.S.C. § 158(d)(2) (providing jurisdiction for courts of appeals to hear appeals if the bankruptcy court certifies that certain conditions are met).

[5] Remarks on the American Auto Industry, 44 Weekly Comp. Pres. Doc. 1569 (Dec. 19, 2008).

[6] Remarks on the United States Automobile Industry, 2009 Daily Comp. Pres. Doc. 2 (Mar. 30, 2009) [hereinafter “March 30, 2009 Presidential Remarks”].

[7] March 30, 2009 Presidential Remarks, supra note 6, at 3.

[8] See Office of the Press Sec’y, White House, Obama Administration’s New Warrantee Commitment Program (Mar. 30, 2009); see also Office of the Press Sec’y, White House, Obama Administration New Path to Viability for GM & Chrysler (Mar. 30, 2009); Steven Rattner, Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry 299 (2010).

[9] See generally Evan F. Rosen, Note, A New Approach to Section 363(f)(3), 109 Mich. L. Rev. 1529, 1538-39 (2011) (“However, unlike sales pursuant to the standard Chapter 11 plan confirmation process, 363(f) Sales occur without the benefit of the Chapter 11 Safeguards — the disclosure, notice, voting, and priority safeguards . . . to protect secured creditors.”).

[10] See Jacob A. Kling, Rethinking 363 Sales, 17 Stan. J.L. Bus. & Fin. 258, 262 (2012) (“A plan of reorganization must be submitted to a vote of creditors and equity holders after furnishing them with a disclosure statement, a process that can take years.” (footnote omitted)).

[11] The Sale Agreement defined “Lemon Laws” as “state statute[s] requiring a vehicle manufacturer to provide a consumer remedy when such manufacturer is unable to conform a vehicle to the express written warranty after a reasonable number of attempts, as defined in the applicable statute.” J. App. 1676.

[12] See, e.g., Bill Vlasic, G.M. Vow to Slim Includes Top Ranks, N.Y. Times (July 10, 2009) (“General Motors . . . emerged from bankruptcy on Friday . . . .”); John D. Stoll & Neil King Jr., GM Set to Exit Bankruptcy, Wall Street Journal (July 10, 2009) (“The new General Motors Co. is poised to exit Chapter 11 protection as soon as Friday morning, and to emerge as a leaner, more focused company after only 40 days in bankruptcy court.”).

[13] Staff of H. Comm. on Energy & Commerce, 113th Cong., Report on the GM Ignition Switch Recall: Review of NHTSA 1 (Sept. 16, 2014); Examining Accountability and Corporate Culture in Wake of the GM Recalls: Hearing Before the Subcomm. on Consumer Prot., Prod. Safety, & Ins. of the S. Comm. on Commerce, Sci., & Transp., 113th Cong. (2014); The GM Ignition Switch Recall: Investigation Update: Hearing Before the Subcomm. on Oversight & Investigations of the H. Comm. on Energy & Commerce, 113th Cong. (2014); Examining the GM Recall and NHTSA’s Defect Investigation Process: Hearing Before the Subcomm. on Consumer Prot., Prod. Safety, & Ins. of the S. Comm. on Commerce, Sci., & Transp., 113th Cong. (2014) [hereinafter “April 2, 2014 Senate Hearing”]; The GM Ignition Switch Recall: Why Did It Take So Long?: Hearing Before the Subcomm. on Oversight & Investigations of the H. Comm. on Energy & Commerce, 113th Cong. (2014).

[14] Plaintiffs and New GM each extensively cite and quote to the Valukas Report as an account of the underlying facts regarding the ignition switch defect, and we do as well.

[15] Torque is a measure of twisting force — it is generated, for example, when one twists off the cap of a soda bottle or tightens a bolt with a wrench.

[16] Those class actions are consolidated before a district judge in the United States District Court for the Southern District of New York. See In re General Motors LLC Ignition Switch Litigation, No. 14-MD-2543 (S.D.N.Y.) (Furman, J.).

