Saturday, June 13, 2009

Claim or Interest -- part 1

Posted on Credit Slips by Stephen Lubben:

One of the key disputes in both the GM and Chrysler cases has been the use of §363(f) to sell the assets "free and clear" of successor liability claims. The normal rule is that a corporation that buys another corporation's assets does not buy its liabilities, unless it expressly contracts to do so. In this context, successor liability typically refers to the "product line" exceptions developed by the California and Michigan Supreme Courts, that allow the assertion of product liability claims against the buyer, notwithstanding the normal rule.

The primary argument against the debtor's ability to sell its assets free of the plaintiff's ability to assert a successor liability claim against the buyer is that §363(f) refers to sales free of an "interest in such property," while §1141, the chapter 11 discharge, relieves the debtor of "claims and interests." For example, in the objection to the Chrysler sale filed by the "tort claimants and consumer organizations," it was argued:

Moreover, the language of Section 1141 of the Bankruptcy Code confirms the propriety of a narrow reading of Section 363(f). Section 1141, which governs the disposition of estate property in a plan of reorganization, broadly states that property dealt with in a plan is free and clear of all “claims and interests of creditors.” 11 U.S.C. § 1141(c). This language is much broader than that of Section 363(f) by including “claims”, not just “interests in property,” i.e. liens.

I do not find the comparison of these two provisions particularly helpful, because it seems clear that the word "interest" is used very differently in the two sections. Indeed, the Bankruptcy Code uses the word "interest" or variations thereof (e.g., disinterested) more than 300 times, often in very different contexts. The most obvious example being interest paid on a debt, e.g., §362(d)(3)(B), a use which would seem to be of little relevance to this discussion.

In §1141(c), confirmation of a plan means that "the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor." In the this instance, it seems clear that "claims" corresponds with "creditors," while "interests" corresponds with "equity security holders" and "general partners."

Shareholders and general partners do not have claims -- so "interest" as used here must refer to them. This also corresponds with the use of "interest" to mean "ownership interest," which is seen in several other parts of chapter 11, like §1129(a)(7), where the use is "class of interests" and 1129(b)(C), which again talks about a "class of interests." Section 101(16)(B) also defines "equity security" to include the "interest" of a limited partner in the partnership. And section 1141(d)(1)(B) confirms this reading by further providing that confirmation of the plan "terminates all rights and interests of equity security holders and general partners." (emphasis added).

Section 1124 also refers to a class of "claims or interests," and here the "or" would seem to create a problem if "interest" meant "lien," as the tort claimants suggest. How does one put a lien -- divorced for the underlying "claim" -- in a class? Senate Report 95–989, which described §1124 as part of the Code's enactment in 1978, further drives home the point that "interest" corresponds with "equity," while "claim" corresponds with "debt" by explaining that

a claim or interest is unimpaired if the plan provides for their payment in cash. In the case of a debt liability, the cash payment is for the allowed amount of the claim, which does not include a redemption premium . . . With respect to any other equity security, such as a common stock, cash payment must be equal to the “value of such holder’s interest in the debtor.” (emphasis added).

In short, it is clear that "interest" as used in §1141, and many other places in chapter 11, does not mean "lien." In chapter 11 "interest" frequently refers to an "ownership interest."

That being said, just because the tort claimants have made a faulty comparison with §1141, it does not necessarily follow that §363(f) allows the sale free of a right to assert a claim against the buyer of the debtor's assets. Instead, the foregoing simply suggests that we can't conclude anything from Congress' failure to include the term "claim" in §363(f) while including it in §1141.

In my next post on this topic, I'll proceed to examine §363(f)'s use of "interest," which I think we can agree clearly does not mean simply "ownership interest," as in §1141. On the other hand, I will argue that it means more than "lien," as the tort claimants have argued.

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