The Bankruptcy Bailout: GM Moves To Block Lawsuits Over Defective Ignition Switches In Bankruptcy Court

150px-General_Motors.svgI recently wrote a column on the expanding scandal over General Motor’s release of the Cobalt and other vehicles with a defective ignition switch that may have killed over a dozen people and injured scores of others. The defect was reportedly found during testing and constituted the perfect storm of negligent designs: it would first shut off the car; cut the steering; and disable the airbags. Mary Barra, the newly appointed Chief Executive Officer of GM, told Congress that GM never puts costs ahead of safety (even though documents show GM pricing out the fix and rejecting it as too expensive). Now Barra and GM have quietly asked a federal court to protect it from product liability lawsuits due to its bankruptcy. It is like a second bailout from the government — this time through the courts — so that the company can keep billions in the federal bailout while barring recovery of billions for deaths and injuries caused by the company.

Many are likely to see the move as requiring considerable hubris after insisting that the company would take full responsibility for the defect. Then there is that little matter of the prior bailout. Some have charged that GM was aware of this defective design before it lobbied the government for a massive bailout in 2009. The government handed over $49.5 billion to the automaker and the public ultimately ate a $10.5 billion loss when our shares in “Government Motors” were finally sold off in 2013. In addition to billions in losses, the public got cars that could put their lives in danger the moment they turned the ignition key. This move adds to the bad optics. After the Obama Administration sold off the shares at a loss, the company will be able to walk away with the billions in unpaid subsidies while barring members of the public from seeking to be made whole after horrific crashes in their defective vehicles.

800px-Chevrolet_Cobalt_LT_sedanThese is now a recall of at least 2.6 million vehicles and lawsuits are popping up around the country, including some that directly contradict the recall information sent out by General Motors. When GM finally got around to recalling the cars, it told customers not to use heavy key chains with other keys on the ring. It was a chilling piece of advice: suggesting that keys on your chain could cause a catastrophic crash in the cars. However, Barra was recently informed by an attorney that his client Laura Valle was driving her recalled 2007 Chevrolet Cobalt without such a chain. Nevertheless, the ignition suddenly cut off, her steering locked, and she was unable to steer her car.

GM is seeking a declaratory judgment from a bankruptcy court in New York that it is shielded from products liability suits concerning defects and crashes prior to July 2009, when GM exited bankruptcy. GM is also arguing that it is protected under warranties for “Old GM” products for three years or 36,000 miles after purchase.

Notably, this technique has worked in the past. When GM moved into bankruptcy in 2009, it was facing about 2,500 lawsuits of various kinds and was able to just pay pennies on the dollar. There are already about three dozen lawsuits over the ignition defect.

What I find most disturbing is the possibility that GM knew about the defect in 2009 when it filed for bankruptcy. Documents suggest that the company may have known before the company sought the status — and sought the bailout. Yet, it did not mention this looming liability issue. If there was an effort to conceal that knowledge, both the bankruptcy and bailout could be viewed as a rather dishonest anticipatory move before the onset of lawsuits. As it stands, the government has effectively subsidized a company in the allegedly knowing release of a lethal product. The billions simply given to the company without repayment will likely cover much of the damages for GM. That will add to the criticism of the government bailing out this company rather than leaving such matters to the market.

Source: CNN

23 thoughts on “The Bankruptcy Bailout: GM Moves To Block Lawsuits Over Defective Ignition Switches In Bankruptcy Court”

  1. Rcampbell: I agree with Paul concerning your objection to the mentioning of the bailout. If someone lies about their income in order to cheat on their taxes and gets away with it, that does not mean the government is guilty of collusion. In this case, it appears GM may have knowingly failed to disclose this product liability issue. Only a mouth-breather like Bruce would think that the government acted with a wink and a smile.

  2. It will be interesting to see how the court acts in this case. Existing bankruptcy laws were ignored, redefined, or effectually rewritten to accommodate the GM bankruptcy in June 2009.

    For good or bad, American taxpayers took an over $10B bath in that deal.

    Years, if not decades of GM’s management malfeasance and culpability were generously forgiven by the court, the government, and ultimately the American taxpayer when saving this company.

