Washington — General Motors Co. is shielded from legal liability for nearly all accidents that occurred before its July 2009 exit from bankruptcy. That protection has emerged as one of the most controversial aspects of the automaker's ignition switch recall.
Challenges to that product liability shield could unravel a key protection from hundreds of lawsuits. The Detroit automaker won that protection in the bankruptcy restructuring funded by its bailout by the federal government.
The company’s immunity led U.S. Sen. Richard Blumenthal, D-Conn., last week to call on GM to create a $3 billion to $8 billion trust that would pay claims connected to the massive recall for defective ignition switches in older Chevrolet Cobalts, Saturn Ions and other similar cars.
Blumenthal is a member of a Senate committee investigating GM’s delayed recall. GM CEO Mary Barra will testify Wednesday in front of that panel, after appearing before a similar House panel Tuesday.
Heavy key chains can cause the key to turn off the engine in a crash or, if bumped by the driver, disable power steering and air bags. GM says air bags have failed to inflate in at least 31 front-end crashes because of the weak ignition switch.
The Justice Department is investigating whether GM committed bankruptcy fraud by failing to disclose the defects at the time of the bankruptcy. GM has been hit with numerous lawsuits after it acknowledged it first knew of ignition switch problems in a pre-production Saturn Ion in 2001 and then didn’t recall the vehicles for more than a decade.
Despite that early warning, a first group of cars was not recalled until early February; two more groups have since been recalled, the most recent announced Friday to find as many as 5,000 defective replacement switches.
As part of its $50 billion government bailout, GM became a new company in July 2009 when it exited bankruptcy. It left behind billions in bad debts and liabilities, including product liability claims for all crashes occurring before that date, as well as toxic waste left behind at abandoned factories.
Lawyers representing people killed or injured in the now-recalled cars are likely to try to convince courts to overturn GM’s immunity from pre-bankruptcy claims, using the “successor liability” argument. In other words, the current GM must keep the liability because it committed fraud.
GM is using its immunity by filing responses to some suits, including one in Texas urging the case be shifted to the bankruptcy case. The automaker has used that argument in dozens of cases in various issues over the last five years.
Brian Johnson, an auto analyst at Barclays Capital, argued that bankruptcy law is clear: The law that created “new GM” out of “old GM” was expressly designed to give the restructured automaker the best assets, while leaving less desirable assets such as closed factories and the bulk of the liabilities with the legal entity known as the “old GM.”
He noted bankruptcy fraud generally involves concealing assets, not liabilities.
“Nevertheless, GM could set up a trust to pay old claims and government fines while shielding new GM,” Johnson said. He forecast the trust could total $2 billion to $3 billion.
Barra acknowledged in a meeting with reporters earlier this month that the remnants of old GM retain some liabilities, but declined to address if the company would consider creating a fund for victims. GM is not expected to announce any fund for victims before Barra testifies Tuesday, according to people briefed on the matter.
In an interview, consumer advocate Ralph Nader called the decision to allow GM to leave behind liabilities “an unparalleled legal atrocity” and an “incredible overreach by the bankruptcy judge.”
But if GM hadn’t come under pressure from eight states in the final days before it exited bankruptcy, it might have been available to avoid even more liability. The states said it was “irrational and unjust” to let GM off the hook for accidents that hadn’t occurred yet, while the new company was building the same cars as the old one.
In June 2009, eight state attorneys general — led by Blumenthal — sought to block GM’s exit because people injured by pre-bankruptcy GM vehicles would have had little recourse if the cars turned out to be defective and would not have been able to bring product-liability claims.
After talks with the attorneys general and the auto task force, GM agreed to accept liability for defects in post-bankruptcy crashes with older cars — but not for crashes that happened before the restructuring. At the time, the automaker estimated the cost of assuming future product claims at $502 million, according to a court filing.
At the time of GM’s bankruptcy, there were 69 million GM vehicles on the road. If the automaker had been successful in protecting itself from liabilities in future accidents in existing cars, then none would have been eligible for product-liability claims against the new company. Those claims would have gone to the estate of old GM, meaning those suing would have received a fraction of what they otherwise could have.
Ex-auto czars quiet
Reached last week, the two former federal auto czars, Steve Rattner and Ron Bloom, declined to talk about the decision to shield GM from product liability claims. There is no evidence that anyone in the auto task force knew anything about the ignition switch defect.
“Bankruptcies are about taking liabilities that companies can no longer afford and finding a way to discharge them in an orderly way,” Bloom told a Senate committee in 2009. “That is clearly a terrible thing for those individuals, but again, there are a lot of people that General Motors made promises to that it can’t honor and we really don’t have an alternative ... other than to essentially write an endless check.”
Clarence Ditlow, director of the Center for Auto Safety advocacy group, says the U.S. government has a moral obligation to see to it that injured people are compensated.
“Treasury may have wanted in 2009 to pay the least amount that had to be paid to get the deal done,” he said. “But now in 2014 that the deal is done, new GM and the U.S. government should step up and do the right thing and cause the allowed claims of products liability claimants in the GM bankruptcy... to be paid in full.”