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In Re: Grumman Olson Industries, Inc v. Denise Frederico and John Frederico

March 29, 2012


Adversary No. 10-03052 11 Civ. 2291 (JPO)

The opinion of the court was delivered by: J. Paul Oetken, District Judge:

Chapter 11


This bankruptcy appeal requires the Court to address a question that has not been resolved by the courts in this Circuit, but has been addressed by courts in several other circuits: whether 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. Because these claimants could not have received notice or an opportunity to participate in the bankruptcy proceedings, the Court holds that enforcing the bankruptcy court's orders to take away their right to bring a claim would violate bankruptcy procedure and due process.

Presently before the Court is an appeal pursuant to 28 U.S.C. § 158(a) from an order of the Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") granting a motion for summary judgment by Appellees Denise Frederico and John Frederico (collectively, the "Fredericos"), denying a motion for summary judgment by Appellant Morgan Olson L.L.C. ("Morgan"), and dismissing the adversary action brought by Morgan in the Bankruptcy Court. See In re Grumman Olson Indus., 445 B.R. 243 (Bankr. S.D.N.Y. 2011) ("BR Ct. Op.").Morgan brought the adversary action for declaratory and injunctive relief barring the Fredericos from proceeding against Morgan in New Jersey state court on theories of successor liability.

For the reasons that follow, the Court affirms the order of the Bankruptcy Court in full.

I. Background

The material facts in this case, as set forth in the Bankruptcy Court's opinion, are not in dispute.

A. The Parties

Appellant, Morgan, is a corporation engaged in the manufacture of products for the truck body industry. Morgan purchased certain assets of Grumman Olson Industries, Inc. ("Grumman" or the "Debtor") after Grumman declared bankruptcy.

Appellees, the Fredericos, initiated an action in New Jersey Superior Court against (inter alia) Morgan for personal injury and products liability after Denise Frederico was injured after the bankruptcy while driving a truck that was manufactured by Grumman prior to the bankruptcy.

B. The Bankruptcy and Sale Order

On December 9, 2002, Grumman, a company that designed, manufactured, and sold products for the truck body industry, filed a petition for Chapter 11 bankruptcy. On July 1, 2003, the Bankruptcy Court entered an Order approving the sale of certain of the Debtor's assets (the "Lot 2 Assets") to MS Truck Body Corp., a predecessor of Morgan (collectively, "Morgan"), pursuant to Bankruptcy Code §§ 363 and 365. (See Order Pursuant to Sections 363 and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004 and 6006 (I) Approving the Sale by the Debtor of Certain of its Operating Assets, Free and Clear of Liens, Claims and Encumbrances, (II) Approving the Assumption and Assignment by the Debtor of Certain Associated Executory Contracts and Unexpired Leases, and (III) Granting Other Related Relief, Appellant's Memorandum of Law in Support of Its Appeal ("Appellant Mem."), Ex. A (Dkt. No. 9) (the "Sale Order").)

The Sale Order contained several provisions that purported to limit Morgan's potential liability arising from the sale of the assets for tort claims based on allegedly defective products manufactured and sold by Grumman prior to the sale. In particular, the sale of the Lot 2 Assets was ordered "free and clear of all . . . claims . . . and other interests . . . and all debts arising in any way in connection with any acts of the Debtor." (Sale Order ¶ Q; accord id. ¶¶ 4, 14.) In addition, the Sale Order provided that the purchase of the assets by Morgan would not subject Morgan to "any liability for claims against the Debtor or the Lot 2 Assets, including, but not limited to, claims for successor or vicarious liability, by reason of such transfer under the laws of the United States, any state, territory or possession thereof or the District of Columbia applicable to such transactions." (Sale Order ¶ 19; accord ¶ S (providing that the purchaser "shall not by virtue of this Order or the Lot 2 [Asset Purchase Agreement ("APA")] or the transactions contemplated hereunder or thereunder, be deemed to have 'successor' liability or responsibility for claims against or obligations of the Debtor arising prior to or as a result of the purchase and sale of the Lot 2 Assets hereunder").*fn1

The Sale Order also provided that the Bankruptcy Court would retain jurisdiction "to interpret, implement and enforce the provisions" of the Sale Order. (Sale Order ¶ 20.)

