Should 'new GM' be liable for pre-bankruptcy ignition accidents?

GM will ask a bankruptcy judge to protect it from many of the lawsuits related to the faulty ignition switch behind a massive recall. And it wants all lawsuits delayed until the ruling is made.

To help the company avoid having to face at least 37 lawsuits related to its current recall crisis, General Motors says it will seek relief from a federal bankruptcy judge next week.

The Detroit automaker wants the lawsuits delayed until the judge can rule whether they violate the terms of its July 2009 Chapter 11 bankruptcy. The company, which emerged out of the bankruptcy as a new corporation, argues that all claims before 2009 are related to "Old GM," which is now known as Motors Liquidation Co. Critics say GM is hiding behind the bankruptcy to avoid taking responsibility.

The lawsuits are related to the global recall of nearly 3 million vehicles due to a faulty ignition switch linked to at least 13 deaths. The switch can unexpectedly turn off power to the engine, power steering, power brakes, and air bags. The recall, one of the largest-ever for the company, covers the Chevrolet Cobalt, Saturn Ion, and other small vehicles from the 2003-11 model years.

The litigation is currently moving down three different though interrelated tracks.

• The bankruptcy hearing that will determine whether the 2009 bankruptcy agreement gives GM immunity against many of the ignition-related claims will happen next Friday.
• In the meantime, GM has filed legal motions in courts across the US, asking judges to delay any rulings in the 37 outstanding cases until the federal bankruptcy ruling.
• Court papers show GM is waiting for a court decision on whether 19 of those cases can be consolidated and granted class-action status.

GM's bankruptcy agreement stipulated that the new company would be immune from claims related to incidents that took place before the bankruptcy, but it would be liable for those that took place afterward – even if they involved pre-2009  model cars. An investigation by Automotive News suggests that most of the ignition-related incidents took place before the bankruptcy; only two of the deaths occurred afterward.

“Just like the other ‘ignition switch actions’ that other plaintiffs have filed in the wake of public reports regarding the outstanding recall, this case relates to a vehicle designed, manufactured, originally sold and advertised by Old GM,” a company motion filed in Texas read. 

In deciding if GM is liable for all the claims, the bankruptcy judge will need to determine if GM was aware of the defective ignition switch before entering bankruptcy negotiations. If it was – and if it didn't disclose that during bankruptcy proceedings – the judge could find the company liable.

“The overall philosophy of relief under the bankruptcy code is to give an honest debtor a fresh start. So the price of admission is full disclosure. You can’t pick and choose. You have to disclose, it’s mandatory that you bare all so there are no surprises,” says Douglas Bernstein, a bankruptcy attorney in the Detroit area.

Court depositions taken last year suggest that some company engineers were aware the switches were problematic as far back as 2004. The question could be determining how far up the ladder that knowledge went. The judge could decide to wait until federal and internal investigations conclude, but that is not required, Mr. Bernstein says.

GM has apologized, but it has not admitted liability.

Complicating matters is that the federal National Highway Transportation Safety Administration (NHTSA) could also be at fault. In congressional hearings, federal lawmakers have criticized the agency for failing to properly sound alarms or to act more swiftly. The agency says GM failed to provide regulators with crucial information, which prevented them from connecting air bag malfunctions with the faulty part.

The NHTSA is currently investigating GM to determine why the company continued to use the switch.

“The government’s involvement is the complicating fact,” says Bernstein. “Was this information passed onto the government when it was moving GM through bankruptcy so quickly? This opens a tremendous can of worms potentially.”

Attorneys representing plaintiffs say the company is using bankruptcy court to avoid compensating victims.

“They’re trying to hide behind bankruptcy to keep from fixing the cars the way they should be fixing them,” said Lance Cooper, an attorney in Marietta, Ga., representing victims.

Some federal lawmakers are also blasting GM. Sen. Richard Blumenthal (D) of Connecticut released a statement Wednesday asking district judges to deny GM’s motions to delay the cases. 

“GM’s recent actions in litigation demonstrate clearly its intent to use the bankruptcy process to prevent many victims and their families from obtaining relief for the harms they have suffered,” he said.

Senator Blumenthal is pushing GM to give consumers a clear timeline on when dealerships will get replacement parts. A survey from the Connecticut Automotive Retailers Association that says 11 of 14 dealerships in the state reported difficulty obtaining the parts from GM. In a letter sent to GM CEO Mary Barra Tuesday, Blumenthal said the “information is vital to your customers’ safety – indeed, their lives – in driving your cars.”

The company told federal regulators it would start delivering the parts to dealerships on April 7, but the date was pushed back to last week. The automaker said it was holding a web conference Wednesday for dealerships to update them on shipment details.