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interest in the property sold to the purchaser. The bankruptcy appellate panel affirmed the bankruptcy court's decision.
xiii. Morgan Olson, LLC v. Frederico (In re Grumman Olson Indus., Inc.), 467 B.R. 694 (S.D.N.Y. 2012)
Issue: "[W]hether a bankruptcy sale order, pursuant to Section 363 of the Bankruptcy Code (the "Code"), 11 U.S.C. § 363, can extinguish the state law claims of third parties based on conduct by the debtor before the bankruptcy, where no injury was caused until after the bankruptcy closed."
Holding: The district court affirmed the holding of the bankruptcy court. The court first examined successor liability under common law, noting that "a corporation that purchases the assets of another corporation is generally not liable for the seller's liabilities," but that "[c]ourts have traditionally crafted specific exceptions to this rule where '(1) the successor corporation expressly or impliedly agrees to [assume the liabilities of the predecessor entity], (2) the transaction may be viewed as a de facto merger, (3) the successor is the mere continuation of the predecessor, or (4) the transaction is fraudulent.' The New Jersey Supreme Court has also applied a 'product line' exeption to the general rule against successor liability.'" Next, the court discussed the New Jersey Supreme Court case Lefever v. K.P. Hovanian Enters., Inc., 734 A.2d 290 (N.J. 1999) wherein the Court held that the product line exception "applied even where the purchaser obtained the assets pursuant to a sale order in a bankruptcy proceeding where the order purported to transfer the assets free and clear of any claims against them." The court then addressed Morgan's argument that, given federal preemption in the field of bankruptcy, the NJ Supreme Court did not have the power to rule as it did in Lefever, stating: "This case does not turn on whether there will ultimately be successor liability under New Jersey law, or whether Lefever was correctly decided. In fact, the case does not actually require the Court to resolve a conflict between state law and federal bankruptcy law at all. Rather, the case presents the more basic question whether enforcement of the Sale Order in the manner advocated by Morgan [so as to prevent Frederico from even trying to bring the state court suit] is consistent with Bankruptcy Code procedure and due process." The court, after noting that the Second Circuit reads section 363 broadly to permit the sale of assets free and clear of both "interests" and tort claims, nonetheless concluded that here, because the claims at issue were "future claims" (i.e. had not caused any harm to an identifiable claimant until after the bankruptcy had closed), the sale order could not be read to preclude such claims. The court, following Piper, 58 F.3d 1573 (11th Cir. 1995) (also followed by the bankruptcy court), found that the future claims involved here were not claims that could have been administered in the bankruptcy case because there was no "relationship established before confirmation between an identifiable claimant or group of claimants and that prepetition conduct." Accordingly, the court concluded that, at the time of the debtor's bankruptcy, Frederico did not have a claim capable of being administered in the bankruptcy case, noting: "[b]ecause parties holding future claims cannot possibly be identified and, thus, cannot be provided notice of the bankruptcy, courts consistently hold that, for due process reasons, their claims cannot be discharged by the bankruptcy courts' orders." Finally, the
©2014 William L. Norton III