    Now they want to escape culpability again! Go figure…

  3. The issue of whether GM should have been bailed out at all, a question on which reasonable minds can differ (and which I don’t intend to discuss here), is different from the question of how you do the bailout if the decision is made to do the bailout. You don’t give GM a tax break to one company that is not available to other similarly situated companies. Period. (IRS did something somewhat similar for the victims of Madoff by allowing theft loss deductions in situations where the case law did not support allowing theft loss deductions.)

    Turning back to the issues discussed by Prof. Turley, one possible way to deal with this situation (if the facts support such action) is to charge the company with a criminal conspiracy or other crime that calls for the payment of restitution upon conviction. If there is a conviction (by plea or otherwise) of the company, they will hopefully then have to pay restitution to the victims of the crime.

    If GM is asking for declaratory relief regarding the effect of a discharge on pre-confirmation claims (claims arising prior to the confirmation of the chapter 11 plan) based on the defect described above, and there are allegations that GM concealed the existence of this defect at the time of the BK filing and/or during the pendency of the chapter 11 case, hopefully someone (the U.S. Trustee’s Office?) will aggressively conduct discovery on this issue in the declaratory relief action. Done correctly, this will cause major headaches for GM. Corporations don’t have a 5th Amendment privilege against self-incrimination. So they can’t refuse to produce documents demanded in discovery on 5th Amendment grounds. Individuals, if deposed in their individual capacity, may be able to refuse to answer based on 5th Amendment grounds, but then the BK court can draw adverse inferences from a refusal to answer. (Note that the rules regarding the drawing of adverse inferences based on a refusal to answer due to 5th Amendment privilege are different in civil litigation than they are in a criminal context.)

    And there could be due process issues which may prevent the discharge of unscheduled pre-confirmation claims based on the defects discussed above, based on a failure to give notice to potential claimants/plaintiffs of their need to file claims.

  4. This is the company Obama spent billions to bail out. They got the protection of bankruptcy, w/o any of the consequences, costing those who pay taxes, billions!

  5. hmmm, there’s a lot of that kind of sTRAGEDY of paying for the bullet that is killing us:

    Industry physician:
    “Gardasil will be the greatest medical scandal of all times”
    April 15, 2014
    by Sandy Lunoe

    The temperature of the heated controversy concerning Gardasil
    was recently raised even more when Dr. Bernhard Dalbergue (France),
    former pharmaceutical industry physician with Merck,
    recently predicted that the vaccine will become the greatest medical scandal of all times.

    In an interview in the April 2014 issue (no. 66)
    f the magazine Principes de Santé (Health Principles),
    Dr. Dalbergue, who has worked for over twenty years with the industry,
    describes the widespread corruption
    and his concern that the health of patients is sacrificed on the altar of profitability.

    Dr. Dalbergue stated:

    I predict that Gardasil will become the greatest medical scandal of all times
    because at some point in time, the evidence will add up
    to prove that this vaccine has absolutely no effect on cervical cancer
    and that all the very many adverse effects
    which destroy lives and even kill,
    serve no other purpose than to generate profit for the manufacturers.

    According to Dr. Dalbergue the pharmaceutical industry has hardened
    considerably during the last decade,
    as shown by increased violations of ethics, manipulation of clinical trial data,
    widespread corruption, gross conflicts of interest
    and generally less emphasis on pharmacovigilance.

    The anti-inflammatory drug Vioxx,
    where Merck hid evidence for years about the dangers,
    is but one example of the industry’s ethical degradation.

    Tens of thousands of deaths due to cardiovascular complications
    were caused by Vioxx before it was removed from the market.

    Merck then made a change in the molecule of the active substance in Vioxx
    and produced a replacement drug,
    Arcoxia which is widely marketed and is suspected of possibly being as dangerous as Vioxx.

    When Gardasil first appeared on the market
    it was said by many that the vaccine was “Merck’s new Vioxx”.
    Some interpreted this as implying that the vaccine would be a new blockbuster.
    Others suspected that it meant that Gardasil would,
    like Vioxx,
    be a scandal involving tens of thousands of injuries and many deaths across the world.

    Tragically, there are signals that Dr.Dalbergue’s prediction may become true.

