Explore a compelling M&A narrative delving into the complexities of acquiring distressed auto business assets during a chapter 11 bankruptcy. This blog examines a critical case involving the United Auto Workers pension fund, Fiat S.p.A., and the U.S. and Canadian governments, facing a legal dilemma regarding pre-closing liabilities. Learn valuable lessons on comprehensive due diligence and the importance of notifying known creditors for buyers in the M&A landscape.
M&A Stories
August 20, 2018
In this M&A narrative, we explore a pivotal case involving the acquisition of distressed auto business assets amid the seller’s chapter 11 bankruptcy. The buyer, a new entity formed by the United Auto Workers pension fund, Fiat S.p.A., and the U.S. and Canadian governments, faces a significant legal dilemma.
The core of the issue traces back to a 2009 sale, where Chrysler, the seller, transferred most of its assets to the buyer, absolving them of liens, claims, and liabilities, except those expressly assumed. The current legal debate revolves around whether the buyer can evade responsibility for a pre-closing claim related to a defective airbag.
The incident originated from a 1996 Chrysler Sebring involved in a collision on January 1, 2009. The airbag deployment exposed the driver, Shelley, to harmful chemicals, causing health issues. Despite assurances from the seller that her airbags were chemical-free, Shelley later discovered through a Material Safety Data Sheet (MSDS) that her airbag contained harmful substances.
The bankruptcy court, approving the sale on June 1, 2009, mandated notifying known creditors, but Shelley did not receive it. The buyer argues that, as they did not assume liability for pre-closing accidents, the claim should be dismissed.
However, the court’s decision hinges on whether Shelley was a known creditor during the notice period. While evidence suggests the seller knew of Shelley’s communication about injuries attributed to the defective airbag, the court stresses the need for more evidence before deciding whether to dismiss the case.
This case underscores a crucial lesson for buyers: comprehensive due diligence is paramount. To shield against pre-closing liabilities, diligent notice to all known creditors of the seller is essential.
Case Reference:
In Re Old Carco LLC, Case No. 09-50002 (SMB), Adv. Proc. No. 17-01185 (SMB), United States Bankruptcy Court, S.D. New York, (August 10, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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