Bankruptcy Court Shields GM From Ignition Switch Liability

The Bankruptcy Court for the Southern District of New York has issued a lengthy opinion—a whopping 138 pages—holding that General Motors is largely immune from claims based on its pre-bankruptcy conduct, including claims involving faulty ignition switches. The bankruptcy proceedings resulted in the creation of a new company, General Motors LLC (“New GM”), which bought most of the assets of the bankrupt General Motors Corporation (“Old GM”) in July 2009 under the terms of an order of the bankruptcy court that allowed New GM to take the assets “free and clear” of most claims that would impose successor liability for actions of Old GM.

In yesterday’s ruling, the court enforced the terms of its sale order to bar economic loss claims against New GM based on faulty ignition switches in cars sold by Old GM, as well as claims based on accidents that occurred as a result of those switches before July 2009. (The ruling does not apply to claims based on post-sale accidents involving cars made by Old GM, because New GM had agreed to accept responsibility for such claims, together with Old GM’s express warranty, recall, and lemon law obligations, under the sale order.) The result is to relieve GM of significant potential liability for the ignition switch defect.

At the time of the original approval of the sale agreement, a number of objectors, including Public Citizen, had urged the bankruptcy court not to approve the limitation on New GM’s successor liability. Objectors argued that the limitation was not authorized by bankruptcy laws and would violate the due process rights of consumers with claims against GM. The bankruptcy court nonetheless approved the sale based on decisions approving similar provisions in the nearly contemporaneous Chrysler bankruptcy proceedings. (Public Citizen and others fought the Chrysler liability limitation as far as the Supreme Court, which ultimately allowed the sale to go through and then held that the issue was moot. An attempt to appeal the GM sale was likewise aborted when the federal district court held the appeal was moot because the sale had already gone through.) 

That was all before the defective ignition switches in GM vehicles came to light. As the extent of that problem became evident, class actions asserting that purchasers of affected Old GM vehicles had suffered economic losses were filed, as were personal injury and property damage suits brought by people whose cars had been in pre-sale accidents caused by the defect. The plaintiffs in those cases argued that their claims against New GM were not barred by the sale order, in large part because they had been denied due process by not having received notice and an opportunity to be heard on whether the “free and clear” provision of the sale order was valid—even though GM already knew about the defect in 2009. 

Strikingly, the bankruptcy court held that under due process principles, purchasers of vehicles affected by the defect should have received notice in 2009. However, the court also held that that constitutional violation did not mean that the provisions of the sale order barring their claims should not be enforced. 

Why? The court said that for the most part, the plaintiffs who had never had the opportunity to argue that their claims should not be barred had not suffered prejudice, because other people (including state attorneys general, Public Citizen, and attorneys arguing on behalf of plaintiffs with other kinds of claims against GM) had made the arguments that the “free and clear” provision was invalid. The court said that it had considered those arguments and its decision to approve the sale would not have been different if the ignition-switch victims had received notice and had added their voices to those arguing against the “free and clear” provision.

The court did, however, refuse to enforce the sale order in one respect. To the extent that the sale order would bar plaintiffs from making claims that were based on post-sale conduct by New GM in relation to defects in Old GM cars, the court held that it was not properly enforceable. Moreover, the plaintiffs suffered prejudice by not having received notice that would allow them to challenge that aspect of the sale order in 2009, because other objectors had not made that specific argument, and if the argument been made at the time of the sale, the court would have modified the sale order to preserve such claims. Thus, the court held that the due process violation in not giving notice to possible ignition-switch claimants had to be remedied by not enforcing the “free and clear” provision only with respect to claims involving post-sale actions by New GM.

In addition, the court held that the due process violation barred enforcement against ignition-switch plaintiffs of the deadline for making claims in bankruptcy against Old GM (now renamed “Motors Liquidation Company”). But because their claims are unsecured and the assets of Motors Liquidation Company are limited, that relief may do the plaintiffs little good.

In short, what critics of the sale order predicted back in 2009 has come true: The order has resulted in GM escaping liability for significant claims that consumers had no way of knowing about in 2009.

Recognizing the significance and difficulty of the issues posed by the claims, the bankruptcy court certified its order for appeal directly to the U.S. Court of Appeals for the Second Circuit, though the court of appeals must also agree to hear an appeal if one is taken.