A federal appeals court ruling that General Motors can’t use its 2009 bankruptcy to fend off lawsuits over faulty and dangerous ignition switches exposes the carmaker to billions in additional liabilities, according to legal experts.
The 2nd US Circuit Court of Appeals in Manhattan on Wednesday ruled that GM knew about the defective switches when it entered bankruptcy seven years ago but kept them secret from the bankruptcy court. By failing to disclose the problems, GM prevented crash victims making claims or contesting the bankruptcy provisions, robbing them of due process, the court ruled.
In a 74-page opinion, a three-judge panel said that GM essentially asked the court to reward it for concealing claims. “We decline to do so,” the court said.
Under terms of the government-funded bankruptcy, the company that emerged, referred to as New GM, was indemnified against most claims against the pre-bankruptcy company, or Old GM. Retired US Bankruptcy Judge Robert Gerber ruled in April last year that most ignition-switch claimants could not sue New GM for damages because the company should emerge from bankruptcy free of claims against Old GM.
But the appeals court overturned most of that decision and allowed hundreds of pre-bankruptcy claims to proceed, including some lawsuits alleging that GM’s actions caused the value of its cars to drop.
“I think GM now has to think about its potential exposure as being in the billions,” said Erik Gordon, a lawyer and professor at the University of Michigan’s Ross School of Business.
Steve Berman, a lead lawyer in the loss-of-value cases, said the appeals court ruled the bankruptcy order didn’t protect New GM from claims that it misrepresented the safety of cars made by pre-bankruptcy GM. The appeals judges, he said, determined that Old GM knew that the cars could stall and airbags wouldn’t work but didn’t reveal so during the bankruptcy.
Gerber’s ruling took away legal rights of crash victims because they never got a chance to contest the bankruptcy seven years ago, yet they were barred from suing New GM after the defective switches were disclosed, said lawyer William Weintraub, representing ignition switch accident plaintiffs. “The only person who could effectively make an argument in 2009 is somebody who bought a time machine.”
About 1000 death and injury lawsuits were put on hold waiting for the appeals court to rule, said Robert Hilliard, another lawyer in the case. General Motors’ filings with securities regulators say there are another 101 pending lawsuits that allege that GM’s actions caused vehicle values to decline.
Gordon said the loss-of-value cases would be difficult to prove, but the death and injury cases were problematic for GM. General Motors Co said this week it was weighing options, including an appeal.
The ignition switches, which were put in small cars like the Chevrolet Cobalt, can slip out of the run position and cause cars to stall unexpectedly. They are linked to at least 124 deaths and 275 injuries.