‘New’ GM Must Defend Ignition-Switch Claims

(CN) — General Motors' sale to its new corporate owner seven years ago cannot allow it to escape potentially billions of dollars in liability for the ignition-switch debacle that spawned nationwide litigation, the Second Circuit ruled Wednesday.

In 2009, GM's former company sold its assets to the current limited liability company that owns it, under an agreement that also shields the new owner from successor-liability claims.

That clause spawned controversy last year amid revelations that ignition-switch defects in GM vehicles caused accidents that killed at least 35 people, though an independent report commissioned by the Center for Auto Safety says the death toll could be as high as 300.

GM tried to fend off more than 60 class-action lawsuits filed against it across the United States by turning to federal bankruptcy court for the enforcement of the sale order. The company had expected to face between $7 and $10 billion in liability.

Most of the vehicles involved were built and sold by the "old" GM.

U.S. Bankruptcy Judge Robert Gerber noted that there were 850 objections to this order, the "most serious" of which related to the "free and clear" provision as applied to the ignition litigation.

However, the judge ruled last year that new GM cannot be sued for ignition-switch claims that could have been brought against old GM, unless the claims arose from new GM's own conduct.

The Second Circuit reversed the decision in large part Wednesday.

The panel found it likely that the extremely rapid sale process of old GM to new GM, which took only 40 days - a record for a sale of that magnitude - likely prevented car owners from negotiating some compensation for their claims.

"We do not know what would have happened in 2009 if counsel representing plaintiffs with billions of dollars in claims had sat across the table from old GM, new GM, and [the U.S. Treasury Department]. Our lack of confidence, however, is not imputed on plaintiffs denied notice but instead bolsters a conclusion that enforcing the sale order would violate procedural due process," Judge Denny Chin said, writing for the three-judge panel.

It is well-documented that old GM was well aware of the ignition-switch defect as early as 2002 but failed to warn dealers or consumers about the dangers, and continued to shift blame away from itself even as people were dying on the highways because their airbags did not deploy.

"While we cannot say with any certainty that the outcome would have been different, we can say that the business circumstances at the time were such that plaintiffs could have had some negotiating leverage, and the opportunity to participate in the proceedings would have been meaningful," Chin wrote in the 74-page opinion.

On these due process grounds, the court reversed the bankruptcy court's decision to enjoin many claims relating to the ignition-switch defect.

"We reverse the bankruptcy court's decision insofar as it enforced the sale order to enjoin claims relating to the ignition switch defect. Because enforcing the sale order would violate procedural due process in these circumstances, the bankruptcy court erred in granting new GM's motion to enforce and these plaintiffs thus cannot be 'bound by the terms of the [sale] order,'" the opinion states.

Further, the court said that yet-unspecified independent claims, and used car purchasers' claims, do not fall within the scope of the sale order's "free and clear" clause.

"We can imagine that some claims involve misrepresentations by new GM as to the safety of old GM cars," Chin wrote. "These sorts of claims are based on new GM's post-petition conduct, and are not claims that are based on a right to payment that arose before the filing of petition or that are based on pre-petition conduct."

Further, "Used car purchasers were individuals who purchased old GM cars after the closing, without knowledge of the defect or possible claim against new GM. They had no relation with old GM prior to bankruptcy," the ruling states.

The panel, however, agreed with the bankruptcy court that preclosing accident claims and economic loss claims arising from the ignition-switch defect are barred by the sale contract language.

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