Tag Archives: notice

August 16, 2016

Buyer Beware: a Sale “Free and Clear” is not Free and Clear of Claims Whose Holders Were not Provided Notice of the Sale Hearing

The Second Circuit’s recent opinion in The Matter of: Motors Liquidation Company, 2016 WL 3766237 (2nd Cir. 2016) should give pause to all buyers of assets from bankruptcy estates. This decision comes in the bankruptcy proceedings of General Motors, in which the debtor’s assets were sold by “Old GM” to “New GM” free and clear of all liens, interests, claims and encumbrances, including claims of successor liability, within weeks after the petition was filed. The question in this particular situation was whether the sale was free and clear of claims purchased by consumers prior to the bankruptcy filing and which had a defective ignition switch. Several years after the bankruptcy sale closed, a group of vehicle owners filed an adversary proceeding against New GM in the bankruptcy court, asserting economic losses arising from the ignition switch defect and seeking liability against New GM on a theory of successor liability. New GM sought to enforce the sale order, arguing it acquired Old GM’s assets free and clear of these claims.

The bankruptcy found that GM had actual knowledge of the defect and of potential claims based on it, and that the holders of these claims were entitled to actual notice of the sale hearing. However, although finding that notice to the claimants had been inadequate under the Due Process Clause of the Fifth Amendment, the bankruptcy court nevertheless enforced the sale order, concluding the claimants had not been prejudiced by the sale order because the court would have entered the sale order over any objection the claimants might have raised. An appeal was certified directly to the Second Circuit.

The Second Circuit reversed and remanded the bankruptcy court’s finding as to these “ignition switch” claims. The court began its analysis by noting that several of its sister courts have held that § 363(f) may be used to bar a successor liability claims, concluding the use of the term “claim” in § 363(f) is to be read in harmony with the definition of the word in § 101. Since successor liability claims falls within the parameters of the term “claim” as defined in § 101(5), the court concluded that assets can be sold under § 363 free and clear of such claims. In short, the court held that the “free and clear” language of § 363(f) applies to claims that flow from the debtor’s ownership of the sold assets.

The Second Circuit agreed with the bankruptcy court that the debtors failed to comply with the Due Process Clause when they failed to give actual notice by mail of the proposed sale to the holders of ignition switch claims. The court also agreed with the bankruptcy court that Old GM could have easily identified the holders of these claims and could have provided them with actual notice of the proposed sale by mail. The court relied on the general rule 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 proceeding in question.” Schroeder v. City of New York, 371 U.S. 208, 212-13 (1962).

On the issue of prejudice, however, the Second Circuit came to a different conclusion than the bankruptcy court. The bankruptcy court held that prejudice is a requirement of the Due Process Clause, and that a party who has been denied due process may not be entitled to relief if he has suffered no prejudice. In this instance, the bankruptcy court found no prejudice, concluding it would have entered the sale order even if the claimants had been given notice. In analyzing this aspect of the bankruptcy court’s decision, the Second Circuit noted a split in authority, with the First Circuit concluding prejudice must be shown in asserting a due process violation, Perry v. Blum, 629 F.3d 1 (1st Cir. 2010), whereas the Eighth Circuit has held a showing of prejudice is not required, In re New Concept Hous., Inc., 951 F.2d 932 (8th Cir. 1991). The Second Circuit did not take either side, concluding instead that, even assuming the claimants had to demonstrate prejudice, they had in this specific case. Noting the significant negotiations among numerous parties which lead to the final sale order entered by the court, the Second Circuit believed the claimants, had they received notice of the sale, may have succeeded in negotiating more favorable treatment in the sale order.

This decision highlights the importance to purchasers of assets to make sure their debtor/seller provides appropriate notice to all holders of claims against which the buyer seeks protection from successor liability.

March 3, 2015

U.S. Supreme Court Holds a Consumer’s Right to Rescind a Home Loan Under the Truth in Lending Act does not Require the Filing of a Lawsuit

The Truth in Lending Act (“TILA”) provides, in the event the lender fails to make certain required disclosures, a right in the consumer borrower to rescind a home loan “by notifying the creditor. . . of his intention to do so” within three years of the date the loan was consummate.  15 U.S.C. § 1635(a).  However, how must the consumer notify the creditor of his intention to rescind?  Must the consumer file a lawsuit seeking rescission, or may he rescind by simply sending the creditor a letter rescinding the loan?  In its opinion in Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015), the U.S. Supreme Court held that a simple letter will suffice.

In Jesinoski, the consumer borrowers sent a letter to Countrywide Home Loans rescinding their loan within three years following consummation of their loan.  A year and a day after sending the letter, the Jesinoskis files a lawsuit seeking rescission and damages.  The District Court entered a judgment in favor of Countrywide, holding that a borrower may exercise his or her right of rescission only by filing a lawsuit within three years after the loan is consummated.  The Eight Circuit affirmed that decision, but the Supreme Court reversed. 

The Supreme Court based its decision on the plain language of TILA.  The statute states that a borrower has the right to rescind a loan “until midnight of the third business day following the consummation of the transaction or the delivery” of required disclosures under TILA, whichever is later by “notifying the creditor. . . of his intention to do so.  15 U.S.C. § 1635(a). If the lender never provides the required disclosures, then the consumer borrower’s right of rescission expires three years after the loan is consummated, or upon the sale of the property, whichever occurs first.  15 U.S.C. § 1635(f).  The District Court and the Eighth Circuit both held that rescission under § 1635(f) can be effected only if the consumer files suit for rescission within three years after the loan is consummated.  The Supreme Court held these conclusions to be in error.

