Bankruptcy judge: GM may yet face lawsuits over defective ignition switch

GM had hoped that the judge who presided over its bankruptcy proceedings in 2009 would affirm Friday that the automaker is shielded from lawsuits predating the 'new GM.' Instead, the judge urged a settlement.

Brendan McDermid/Reuters
Lawyers for General Motors Richard Godfrey (c.) and Arthur Steinberg (r.) arrive at the US District Bankruptcy Court in New York's lower Manhattan on Friday. Five years ago, New York bankruptcy Judge Robert Gerber oversaw the historic bankruptcy of GM, establishing a new company that is shielded from liability for the actions of its precursor. Now, the same judge must decide whether to lift the shield he put in place.

General Motors could be exposed to nearly 60 class-action lawsuits related to its ignition-switch crisis affecting 2.6 million vehicles worldwide and linked to at least 13 deaths.

US bankruptcy Judge Robert Gerber in New York ruled Friday that the 2009 Chapter 11 bankruptcy that allowed the Detroit automaker to restructure its operations does not necessarily shield the company from lawsuits seeking as much as $10 billion in damages connected to incidents dating back to the old company.

Before rendering a final decision, Judge Gerber urged settlement talks between GM and the plaintiffs, rather than continued litigation.

Although General Motors has apologized for errors that delayed action to prevent the defective part from being installed in cars for nearly 10 years, it has not admitted liability. Instead, the company argues that the terms of its bankruptcy protect it from any product liability claims for crashes, or other malfunctions, dating before July 10, 2009, when the "new GM" emerged from bankruptcy.

On Friday, GM went before Gerber to ask him to reaffirm the terms of the 2009 bankruptcy, given that he was the presiding judge at that time.

“New GM did not assume the liabilities of Old GM,” GM said in its court filing. The old company was formally named Motors Liquidation Corp. and was dissolved in December 2011, after operating as a trust to settle old claims.

Before coming to a decision, Gerber urged the company to consider settling rather than moving forward with what he predicted would be a “monstrous battle” in court.

“Frankly, it would be great if whatever money is available for injured people could go to them, and not to litigation costs and attorneys' fees,” the judge said.

Separate from the Gerber ruling is a hearing set for May 29 in Chicago. That hearing, before a multi-judge panel, will decide if the multiple lawsuits will be assigned to a single judge to speed up the process to reach a settlement. Gerber said he would not block decisions from that panel.

One key issue Gerber said needs to be resolved is determining if GM officials knew of the defective ignition-switch problems before agreeing to the terms of the bankruptcy He said he ,may consider arguments that GM committed fraud.

He also said more time is needed to review all the claims, plus to learn the outcome of an independent investigation by former federal prosecutor Anton Valukas and paid for by the automaker.

GM has hired Kenneth Feinberg, who handled victim compensation in the Gulf of Mexico oil spill and with the September 11th Victim Compensation Fund, to advise it how best to establish a system to compensate victims affected by the recall. How the company may deal with possible settlements is not known.

GM had hoped for a quick fix from Friday's hearing. Now, both sides will gear up for another day in court or negotiations toward a settlement.

GM, besides emphasizing that immunity was an integral component of its bankruptcy filling, is also likely to stress that the inefficiencies of its processes prior to the bankruptcy were precisely why the company needed restructuring into a more efficient operation.

An investigation by the National Highway Traffic Safety Administration (NTHSA) is focusing on internal reviews handled under the engineering and manufacturing sectors of the company. GM is likely to argue that its financial division, which was negotiating with the federal government, was insulated from that part of the company and therefore proceeded with the bankruptcy without knowledge of the defective part.

However, plaintiffs will likely argue that the bankruptcy does not shield GM from claims. They say GM’s argument violates the due process rights of those who could not have known they were entitled to claims at the time the shield took effect. Plaintiff lawyers told Gerber that those claimants have a right to sidestep the shield and sue the new company.

The Detroit Free Press reports that Bob Hilliard, a Texas lawyer representing hundreds of plaintiffs filing lawsuits against GM, met Friday with Mr. Feinberg to explore possible settlement options. 

“I expect GM to pay full and complete compensation for every single qualified claim,” Mr. Hilliard told the Free Press. “My clients deserve to quickly receive what they are entitled to under our country’s tort laws.”

GM is also facing investigations from the US Justice Department, the Securities and Exchange Commission, and the US Congress.

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