## Facts

- Grumman Olson Industries, Inc. designed and manufactured truck bodies mounted on Ford and GM chassis.
- Grumman filed for Chapter 11 relief in December 2002.
- In July 2003, the bankruptcy court approved a sale of certain operating assets to MS Truck Body Corp. (later Morgan Olson, LLC) under 11 U.S.C. §§ 363 and 365, “free and clear of liens, claims and encumbrances,” and included language purporting to bar certain successor-liability claims against the purchaser.
- After the sale and after the bankruptcy case closed, Denise Frederico (a FedEx employee) was injured in an accident involving a FedEx truck body allegedly manufactured and sold prepetition by Grumman.
- The Fredericos sued Morgan in New Jersey state court, asserting products-liability and product-line successor-liability theories under state law.
- Morgan filed an adversary proceeding seeking declaratory and injunctive relief enforcing the sale order to bar the Fredericos’ successor-liability claims; both sides moved for summary judgment.

## Issues

1. Whether a § 363 “free and clear” sale order can extinguish successor-liability tort claims based on a debtor’s prepetition conduct when the injury occurs after the bankruptcy case closes and the claimants had no notice or opportunity to participate.
2. Whether enforcing such a sale order against unknown future tort claimants violates due process and bankruptcy procedural requirements.
3. Whether the asserted successor-liability claims constitute a cognizable “claim” or “interest” that can be cut off under § 363(f) absent constitutionally adequate notice.

## Decision

- The bankruptcy court granted summary judgment to the Fredericos, denied Morgan’s motion, and dismissed Morgan’s adversary complaint.
- The court held the sale order could not be enforced to bar the Fredericos’ successor-liability claims where the claimants were unknown and unidentifiable at the time of the bankruptcy and received no notice.
- The court concluded that § 363(f) does not authorize in personam relief that effectively strips post-closing tort claimants of state-law causes of action without due-process protections.
- On appeal, the district court affirmed, holding that extinguishing such claims would violate bankruptcy procedure and due process because the claimants could not have received notice or an opportunity to be heard.

## Legal Principles

- Due process requires notice and an opportunity to be heard before a bankruptcy order can terminate a person’s legal rights; unknown future tort claimants who could not be identified at the time of the case cannot be bound absent constitutionally sufficient notice.
- A § 363(f) sale “free and clear” is principally in rem relief and does not, by itself, authorize sweeping in personam insulation of a purchaser from later-arising tort claims of nonparticipants.
- Even if some successor-liability theories may be characterized as “interests” for § 363(f) purposes, they cannot be cut off without procedures that satisfy notice and due process.
- Bankruptcy court jurisdiction to interpret and enforce a prior sale order does not permit enforcement that exceeds statutory authority or constitutional limits.
- The merits of state-law successor-liability theories remain for the appropriate nonbankruptcy forum when the sale order cannot constitutionally or statutorily bar the claims.

## Conclusion

The court refused to enforce a § 363 sale order to bar successor-liability tort claims brought by post-closing injury victims who had no notice and no realistic ability to participate in the bankruptcy case, holding that such use of “free and clear” relief would contravene bankruptcy procedure and due process.


Morgan Olson, LLC v. Frederico (In re Grumman Olson Indus., Inc.), 445 B.R. 243 (Bankr. S.D.N.Y. 2011)