Restructuring

Contributed by Brian Wells
The fresh start is an integral feature of chapter 11.  Through the operation of discharge, reorganized debtors shed past liabilities and debts in order to maximize the value of their underlying assets and, by extension, the return made to pre-discharge creditors and claimants.  The discharge also fosters equal treatment by forcing all claimants to share in the bankruptcy estate (it would be unfair if, by saving its claim, a creditor could seek full satisfaction from the reorganized debtor.)  Although the discharge is powerful, In re Lear Corporation, a recent decision from the United States Bankruptcy Court for the Southern District of New York, shows the tension between the goals of broadly discharging claims to effectuate the fresh start and ensuring the debtor in possession remains responsible for post-emergence legal obligations.
As has been discussed in a previous post, when a claim arises can have a marked impact on its treatment in bankruptcy, including whether it is discharged.  In general, where a claim arises after the effective date of a plan of reorganization, it is not discharged.  For example, tort claimants harmed by conduct occurring after the plan’s effective date are free to sue the reorganized debtor, potentially collecting in full.  Application of this rule is usually straightforward, but some cases present a challenge.  Consider, for example, a price-fixing scheme that, through a series of illegal sales, creates a continuous stream of wrongs.  Where all of these wrongs occur after the effective date, application of the rule remains simple.  But where those wrongs occur both before and after, then what?  Is a claim for all of the wrongs preserved?  None of them?  Only those that occur post-effective date?
Lear Corporation, a manufacturer of auto parts, filed for chapter 11 in response to pressures from the global recession and a lagging automotive industry.  Lear filed its petition in July, 2009, and, despite the economic climate, managed to emerge from bankruptcy within a year.  Its problems, however, were far from over.  Within two years of confirmation, Lear was hit by a wave of antitrust suits alleging that it had sold parts at supra-competitive prices as part of a price-fixing cartel.  Importantly, the litigants alleged that the conspiracy extended from 2000 through, at least, 2011.  As more claims flooded in, Lear returned to the bankruptcy court where it asserted that the actions had been discharged and asked the court to compel their dismissal.
In determining whether the actions were claims subject to discharge, the bankruptcy court first noted that, under the In re Chateaugay conduct test, a contingent claim is dischargeable if it arose from prepetition conduct.  The court then turned to two cases that had applied the conduct test to antitrust violations.  Both found that the antitrust actions were claims, and both found them discharged, because “[a]ll the physical events required to establish the elements of causation and damage for such claims occurred prior to confirmation.”  The Lear court thus found that the litigants had “claims” where “the conduct constituting an alleged antitrust violation [took] place before plan confirmation.”
The court also found that liability arising solely from post-effective date conduct would not be discharged because, although “Bankruptcy Policy affords debtors a fresh start[,] a debtor is responsible for the consequences of its actions after it emerges from chapter 11.”  Judge Gropper, however, declined to decide whether the antitrust cause of action arose from post-effective date conduct, reasoning that doing so would require “intensely factual inquiries” that were better explored by the court before which the antitrust cases were pending.  This procedural aspect of the decision is itself of interest because Debtors often prefer to respond to post-bankruptcy claims in the bankruptcy courts, which have concurrent jurisdiction and often are viewed by debtors as a more favorable forum.  The Lear decision shows that, in some cases, bankruptcy courts may be reluctant to exercise jurisdiction to assess complex questions about when claims arise.
It remains an open question whether the quirks of antitrust law will shield the reorganized debtor from these claims.  Lear argued that the claim arose before the bankruptcy because “an original conspiratorial agreement is the salient act for antitrust purposes.”  Thus, in the view of the reorganized debtor, “later individual sales only effectuate that agreement in a ‘rippling effect’ manner, they cannot be a basis for antitrust liability.”  The logical conclusion of this reasoning is that continuation of a pre-bankruptcy price-fixing conspiracy is not an actionable post-bankruptcy claim because a key element of the cause of action – the agreement – has been discharged, thus leaving the reorganized debtor free to continue its sales practices in furtherance of the alleged conspiracy without fear of liability.
Although the court found that only post-effective date conduct can trigger liability, it set no limit on what conduct can be considered when calculating damages.  The distinction between imposing liability and measuring damages, however, may prove superficial.  The antitrust claimants argued that antitrust law would hold the reorganized debtor liable for damages arising from the entire term of the conspiracy, because its post-effective date acts triggered joint and several liability with co-conspirators.  If that theory were accepted, the reorganized debtor would have to pay damages on account of acts for which the bankruptcy court found, in furtherance of the policy of a fresh start, it could not be liable.  Nevertheless, the court took no issue with imposing liability “similar” to that discharged, and noted that Lear could not bar the antitrust plaintiffs “from seeking to measure the [reorganized debtor’s] liability by activity prior to the Effective Date.”
The Lear decision demonstrates there is continuing uncertainty about the scope of the discharge for claims that span the pre- and post-bankruptcy periods.  The courts will continue to grapple with the determination of when claims arise where they are based on conduct that begins before a bankruptcy and continues after it.