Notice Requirement Clarified for Successor Liability Protection in Chapter 11 Asset Sale Orders

“[M]ere publication notice” to known or knowable claimants, explained the court, was insufficient when the debtor sought to enforce a “free and clear” provision in a “Sale Order” insulating the asset buyer from successor liability based on tort claims “that ' could have been brought against” the debtor-seller. Id. at *26-27. Had the requisite notice been given, though, the Sale Order (and the buyer's protection against successor liability) would probably have been enforceable. See Bankruptcy Code (Code) ' 363(f)(1) (sale may be made “free and clear of any interest in such property”); In re Chrysler LLC, 576 F. 3d 108, 126 (2d Cir. 2009) (successor liability claims are interests), vacated as moot, 558 U.S. 1087 (2009).

The bankruptcy court properly found that the debtor “should have provided direct mail notice to ' [known] owners” of defective vehicles, said the Second Circuit, but erred in holding that “plaintiffs were not prejudiced ' because [it] would have approved the Sale Order even if plaintiffs [had been] provided adequate notice.” According to the bankruptcy court, these plaintiffs would not have “succeeded on [their] successor liability argument” and their “other arguments were 'too speculative.'” Id. at *58. But the Second Circuit disagreed, holding that “enforcing the Sale Order [so as to insulate the asset buyer from liability] would violate procedural due process” because, with adequate notice, the “plaintiffs could have had some negotiating leverage [regarding the terms of any sale order] ' and [a meaningful] opportunity to participate in the proceedings.” Id. at *61.