[17] On August 1, 2014, New GM filed motions to enforce the Sale Order against the Pre-Closing Accident Plaintiffs and Non-Ignition Switch Plaintiffs, who entered the bankruptcy proceedings later.

[18] On appeal, the Non-Ignition Switch Plaintiffs are joined by certain ignition switch and pre-closing accident plaintiffs and call themselves the “Elliot, Sesay, and Bledsoe Plaintiffs.” That group also represents two other appellants captioned above: Berenice Summerville and Doris Powledge Phillips. For ease of reference, in the context of this appeal, we will continue to call the group the “Non-Ignition Switch Plaintiffs.”

[19] Indeed, the bankruptcy court’s opinion in GM, 407 B.R. 463, which approved the § 363 sale, has been reviewed on appeal has three times: a stay pending appeal was denied in In re General Motors Corp., No. M 47(LAK), 2009 WL 2033079 (S.D.N.Y. July 9, 2009), and the opinion was affirmed in In re Motors Liquidation Co., 428 B.R. 43 (S.D.N.Y. 2010), and in In re Motors Liquidation Co., 430 B.R. 65 (S.D.N.Y. 2010) .

[20] The bankruptcy court mentioned, however, that claims based on New GM’s “independently wrongful, and otherwise actionable, conduct” could not be categorized as claims that could be assumed by New GM or retained by Old GM via the Sale Order. MLC II, 529 B.R. at 583. But the bankruptcy court did not explicitly address whether it still considered those claims to be covered by the Sale Order.

[21] New GM also cites a non-precedential summary order on this issue. See Douglas v. Stamco, 363 F. App’x 100 (2d Cir. 2010) .

[22] When the bankruptcy court determined that successor liability claims could constitute interests, Chrysler had not yet been vacated. See GM, 407 B.R. at 505 (“Chrysler is not distinguishable in any legally cognizable respect.”).

[23] Although Chrysler was vacated on grounds of mootness, it still “constitute[s] persuasive authority.” Anderson v. Rochester-Genesee Reg’l Transp. Auth., 337 F.3d 201, 208 n.5 (2d Cir. 2003) . Both our Circuit and the Third Circuit have continued to cite Chrysler favorably. See In re N. New Eng. Tel. Operations LLC, 795 F.3d 343, 346, (2d Cir. 2015) ; In re Jevic Holding Corp., 787 F.3d 173, 188-89 (3d Cir. 2015) .

[24] To the extent that Pre-Closing Accident Plaintiffs assert claims arising after the petition but before the § 363 sale closing, no party on appeal suggests that we treat claims in this timeframe differently. In any event, those claims are contingent on the accident occurring and “result from pre-petition conduct fairly giving rise to [a] contingent claim.” Chateaugay I, 944 F.2d at 1005 (internal quotation marks omitted).

[25] See, e.g., McNabb v. Comm’r Ala. Dep’t of Corr., 727 F.3d 1334, 1347 (11th Cir. 2013) (“Our cases have long held that certain procedural due process violations, such as the flat-out denial of the right to be heard on a material issue, can never be harmless.”); Kim v. Hurston, 182 F.3d 113, 119 (2d Cir. 1999) (commenting that even though the “minimal hearing that procedural due process requires would have done [the plaintiff] little good since she could not have realistically contested the changed reason,” that “[n]evertheless, the procedural due process requirement[s] . . . must be observed”); Lane Hollow Coal Co. v. Dir., Office of Workers’ Compensation Programs, 137 F.3d 799, 806 (4th Cir. 1998) (“[A] just result is not enough.”); In re Boomgarden, 780 F.2d 657, 661 (7th Cir. 1985) (“In bankruptcy proceedings, both debtors and creditors have a constitutional right to be heard on their claims, and the denial of that right to them is the denial of due process which is never harmless error.” (internal quotation marks omitted)); In re George W. Myers Co., 412 F.2d 785, 786 (3d Cir. 1969) (holding that “alleged bankrupt was denied procedural due process by the . . . refusal of its offer to present evidence at the close of the evidence” and that such denial could not be “harmless error”); Republic Nat’l Bank of Dallas v. Crippen, 224 F.2d 565, 566 (5th Cir. 1955) (“The right to be heard on their claims was a constitutional right and the denial of that right to them was the denial of due process which is never harmless error.”); Phila. Co. v. SEC, 175 F.2d 808, 820 (D.C. Cir. 1948) (“Denial of a procedural right guaranteed by the Constitution — in this instance denial of the type of hearing guaranteed . . . by the due process clause — is never `harmless error.'”), vacated as moot, 337 U.S. 901 (1949) .

