Restructuring

Contributed by Brian Wells
We posted a while back about the February 2012 bankruptcy court decision in Lear, which concluded that a non-bankruptcy forum was the correct place to adjudicate whether a post-bankruptcy antitrust claim against a reorganized debtor could take pre-bankruptcy conduct into account in calculating damages notwithstanding the bankruptcy discharge.  Lear appealed the bankruptcy court’s decision to the United States District Court for the Southern District of New York, which on November 5, 2012, reversed and remanded in a Memorandum Opinion, concluding that it was an abuse of discretion for the bankruptcy court to abstain from deciding the scope of the bankruptcy discharge in this gray area of the law.
To refresh your memory, years after Lear had successfully emerged from bankruptcy, a class action was filed alleging that it had participated in a price-fixing conspiracy both before and after the effective date of its plan.  In response, the reorganized Lear moved for the bankruptcy court to dismiss the action, claiming that it could not be found liable for pre-effective date conduct because of the discharge and plan injunction.  The plaintiffs responded that the discharge did not apply because Lear was liable for the conspiracy solely on account of its post-effective date conduct.  Plaintiffs, however, also claimed that, under applicable antitrust rules, the damages for this liability would be measured by conduct spanning the entire conspiracy—including Lear’s prepetition conduct.  (Co-conspirators in antitrust actions may be jointly and severally liable for damages from conduct occurring prior to their involvement in the conspiracy.)  The bankruptcy court found that liability could not arise on account of prepetition conduct, but ruled that it was up to the court deciding the antitrust action to determine whether pre-effective date conduct could be used to measure the damages for post-effective date liability.
On appeal, the district court characterized the bankruptcy court’s deference to the antitrust court as an unwarranted abstention.  The district court carefully framed the undecided issue, noting that there was no question that pre-effective date conduct could not give rise to liability and also that the antitrust court should determine whether post-effective date conduct gave rise post-effective date damages (i.e., damages based only on the post-effective date conduct).  But the court found an important question remained as to whether the discharge would preclude the use of pre-effective date conduct to measure damages for liability arising solely from post-effective date conduct.  The district court found that this question would be resolved by interpreting the Bankruptcy Code and considering the scope of a bankruptcy discharge.  Because the bankruptcy court was in the best position to decide this issue, the district court remanded the decision for further review.
There are relatively few decisions applying the discharge provisions of the Bankruptcy Code to claims that span both pre- and post-bankruptcy periods and this remains a gray area of the law, so we will continue to watch the Lear case. The bankruptcy court’s decision on remand could have important implications for the scope of the discharge available to reorganizing chapter 11 debtors.  The outcome could have ramifications not just for antitrust claims, but also for other continuing claims.  A finding that the antitrust damages survive would weaken the discharge and may undermine the bankruptcy policy of a fresh start.