When the United States Court of Appeals for the Second Circuit ruled against General Motors last week, the court opened the doors for over 1,000 death and injury lawsuits against the automaker. In its decision, the court of appeals found that a lower bankruptcy court ruling had deprived claimants of due process to bring damages against GM.
At issue before the court of appeals was whether GM could use a 2009 bankruptcy to defend against lawsuits over faulty ignition switches. It is estimated that $7-10 billion in liabilities hinged on whether the court of appeals overturned the bankruptcy court.
Certain GM vehicles as early as model year 1998 were sold with faulty ignition switches. During operation, the switches could slip and cause the car to stall. In some instances, the switch failure led to accidents and injury to the driver and passengers. The faulty switches are linked to almost 125 deaths as well.
The question of liability arose after GM’s 2009 bankruptcy. One of many government bailout programs, the terms of the federally-backed bankruptcy indemnified the reorganized GM from claims against the “old” GM. Until last week, GM executives maintained this meant cases brought against old GM for the faulty ignition switches.
As a general rule of Chapter 11 proceedings, the debtor must file a disclosure statement pursuant to 11 U.S.C. §1125. The disclosure statement provides financial information critical to the bankruptcy – including information on assets and liabilities. When GM filed for reorganization in 2009, the company did not acknowledge faulty switches as a potential liability, even though – according to court records – company executives were aware of the problem but did not reveal the issue because it could have hampered the bailout.
In April 2014, plaintiffs argued in bankruptcy court that GM has lost its liability protections due to the failure to disclose. However, GM maintained that the new company created post-bailout was not liable for the old company’s faulty switches. Despite the fact that the suit exposed a recall a decade in the making affecting over 2.5 million autos, the lower court sided with GM.
The court of appeals, however, did not agree. In a 74-page opinion, the court examined the due process rights of GM consumers affected by vehicles that the company should have known to be defective. “New GM essentially asks that we reward debtors who conceal claims against potential creditors.” The court declined GM’s argument.
Though the court of appeals affirmed many of the findings of the bankruptcy court, the crux of the decision rested on the key issue of prejudice. While the bankruptcy court had dismissed the plaintiffs’ claims against GM for lack of prejudice, the court of appeals ruled otherwise, thus opening the door for over 1,000 pending or potential lawsuits.
Relying on the record of the previous proceedings, the court of appeals determined that it need not reach the question of prejudice because, ultimately, the plaintiffs had not been given adequate notice of the bankruptcy sale of old GM. Lack of notice, according to the appellate court, constituted a procedural due process violation that could not be overlooked.
When a debtor fails to disclose a claim – or a potential claim – it is aware of, bankruptcy law cannot be invoked as a protection. Typically, debtors in a bankruptcy proceeding may try to hide assets. In doing so, they commit bankruptcy fraud, an offense punishable by up to five years in federal prison. Personal Injury attorney Matt Davey commented, “General Motors executives walked a very questionable line in choosing not to disclose the faulty ignition problem in 2009 by failing to disclose a large potential liability.”
Speaking in support of the government bailout, President Obama assured the American public in 2009 that, “If you buy a car from General Motors…the United States Government will stand by your warranty.” While the assurances of a president may sway consumer confidence, a greater influence can be found in the court of appeals’ decision.
Time will tell how GM responds to the latest court ruling and how the public reacts to this very important court ruling.
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