[26] See A. Joseph Warburton, Understanding the Bankruptcies of Chrysler and General Motors: A Primer, 60 Syracuse L. Rev. 531, 531 (2010) (“Certain creditors, who saw their investments in the companies sharply reduced, vigorously objected to the role of the government in the bankruptcy process. Some charged that in protecting the interests of taxpayers, the Treasury Department negotiated aggressively with creditors but, in protecting the interests of organized labor, it offered the United Autoworkers union special treatment.”); see also GM, 407 B.R. at 496 (“The objectors’ real problem is with the decisions of the Purchaser, not with the Debtor, nor with any violation of the Code or caselaw.”).

[27] New GM informs the Court that a similar process occurred with respect to New GM accepting responsibility for post-closing accidents.

[28] See Rattner, supra note 8, at 304 (“The auto rescue succeeded in no small part because we did not have to deal with Congress.”).

[29] In reversing, we express no views on the Groman Plaintiffs’ request for discovery to prove a procedural due process violation or fraud on the court.

[30] We do not resolve whether it is appropriate for a bankruptcy court — as opposed to an appellate court — to apply equitable mootness, which appears to be a recent phenomenon. E.g., In re Innovative Clinical Sols., Ltd., 302 B.R. 136, 141 (Bankr. D. Del. 2003) (citing In re Circle K Corp., 171 B.R. 666, 669 (Bankr. D. Ariz. 1994), which nominally applied constitutional mootness); see also Alan M. Ahart, The Limited Scope of Implied Powers of a Bankruptcy Judge: A Statutory Court of Bankruptcy, Not A Court of Equity, 79 Am. Bankr. L.J. 1, 32-33 (2005) (“Since a bankruptcy court is not a court of equity, a bankruptcy judge ought not resort to non-statutory equitable principles, defenses, doctrines or remedies to excuse compliance with or to override provision(s) of the Bankruptcy Code or rules, or nonbankruptcy federal law.”(footnotes omitted)). Indeed, this Circuit’s equitable mootness cases have all involved an appellate body applying the doctrine in the first instance. See, e.g., BGI, 772 F.3d 102 ; In re Charter Commc’ns, Inc., 691 F.3d 476 (2d Cir. 2012) ; In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005) ; In re Burger Boys, Inc., 94 F.3d 755 (2d Cir. 1996) ; In re Chateaugay Corp., 94 F.3d 772 (2d Cir. 1996) ; In re Best Prods. Co., 68 F.3d 26 (2d Cir. 1995) ; Chateaugay III, 10 F.3d 944; Chateaugay II, 988 F.2d 322.

[31] The bankruptcy court lifted the bar date for independent claims as a remedy. See MLC II, 529 B.R. at 583. We note, however, that neither the Groman Plaintiffs nor Ignition Switch Plaintiffs requested this as relief. The Ignition Switch Plaintiffs only mentioned in a footnote in their opposition to the motion to enforce that Old GM failed to provide notice of the bar date. The Pre-Closing Accident Plaintiffs stated on behalf of all plaintiffs that “Plaintiffs are not asserting a due process challenge to a bar date order or a discharge injunction issued in favor of a debtor.” Bankr. ECF No. 13021, at 48 n.26.

[32] The bankruptcy court seemingly agreed momentarily, commenting at the hearing that they could proceed “without now addressing and while maintaining reservations of rights with respect to issues such as . . . equitable [moot]ness.” Id. at 8491.

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