Supreme Court: General Motors Can’t Use Bankruptcy To Avoid Lawsuits Over Deadly Ignition Defect

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The Supreme Court has denied General Motors’ legal efforts to use its 2009 bankruptcy to block lawsuits over injuries and financial losses related to the carmaker’s long-ignored ignition switch defect.

When GM, with more than a little help from taxpayers, clawed its way out of bankruptcy in 2009, it did so with an understanding that the “New GM” had purchased all the old assets of pre-bankruptcy “Old GM,” under the condition that the new company would be “free and clear” from liability for claims against the old company.

So the massive ignition recall presented a difficult question, in terms of which GM should be blamed. Some people at the car company knew of the defect — which could result in a vehicle being suddenly turned off, rendering it very difficult to control — as far back as 2001, before the affected cars even went into production.

Internal memos unearthed during a Congressional investigation showed that the problem was brought to the attention of some executives in 2005, but no recall occurred until early 2014, five years after the creation of New GM.

In 2015, a federal bankruptcy court sided with GM [PDF], ruling that lawsuits could be brought against New GM, but only ones that involve actions of the post-bankruptcy company.

Last summer, the Second Circuit Court of Appeals upended that decision [PDF], ruling that buyers of affected used GM cars were wrongly barred from suing by the bankruptcy court. Additionally, the appellate panel held that GM failed to properly notify the other class plaintiffs of the defect — which it knew of, but had not recalled — or of the carmaker’s bankruptcy.

GM had argued that the generic public notice of its bankruptcy was adequate, and that the owners of affected vehicles were an unknown factor at that point. The court was not convinced.

When Old GM was going through the bankruptcy process, there was no reason it could not have done more to notify affected vehicle owners, said the Second Circuit. Federal law requires that carmakers keep records of the first owners of their vehicles, and by the time of 2009 sale to New GM, Old GM was already aware of multiple incidents and fatalities linked to the defective ignition switches. In fact, by that point the company had already stopped using these switches and quietly revised the design to address the defect.

“In the face of all the reports and complaints of faulty ignition switches, moving stalls, airbag non‐deployments, and, indeed, serious accidents, and in light of the conclusions of its own personnel, Old GM had an obligation to take steps to acquire full or exact knowledge of the nature and extent of the defect,” wrote the court. “At minimum, Old GM knew about moving stalls and airbag non‐deployments in certain models, and should have revealed those facts in bankruptcy.”

GM had also argued that there was no way it could have notified these people during the expedited 40-day bankruptcy process that resulted in New GM. Again, the court was not won over.

“While the desire to move through bankruptcy as expeditiously as possible was laudable, Old GMʹs precarious situation and the need for speed did not obviate basic constitutional principles,” wrote the Second Circuit. “Due process applies even in a companyʹs moment of crisis.”

In a nutshell, “[I]f a debtor does not reveal claims that it is aware of, then bankruptcy law cannot protect it” from those claims, explained the court. It agreed that the bankruptcy code does allow for “free and clear” asset sales to give companies the “opportunity for a completely unencumbered new beginning,” but noted that this intended only for the “honest but unfortunate debtor.”

GM appealed the Second Circuit ruling to the Supreme Court, but this morning SCOTUS denied that petition without comment, meaning the appeals court ruling will stand, and the various lawsuits against GM can move forward.

Neither the SCOTUS denial nor the Second Circuit ruling say anything about the actual merits of those lawsuits, and the carmaker believes that it will ultimately be vindicated in court.

“The plaintiffs must still establish their right to assert successor liability claims,” reads a statement from GM. “From there, (they) still have to prove those claims have merit.”

“GM can hide no more,” said Robert Hilliard, an attorney representing plaintiffs against the car company. “These cases are factually some of the most tragic stories, and also some of the strongest in terms of clear liability of GM’s intentional misconduct. Each case will soon be sent back to its local venue and each one will be tried to a verdict.”

The automaker has already paid out nearly $600 million in claims through an independent fund. The company has acknowledged that the ignition defect is linked to at least 124 fatalities and hundreds of injuries.