A sale of assets pursuant to §363 of the Bankruptcy Code has become an increasingly routine method for a distressed company to expeditiously and effectively liquidate its assets and restructure its financial affairs. Such sales, commonly known as “363 sales,” provide both great value and protection to buyers. Purchasers steadily rely on the debtor’s ability to sell assets “free and clear” of claims and interests, including product liability claims against the debtor-seller. On July 13, 2016, the U.S. Court of Appeals for the Second Circuit, however, issued a ruling in the General Motors bankruptcy case (Elliott v. Gen. Motors LLC (In the Matter of Motors Liquidation Co.), 2016 WL 3766237 (2d Cir. 2016)) calling into question the limits on the enforceability of these “free and clear” provisions, especially against known claimants who did not receive actual notice of the sale. The Motors Liquidation decision serves as an important lesson to buyers of assets in 363 sales: Actual notice to known or potential creditors is critical.

Background

In 2009, General Motors Corporation (“Old GM”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Immediately after the commencement of the bankruptcy case, Old GM sought to sell its core assets to a new entity (“New GM”) owned predominantly by the U.S. Treasury. Old GM provided notice of the proposed sale by direct mail to “all parties … known to have asserted any lien, claim, encumbrance, or interest in or on [the to-be sold assets].” Old GM also noticed the sale in major publications.

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