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 automaker to billions in additional liabilities, according to legal experts.
The 2nd U.S. 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 from 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 U.S. Bankruptcy Judge Robert Gerber ruled in April 2015 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.
When Gerber's ruling came out, plaintiffs' lawyers said it blocked $7 billion to $10 billion in potential legal liabilities.
Steve Berman, a lead attorney in the loss-of-value cases, said the appeals court ruled the bankruptcy order doesn'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 air bags wouldn't work but didn't reveal those facts during the bankruptcy.
"At minimum, Old GM knew about moving stalls and air bag non-deployments in certain models and should have revealed those facts in bankruptcy," the court said. "If a debtor does not reveal claims that it is aware of, then bankruptcy law cannot protect it."
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 William Weintraub, an attorney representing ignition switch accident plaintiffs. "The only person who could effectively make an argument in 2009 is somebody who bought a time machine," Weintraub said.
About 1,000 death and injury lawsuits were put on hold waiting for the appeals court to rule, said Robert Hilliard, another attorney in the case. General Motors' filings with securities regulators say there are another 101 U.S. lawsuits pending that allege that GM's actions caused vehicle values to decline.
Gordon said the loss-of-value cases will be difficult to prove, but the death and injury cases are problematic for GM.
General Motors Co. said Wednesday it is weighing options, including an appeal. The company said the appeals court did not decide whether claims against GM are valid. "Many of the claims we face have been brought on behalf of car owners who want to be compensated even though they have not suffered any loss," a company statement said.
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.
In its ruling, the appeals court said that the desire to move GM through bankruptcy quickly to avoid its collapse was "laudable," but it doesn't do away with basic constitutional principles. It took only 40 days for the bankruptcy to end, an unprecedented period at the time.
"Due process applies even in a company's moment of crisis," the court wrote.
The ruling also could affect 399 injury and death cases settled for GM by compensation expert Kenneth Feinberg for a total of $594.5 million. GM says those who settled gave up their legal rights to sue the company, but Hilliard said he will look into whether some of those claims could be reopened in light of the court's ruling.