On October 31, 2005, the Debtor and the Official Committee of Unsecured Creditors confirmed a joint liquidating plan. The Court signed the Final Order and Decree on December 29, 2006, thereby closing the bankruptcy proceedings.

C. The New Jersey Action

Prior to the bankruptcy filing, the Debtor manufactured and sold truck chassis to various companies, including FedEx. On October 8, 2009, the Fredericos brought a personal injury action against Morgan and others in New Jersey Superior Court. The complaint alleges that Ms. Frederico, an employee of FedEx, sustained injuries when the FedEx truck she was driving struck a telephone pole on October 15, 2008. (See Appellant Mem. Ex. B.) The complaint also alleges that the truck she was driving was manufactured, designed, and/or sold by Grumman in 1994 and was defective for several reasons. On April 28, 2010, the Fredericos filed an amended complaint that alleged that Morgan continued Grumman's product line, and was therefore liable to the Fredericos under New Jersey successor liability law.

D. This Adversary Proceeding

On March 24, 2010, Morgan brought this adversary proceeding in the Bankruptcy Court seeking declaratory and injunctive relief barring the Fredericos from bringing their claims against Morgan in New Jersey state court. Morgan's complaint alleged that the Sale Order and accompanying Asset Purchase Agreement "provided that the assets of the debtor would be sold and purchased without liability for products manufactured prior to the sale, including without liability under any state law successor liability theory." (Complaint, 10-3052 (Bankr. S.D.N.Y. Mar. 24, 2010) (Dkt. No. 1) ("Comp.") ¶ 8.) The truck involved in the accident was manufactured by Grumman, not Morgan, and so, the Complaint alleged, Morgan could not be held liable for any damage caused by any alleged defects in that truck. (Id. ¶¶ 13-17.) The parties cross-moved for summary judgment. As the Bankruptcy Court explained, the parties dispute "whether Grumman had a role in designing, manufacturing or selling the FedEx truck at issue," but this factual dispute, "though critical to the question of Morgan's potential liability, is immaterial to the resolution of the meaning of the Sale Order. Instead, the motions present a straightforward, threshold legal question: does the Sale Order exonerate Morgan from liability to the Fredericos?" BR Ct. Op., 445 B.R. at 247. The Bankruptcy Court answered this question in the negative, denying Morgan's motion for summary judgment and granting the Fredericos' motion for summary judgment dismissing Morgan's complaint. This appeal followed.

II. Discussion

A. Jurisdiction and Standard of Review

The Bankruptcy Court assumed jurisdiction to hear this adversary action pursuant to its power to interpret and enforce its own prior orders, specifically the Sale Order. BR Ct. Op., 445 B.R. at 247-48 (citing Travelers Indem. Co. v. Bailey, -- U.S. --, 129 S. Ct. 2195, 2205 (2009); Luan Inv. S.E. v. Franklin 145 Corp. (In re Petrie Retail, Inc.), 304 F.3d 223 (2d Cir. 2002)). Under 28 U.S.C. § 158(a), district courts have jurisdiction to hear appeals from the final judgments of bankruptcy judges.

Under Rule 8013 of the Federal Rules of Bankruptcy Procedure,

On an appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.

Fed. R. Bankr. P. 8013. "A bankruptcy court's conclusions of law, by contrast, are reviewed de novo." In re Adelphia Comm. Corp., 367 B.R. 84, 90-91 (S.D.N.Y. 2007) (citation omitted).

The Bankruptcy Court's decision here granted the Fredericos' motion for summary judgment and denied Morgan's motion for summary judgment. Under the Federal Rules of Civil Procedure, a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a).*fn2

The material facts in this case are not in dispute, and the Bankruptcy Court did not make any factual findings. Instead, the appeal presents a pure question of law as to the interpretation and enforcement of the Sale Order. Thus, ...

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