How Free Is Free and Clear? Bankruptcy Court Shields GM from Texas Lawsuit

A New York bankruptcy court has enjoined the State of Texas from prosecuting state court consumer protection litigation against General Motors to the extent that it involves facts that predate the General Motors 2009 bankruptcy. The decision, In re Motors Liquidation Co., shows the broad scope and effect of “Gatekeeper” injunctions and “free and clear” sale orders, and highlights the policy tensions between law enforcement concerns and bankruptcy concerns.

Background

General Motors filed for bankruptcy in 2009 with the New York bankruptcy court. A critical step in that bankruptcy case was the sale by General Motors of substantially all of its assets to “New GM.” As is customary in bankruptcy sales, the order approving the sale provided that the assets were sold free and clear of all liens, claims, encumbrances and other interests, except for specified assumed liabilities.

In August 2024, the Texas Attorney General filed a lawsuit against New GM in Texas state court alleging that New GM operated a mass surveillance program involving the collection of data pertaining to a user’s driving behavior and geolocation data, and disclosing that data to third parties without adequate disclosure to consumers in violation of Texas consumer protection laws. New GM filed a motion with the New York bankruptcy court that asserted that the Texas proceeding violated the 2009 sale order because the amended complaint included allegations of actions by old GM before 2009, and because the formula for calculating civil penalties would include those pre-sale acts by old GM.

The Decision

The bankruptcy court enjoined Texas from continuing its litigation against New GM unless it first struck from the complaint allegations relating to Old GM. It determined that by including acts by Old GM in the damages formula Texas would be, in effect, seeking to recover from New GM for the acts of Old GM. The court rejected Texas’ jurisdictional arguments, ruling that a bankruptcy court has broad jurisdiction to enforce all of the terms of a bankruptcy sale order.

Conclusions

This case illustrates the broad reach of bankruptcy sale orders and gatekeeper provisions. The bankruptcy court has exercised jurisdiction over a state court consumer protection action based on a sale order that was entered over 15 years ago.

The court rejected several of Texas’ arguments on the ground that those issues had been finally resolved in the 2009 sale order such that Texas’ challenges were impermissible collateral attacks on a final order. This raises the question of whether Texas or other governmental authorities should have litigated such arguments regarding the sale order at the time it was entered. The record shows that the New York district court dismissed appeals from the sale order based on Bankruptcy Code section 363(m), which it interpreted to moot appeals from bankruptcy sale orders if no stay pending appeal was obtained. The district court’s decision may no longer be good law following the Supreme Court’s 2023 decision in MOAC Mall Holdings, discussed in an earlier Kleinberg Kaplan client alert, linked here. While the MOAC Mall decision comes too late to rescue challenges to the GM sale order, it should inform strategy in future cases involving sale orders.

The bankruptcy court’s reasoning does not attempt to assess the relative importance of the interests that Texas was attempting to uphold. In the GM case such a balancing may have been performed by President Obama because the federal government was the primary orchestrator and financial backer of the GM restructuring. But a similar dynamic regarding the interplay between bankruptcy sale orders and state regulatory regimes may be found in many cases in which the debtor is a private company without governmental support. For example, in the recent 23andMe bankruptcy case the bankruptcy court approved a sale of assets free and clear of liens, claims, encumbrances and other interests, determining that goal of realizing a higher return in the sale outweighed the interests representing state regulatory agencies.

The result here should encourage debtors and asset purchasers to seek expansive sale orders with expansive Gatekeeper provisions, and provides a warning to regulators of the potential consequences of not challenging those orders.