In its opinion, the Supreme Court noted first that the plain language of § 1635(a) states that a consumer “shall have the right to rescind . . . by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.”  (emphasis in original).  The Court went on to state that “nothing in § 1635(f) changes this conclusion.”  Although § 1635(f) provides the deadline by which a consumer borrower must provide notice of rescission, the Court stated that the statute “says nothing about how that right is exercised.”  The Court noted its prior decision in Beach v. Ocwen Fed. Bank, 523, U.S. 410, 417 (1998) that there was no federal right to rescind under § 1635(f) after the three year period expired, but that it did not address in Beach whether rescission required a suit be filed. 

The Court stated that the plain language of § 1635(a) requires only written notice of rescission.  Countrywide argued that, because it and the Jesinoskis disputed whether Countrywide had provided the required disclosures, rescission under the statute required the filing of a lawsuit and that a mere written notice did not suffice.  The Court rejected this argument, stating that the language of § 1635(a) “nowhere suggests a distinction between disputed and undisputed rescissions.”  Countrywide also argued that, since § 1635(g) empowers a court to award relief in addition to rescission in an action supported its argument that rescission requires a judgment awarding that relief.  The Court rejected this argument also, holding that allowance of judicial remedies in addition to rescission does not mean that rescission can be accomplished only through legal action.  Finally, the Court rejected Countrywide’s argument under common law, which provides that a party seeking rescission must return what he has received before rescission can occur.  First, the Court noted that § 1635(b) of TILA disclaims the common law condition precedent to rescission that the borrower tender the proceeds received under the transaction. Second, the Court held that “Nothing in our jurisprudence, and no tool of statutory interpretation, requires that a congressional Act must be construed as implementing its closest common-law analogue.”

May 27, 2014

What You Don’t Know Can Hurt You: Lender’s Appeal of Sale Order is Statutorily Moot Despite Lender’s Claim That it Didn’t Know About the Sale

A nightmare scenario for a lender: you lend $1.2 million to a debtor to purchase equipment; you take a first priority security interest in the equipment; one day another company calls to tell you it purchased the equipment at a bankruptcy auction you never knew about, for 10-20% of what you’re owed; you try to overturn the sale, but cannot, because the sale is consummated and your appeal is now “statutorily moot.”  Could this happen?  It happened in a recent Oregon case.

In In re Pacific Cargo Services, LLC, 2014 WL 2041821 (D. Ore. May 9, 2014), the debtor conducted a public auction for its assets under Bankruptcy Code § 363.  Among the assets it sold were 11 specialized industrial trucks, which were General Electric’s collateral, and against which General Electric had loaned $1.2  million.  They were purchased at the auction for $180,000.  General Electric claimed that it first learned about the auction more than a week later, when the purchaser called to obtain titles thereto. 

In connection with the sale, debtor had filed a series of court documents and served them on all creditors: a sale procedures motion, a notice of intent to auction, and a sale motion.  These had gone to GE’s local counsel and attorney of record, to GE’s registered agent, and to the address listed in GE’s proof of claim.  GE’s local counsel did not review them because he was forbidden by GE’s billing policies from reviewing certain types of documents.  The motions mailed to GE itself apparently never made it into the hands of the appropriate person at GE who would know what to do with them.

GE moved in bankruptcy court to vacate the sale order, on the grounds that the sale price of the trucks was unacceptably low and GE was unaware of the auction.  GE’s motion to vacate was unsuccessful.  It then appealed to the district court.  The debtor and the purchaser of the trucks moved to dismiss the appeal as moot under Bankruptcy Code § 363(m).  They succeeded — the district court dismissed GE’s appeal.

A sale under Bankruptcy Code § 363 is protected from reversal on appeal — in other words, the appeal is “statutorily moot” — if the sale was made in good faith and was not stayed pending appeal.  See Bankruptcy Code § 363(m).  But there are exceptions: a sale is not statutorily moot if it was conducted in bad faith, or if the objecting party did not receive sufficient notice.

The bankruptcy court and the district court each held that those exceptions did not apply to GE.  Although GE’s collateral was sold for a fraction of what GE was owed, “a public auction, conducted in accordance with court-approved procedures and without fraud or collusion, is compelling evidence of value.”  Id. at *6.  GE did not allege any fraud or collusion.  A low purchase price, standing alone, does not compel a finding of bad faith.

GE also claimed notice was insufficient because it learned of the auction only after it was over.  The bankruptcy court and the district court each held that the debtor properly followed the Bankruptcy Rules regarding notice and service.  It was not the debtor’s fault that GE forbade local counsel from reviewing certain notices, or that the appropriate person at GE did not receive the notices mailed directly to GE.

Pacific Cargo is a reminder that lenders — especially large, complex institutions — should adopt notice practices and procedures that ensure that notices are received by an employee within the company who will recognize their meaning.  Where local counsel is used, and is the attorney of record, local counsel should be authorized to review all filings in the case so that he or she can protect the creditor’s rights. 

Pacific Cargo is available here: Download In_re_Pacific_Cargo_Services_LLC.