Why Congress could be crucial in quest to hold GM liable

General Motors CEO Mary Barra apologized for ignition-switch problems that led to the deaths of 13 people and a prolonged recall of more than 2 million vehicles worldwide, but she did not admit liability, despite sharp questioning from members of Congress in testimony before a US House subcommittee Tuesday.

That’s because, under GM's 2009 federally mandated bankruptcy and subsequent restructuring, the Detroit automaker agreed to terms that made it immune to any product liability claims for crashes, or other malfunctions, dating to before July 10, 2009, when it emerged from bankruptcy. The current recalls affect vehicles spanning model years 2003 through 2007.

But critics, including families of those killed or injured, aim to challenge GM's immunity, either through new legislation or in the courts, to ensure that GM adequately compensates victims and more promptly addresses safety issues in the future.

Ms. Barra, who became the company CEO in January, often sided with House members who complained during questioning that the company waited far too long to take action about the defective part.

“Why in the world would a company like GM purchase a part that didn’t meet its own specifications?” asked Rep. Joe Barton (R) of Texas.

“I want to know that as much as you do,” Barra answered. She added that no one has yet been held accountable, and she is relying on the outcome of the company’s internal investigation to determine company actions.

She also announced that GM had hired Kenneth Feinberg, the attorney who has overseen funds for those harmed in several high-profile cases, including the Gulf of Mexico oil spill and the 9/11 terrorist attacks, to figure out how to properly compensate recall victims. The company will meet with Mr. Feinberg Friday, she said.

More than 230,000 pages of documents assembled by the National Traffic Highway Safety Administration (NTHSA) are fueling an investigation that could result in fines for GM as high as $35 million for failing to report safety defects within five days. Last month, Toyota Motor Corp. agreed to pay $1.2 billion to settle a similar recall investigation involving its admission it failed to properly notify vehicle owners of problems related to unintended acceleration.

There are already numerous lawsuits filed across the US against GM seeking class-action status. Some suits are being brought by families of victims who died in accidents they say resulted from the faulty vehicles, while others are by current owners of GM vehicles affected by the recall. One suit, filed March 21 in Detroit, seeks to represent GM shareholders accusing the company of securities fraud.

GM’s immunity can be challenged two ways: The first may involve Congress pushing through a statute that essentially unravels the bankruptcy terms that allows plaintiffs to pursue their claims. The second would come from a federal bankruptcy judge, who would need to be convinced that GM’s Chapter 11 bankruptcy case needed reopening.

Stephen Selbst, an attorney specializing in commercial bankruptcies for Herrick, Feinstein LLP in New York, says that the second scenario would typically be considered “impossible” and unfair to both GM and its shareholders who originally sought relief.

But evidence emerging from the current NTHSA investigation and  House and Senate hearings may be persuasive, especially if they demonstrate that GM signed off on the bankruptcy terms knowing the faulty vehicles were on the road.

“The evidence appears to be quite damning and if it percolated for years, that’s a bad set of bad acts and makes for a particularly sympathetic claim by the plaintiffs. I can see a judge having second thoughts about that and reopening the case,” says Mr. Selbst.

Besides emphasizing that immunity was an integral component of its bankruptcy filling, GM will also likely stress that the inefficiencies of its processes prior to  the bankruptcy were precisely why the company needed restructuring into a more efficient operation. The NTHSA investigation is focusing on internal reviews handled under the engineering and manufacturing sectors of the companies, which GM can say were insulated from the company’s financial division that was negotiating with the federal government. 

“Clearly, people at GM did not have the full clarity of what would happen,” says Jessica Caldwell, a senior automotive analyst with Edmunds.com. “It may be bit of a stretch that everyone there was in the know about [the defective parts], especially those people who were working through the bankruptcy issues.”

One proposal for forcing GM to deal with those affected by the recall is being floated by Sen. Richard Blumenthal (D) of Connecticut, who wants GM to create a $3 billion to $8 billion trust that will pay claims related to the defective vehicles.

Another proposal, by Rep. Henry Waxman (D) of California, involves legislation requiring a $3 fee on new vehicle sales to fund better enforcement and raising penalties on automakers up from $35 million to as much as $200 million for failure to promptly recall unsafe vehicles.