Tag Archives: successor liability lawsuits

Business Restructuring and Bankruptcy: Court issues reminder that "free and clear" sales are not totally free and clear

A New York Federal Court refused recently to dismiss a successor liability lawsuit brought against the purchaser of assets for a claim based on pre-bankruptcy actions of the seller of those assets. In doing so, the court reiterated a rule that, in the wake of the GM and Chrysler bankruptcies, may have been forgotten: absent appropriate notice, a creditor or potential creditor cannot be deemed to have lost or waived its claim against the debtor or its assets, even if a purchaser now owns the assets.

In re Grumman Olson Industries, Inc., the U.S. District Court for the Southern District of New York affirmed a bankruptcy court’s ruling that a bankruptcy court sale order cannot extinguish state law tort claims, based on the debtor’s prepetition conduct, if no injury was caused until after the bankruptcy closed. The district court held that enforcing the “free and clear” provisions of the sale order on claimants who did not receive, and could not have received, notice or an opportunity to participate in the bankruptcy proceedings would violate bankruptcy procedure and due process.

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