The Examiners: Richard A. Chesley on GM’s Liability

It’s up to the courts to decide whether old or new GM is liable for faulty ignition-switch claims. But what do you think? From a legal, practical or ethical point of view, should it be?

As the GM post-confirmation litigation moves through the New York bankruptcy court, it is important not to lose sight of the how the underlying issues in Motors Liquidation (which are not altogether novel or unduly complex) may impact today’s bankruptcy environment, where asset sales under section 363 have proven to be critical to saving businesses and jobs.

First among the issues is that any buyer of distressed assets can contract for those assets it wishes to purchase and the liabilities it desires to assume. As Motors Liquidation (the name given to the “old GM”) illustrates, it is critically important that buyers (and sellers) carefully describe four key elements of non-cash consideration: purchased or assumed assets, excluded assets, assumed liabilities and excluded liabilities. Certainty around these issues will greatly reduce creditor challenge and judicial intervention following a 363 sale.

Second, there is both market and judicial review of the buyer’s sale conditions. As the economics of the buyer’s offer is subject to “higher and better” offers, buyers need to construct a flexible model to value both cash and non-cash consideration. And, following the sale process, the bankruptcy court must approve the sale, including the all-important determination that the purchase is free and clear of successor liability. Not only must the buyer act in “good faith” to obtain this finding, but it must demonstrate it to the court.

Finally, section 363 protections are only as good as the notice provided to affected creditors. To comport with due process, affected parties must be afforded notice “reasonably calculated under all of the circumstances.” Thus, buyers and sellers alike must pay careful attention to assure that affected parties known or “reasonably ascertainable” are provided full notice and a right to participate in the proceedings.

In the end, while the issues raised in Motors Liquidation are of obvious importance, for those sellers and purchasers of distressed assets, careful attention to the purchase agreement, sale process and hearing and bankruptcy court notices should preserve the ability to continue to use section 363 as a viable tool to sell distressed assets.

Richard A. Chesley is the co-chair of DLA Piper’s restructuring practice, focusing on bankruptcy transactions both in the United States and internationally. He is based in Chicago.