GM Dodges Bullet On Ignition Lawsuits

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General Motors will not have to face dozens of lawsuits accusing it of concealing an ignition-switch defect that has been blamed for more than 200 deaths and serious injuries, a U.S. bankruptcy judge ruled.

Plaintiffs in the lawsuits said the company violated their constitutional rights by failing to disclose the defect, while GM had argued it was protected from claims on vehicles pre-dating its 2009 exit from Chapter 11 bankruptcy.

The decision by U.S. Bankruptcy Judge Robert Gerber means GM may avoid potentially billions of dollars in liability, as well as the cost of defending those lawsuits, although claims arising after its bankruptcy will not be affected.

The plaintiffs will have to file their claims instead against the financially limited “Old GM,” the shell company comprised of bad assets that GM shed in bankruptcy.

The ruling is a major victory for GM as it strives to move beyond the safety crisis that erupted in early 2014.

The automaker’s victory was tempered, however. Gerber said car owners can still sue over its failure to warn of the defects.

“GM is saved from its transgressions prior to the bankruptcy,” said Erik Gordon, a law professor at the University of Michigan’s business school. “Victims still can sue GM for its actions after the bankruptcy, including allegations that the company continued to cover up what it knew about the switches or didn’t recall cars it knew were defective.”

Gerber sided with the company on the question of pre-bankruptcy liability, while opening the way for “otherwise viable claims against New GM for any causes of action that might exist arising solely out of New GM’s own, independent” acts after the reorganization.

A lead lawyer for ignition-switch plaintiffs, Steve Berman, said that he was pleased the judge would let claims based on New GM’s conduct proceed. However, he said, plaintiffs intended to fight the ruling on appeal.

Gerber said he would certify the case for direct review by the 2nd U.S. Circuit Court of Appeals.

“Judge Gerber properly concluded that claims based on Old GM’s conduct are barred, and that the Sale Order and Injunction will be enforced for such purposes,” GM said in a statement. “With respect to any claims that were not expressly barred, Judge Gerber’s decision doesn’t establish any liability against GM and the plaintiffs still must prove the merits of their claims in the proceeding.”

The claims center on a faulty ignition switch in some older vehicle models that could slip out of position, cutting power to brakes, steering and airbags. Last year GM recalled 2.6 million vehicles with the switch, and later issued a series of additional recalls for other safety issues. The defect was linked to nearly 160 serious injuries and 84 deaths. GM ultimately recalled a record 27 million vehicles in the U.S. last year.

The claims mostly allege loss in vehicle value, as GM has already agreed to compensate most injury and death claimants through a separate fund. However, some personal injury and death claimants who were not compensated through the fund are among those now suing the company.

During a February hearing, Gerber expressed some doubts about his original 2009 ruling that paved the way for the company to exit bankruptcy with the shield, saying GM might have acted “very badly” in delaying recalls of defective cars.

“My task, obviously confined by the limits of law, is to do what’s fair and right,” he said, according to Bloomberg News. He said the 2009 ruling gave New GM a “get out of jail free card,” even if Old GM had knowingly used faulty switches.

GM’s 2009 bankruptcy essentially split the company, with New GM purchasing the profitable business operations and Old GM retaining burdensome liabilities. Under the sale, New GM expressly disavowed responsibility for most product-related claims on cars made before the bankruptcy.

Plaintiffs sought to pierce that shield on grounds that they could not have known they might have legal claims at the time of the bankruptcy. Despite having been given notice of the sale, they said, GM covered up the switch defect and deprived them of their day in court.

In his ruling, Gerber cited due process “failures” but said they did not rise to the level of a violation because plaintiffs failed to show they were prejudiced by insufficient notice.
“A denial of notice need not result in an automatic win for the party that failed to get appropriate notice the first time around,” Gerber said.

Nearly 200 lawsuits, many of which have been brought on behalf of potentially millions of economic-loss plaintiffs, have been consolidated in New York federal court. Plaintiffs are seeking an estimated $7 billion to $10 billion in lost vehicle value, the ruling said.

GM feared a damaging financial hit if the judge ruled that the bankruptcy settlement did not shield GM from lawsuits over vehicles made before its bankruptcy. GM executives cited the risk among the reasons why they were reluctant earlier this year to return to investors a larger share of its $25 billion cash trove.

In March, after a group of investors mounted a public push for $8 billion in stock buybacks, GM announced it would launch a $5 billion stock buyback and boost dividend payouts by another $5 billion through 2016.

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