Why GM May Never Pay a Dime in Liability Claims
Business + Economy

Why GM May Never Pay a Dime in Liability Claims

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It was a parent’s worst nightmare. A freakish 2006 car crash in Wisconsin killed 18-year-old Natasha Weigel and Amy Rademaker, 17, and left the 17-year-old driver of the car, Megan Phillips, with serious brain damage.

The young women were traveling in a 2005 Chevrolet Cobalt. The popular compact was one of six models recently recalled by General Motors because of a serious defect – a hypersensitive ignition switch liable to shut off and immobilize the steering and brake system and prevent the car’s airbags from deploying.

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Police investigating the Wisconsin tragedy found that the Cobalt’s ignition switch had mysteriously shifted from “run” to the “accessory position” before the Cobalt froze up and slammed into a telephone pole and two trees without triggering the airbags. Just a year earlier, a Maryland teenager named Amber Marie Rose was killed in a similar accident when the Chevrolet Cobalt she was driving slammed into a tree and the airbag failed to deploy.

A lawsuit filed on behalf of Phillips and the families of Weigel and Rademaker is seeking more than $50,000 in damages from GM and the Minneapolis dealership that sold the car, but other lawyers are bringing a class action suit against the automaker that potentially could involve hundreds of millions of dollars or more in damages.

Ironically, while GM already has acknowledged a link between the faulty ignition switch and 12 deaths and 31 crashes, the car manufacturer may never have to pay a dime in damages to any victims and their families. That’s because of a glaring loophole in the federal bankruptcy law.

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GM has told federal regulators that it was alerted to problems with the ignition switch as early as 2001. Twice the automaker told the National Highway Transportation Safety Administration that it had explored corrections to the switch in 2004 and 2005 but didn’t follow through.

Yet the accidents all occurred before GM emerged from an historic Chapter 11 bankruptcy in 2009 – a legal and financial process that shielded the restructured manufacturer from any liabilities of the “old” GM.

Harvey R. Miller, a New York lawyer who represented GM in the bankruptcy proceedings, said Monday that the terms of the bankruptcy order are very clear: Any liabilities incurred before the bankruptcy petition was filed on June 1, 2009, are the obligations of the former GM – while any incurred afterward are the responsibility of the “new” GM.

“If they [the liabilities] occurred before the bankruptcy and the injury was manifested before the bankruptcy, then it would be a pre-petition claim and subject to the discharge under the bankruptcy code,” he said in an interview. “The critical date is the date of the commencement of the Chapter 11 cases, and under the general bankruptcy law, that’s a day of demarcation.”

Douglas C. Bernstein, a Bloomfield Hills, Mich., lawyer who specializes in bankruptcy and creditors’ rights, said GM will have difficulty taking advantage of the shield against the claims if it can be shown that the manufacturer hid information about the car defects during the bankruptcy proceedings.

“The bankruptcy law allows an honest debtor to get a fresh start, whether it’s a corporation or an individual,” he said. “But the price of admission is full disclosure. So you don’t get the relief of being rid of your obligations by not being honest.”

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Sen. Richard Blumenthal (D-CT) yesterday urged Attorney General Eric Holder to immediately intervene to force GM to establish a fund to compensate victims and to warn current owners of the recalled cars of the dangers of continuing to drive them.

“Like many Americans, I was appalled and astonished by GM’s recent admission that it knew of these disabling defects and their disastrous effects well before the 2009 reorganization,” Blumenthal said in a letter to Holder. “Their deliberate concealment caused continuing death and damage and it constituted a fraud on the bankruptcy court that approved its reorganization.”

Blumenthal added that GM had “criminally deceived” the federal government and the public.

Lawyers for some of the plaintiffs in the recall case are going to court to try to force GM to issue a “park it” order to the owners of the 1.6 million or more cars that have been recalled.

The New York Times reported yesterday that GM and its engineers nearly five years ago “laid to rest” any doubt that a fatal defect existed in hundreds of thousands of its cars, yet subsequently told the families of accident victims and other customers that it did not have enough evidence of any defect in their cars.

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“In one case, G.M. threatened to come after the family of an accident victim for reimbursement of legal fees if the family did not withdraw its lawsuit,” the newspaper reported, based on interviews, letters and legal documents.

Federal bankruptcy laws are designed to give debt-ridden and poorly managed corporations the opportunity to negotiate settlements with creditors, jettison losing operations, reorganize the management team and move on as a newly restructured entity.

Under the 2009 restructuring agreement that helped GM emerge from the auto industry crisis, the company was divided into old and new corporate entities – with the old GM saddled with all the bad assets, such as closed assembly plants, while the new GM inherited the best of the company. Any claims pending against the company were settled and paid from a limited pool of money.

With its recall of 1.6 million cars, GM will be on the hot seat as the Justice Department, congressional committees and the National Highway Traffic Safety Administration investigate why the automaker kept the defects secret for more than a decade before first announcing them last month

GM officials haven’t indicated yet whether they will utilize the shield and fight the lawsuits – or whether they might attempt to reach a settlement with plaintiffs to limit the public relations damage to the company.

Related: General Motors Hits Reverse on Its Public Relations

Beginning in mid-February, the company issued recalls for model year 2005-2007 Cobalts and Pontiac G5s with faulty ignition switches. It added 842,000 Ion compacts (model years 2003-2007), Chevrolet HHR SUVs and Pontiac Solstice and Saturn Sky sports cars (2006-2007) to the list of cars being recalled for the problems as well.

Mary Barra, GM’s new president and CEO, said recently, “There are certain cases where liabilities prior to bankruptcy are – I don’t know the right word – they’re with the previous company. But I would say right now, our focus 100 percent is on the customers, on fixing their vehicles – getting the parts, fixing their vehicles and supporting them through that process.”

Some lawyers for the victims of the fatally flawed automobiles believe it can be shown that GM intentionally sat on information about the ignition and airbag problem during the bankruptcy proceedings.

A GM timeline of events that the company gave to NHSTA showed that there were numerous reports and inquiries into concerns about the ignition switches being out of position in almost every year since 2003 except 2008, when the company’s survival was in doubt and GM was seeking a government bailout.

“The truth is they knew they had this recall [coming],” Shelby Jordan, a Corpus Christi, Tex., lawyer involved in the recall controversy, told the Detroit Free Press last week. “There is no question GM knew that this was a problem. They even told their dealers privately about it” before the bankruptcy.

Miller, the GM bankruptcy lawyer, said yesterday, “I don’t recall it being specifically brought up, but there were all kinds of issues about tort claimants resulting from accidents, manufacturing defects, etc. And that’s why the plan was structured in the way it was, to deal with the successor liability issue.”

This article was updated Tuesday, March 25 at 11:30 am.

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