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Holding: Without deciding whether the Doctrine of Necessity still existed in the Fourth Circuit for pre-confirmation payments to creditors, the bankruptcy court held that the debtors did not show it was necessary to use cash collateral to make pre-confirmation payments to the debtor's shareholders' creditors. The debtor's accounts receivable were pledged as collateral on a loan to Wells Fargo. Roughly a month into its Chapter 11, the debtor moved to use cash collected from its accounts receivable to pay two creditors of its shareholders: BB&T and SunTrust. The debtor argued that the Doctrine of Necessity still allowed for pre-confirmation payments to creditors. It also argued that payments to BB&T were necessary because it would otherwise foreclose of the office building housing the debtor's headquarters and the debtor would cease to operate. As to SunTrust, the debtor argued that without payments, the debtor's shareholders would not be financially able to help out the debtor in future emergencies. The court did not decide whether the Doctrine of Necessity survived the Fourth Circuits decision in Official Committee of Equity Security Holders v. Mabey, 832 F.2d 299 (4th Cir. 1987). However, the court found that even if the doctrine did survive, the debtor failed to show payments to BB&T and SunTrust were necessary. The Doctrine of Necessity is narrow and a showing of convenience is not enough. The court found that there was no evidence that the debtor could not lease the office space for its headquarters even after a foreclosure sale. As for the SunTrust payments, the court found that a contingency plan for a Chapter 11 debtor is often absent and thus, not necessary. Additionally, the court seemed to emphasize that payments to the debtor's shareholders' creditors had no compelling business justification. Lastly, the court found that such payments would be harmful to the debtor's other creditors because the debtor had not shown that it could successfully reorganize.
vi. Burton v. Chrysler Gourp, LLC (In re Old Carco LLC), 492 B.R. 392 (Bankr. S.D.N.Y. 2013)
Issue: What effect, if any, did the sale order allowing Chrysler to purchase the debtor car manufacturers' assets have on plaintiff vehicle owners' claims for manufacturing defects.
Holding: The bankruptcy court held that with a couple of exceptions, the sale order allowing Chrysler to purchase the debtor car manufactures' assets prevented the plaintiff vehicle owners from asserting claims arising prior to closing. Conversely, the court held that Chrysler was liable for claims arising after the closing. Debtors were car manufacturers, and Chrysler bought most of the debtors' assets. The plaintiffs were owners of cars manufactured by debtors or Chrysler that brought various claims centered on certain defects, mainly a "fuel spit back" defect. Chrysler moved to dismiss the plaintiffs' claims because the sale order provided that it was not liable for such claims. The court reviewed the sale order and several related documents. Specifically, the court found that the claims of owners who purchased vehicles sold or manufactured by Chrysler after closing were not affected by the sale order. The court also found that "Chrysler did not assume any liabilities with respect to any pre-existing defects except for the Repair Warranty, Lemon Law claims and Product Liability claims involving accidents. New Chrysler had no duty to extend lifetime warranties to any owner of a [debtor] vehicle. Its duty to repair and replace the 'fuel spit back' flawed components as to those owners who did not receive
©2014 William L. Norton III