    Dr. Dalbergue went on to explain:

    The full extent of the Gardasil scandal needs to be assessed:
    decision makers and many others knew when this vaccine was released
    on the American market that it would prove to be useless – and it costs a fortune!

    Diane Harper, a major opinion leader in the United States,
    was one of the first to question several aspects regarding this vaccine.

    When asked why Gardasil is not being withdrawn from the market

    Dr. Dalbergue replied:

    There is far too much financial interest for these medicines to be withdrawn.

    Regarding vaccines in general, Dr. Dalbergue stated:

    Cases of Guillain-Barré syndrome, paralysis of the lower limbs,
    vaccine-induced MS and vaccine-induced encephalitis may be induced,
    whatever the vaccine…

    Dr. Dalbergue compared the price which vaccine injured patients may be forced to pay
    to the way dissidents are dealt with in China, saying:

    In China, dissidents are executed with a single shot of a bullet to the neck
    and executions are broadcast on television.
    Worse still, the victim’s families are made to pay for the bullet used.
    In my opinion, 18,000 to 30,000 deaths in France caused by medicines are the same:
    the patients are made to pay for the bullet which kills them.

    Dr. Dalbergue is author of the newly published book
    Omerta Dans Les Labos Pharmaceutiques (Omerta in pharmaceutical labs).

    For the first time a person within the system describes the methods
    which are used including cheating, embezzlement and brainwashing.

    Read the interview in French here…

  6. Paul

    A) The bailout was put together to save jobs, home, small businesses that depended on workers having a pay check. It also saved the supply chain of companies which provide the products that go into cars made by all the auto makers, not just GM? That group of companies would have been devastated and affect all auto production. There would be NO auto industry in the US.

    B) I do believe someone from GM should go to jail over this scandal. More corporate execs should be jailed until they get the point that their contempt for consumers is not okay.

    C) The comment on putting the company in jail is one on the larger issue of how to handle corporate misdeeds. Does that put people out of work? Yes, in the short term. Shut them down for 30 days, 60 days. The punishment must hurt the investors. That’s the only way to get their attention and get change.

  7. If they have a legal right to use this remedy to limit their liability then they would be remiss not to use it. The bankruptcy was oddly structured to begin with so who knows.

  8. I could see if GM had listed it as an issue under the section for claims yet to accrue, liabilities etc….. Then the bankruptcy court should protect them and anytime GM was sent notice of litigation then this would work as an affirmative defense…. And defeat the claims….

    But if GM had not listed this then only the extraordinary remedies of the bankruptcy court could be involved….. Other than that…. I think they are on the hook and liable…..

  9. Everyone needs to form a corporation whose religious beliefs prohibit their employees from driving GM vehicles.

    More seriously, there needs to be a major accountability moment for individual members of GM management in the form of a criminal investigation and, if appropriate, prosecution.

    One aspect of the GM bailout was particularly odious. Normally the future use of net operating losses is severely limited under the tax laws when a company in chapter 11 bankruptcy has an ownership change. Treasury invented a special rule for GM out of thin air (I.e., they ignored the law), allowing GM to use net operating losses going forward notwithstanding the existence of an ownership change.

  10. Rcampbell I don’t get your reasoning, First you say the GM bailout was good because it saved thousands of jobs. Then you say if the corporation did something illegal it should be closed and people should loose jobs. Which is it? GM ran into trouble because they built products people did not want, that is what bankruptcy is all about. Do you not think someone would have bought those assets at some price and put them to use making a product people want? We will never know, the Government stepped in and intervened, took money from a lot of non-politically correct people (non union), gave it to those that were politically correct (big bankers with loads of GM debt and the union), and set them free from all prior malfeasance and gave all the big executives of the failed GM a hefty bailout for their failure.

    I don’t get it.

  11. I think it’s a bit over the top to insert words like “bailout” into this subject. The inference is that GM’s use of the courts in this matter has anything to do with the financial bailout from years ago is misleading at the very least. The comment falsely implies some sort of cooperation or collusion between GM and the government? There is also a comment that they are seeking the court’s help to “…keep billions in the federal bailout…”. Though the stock the federal government held came up some $10-$15 billion short of full repayment, the government has sold it’s stake, so GM is on it’s own in this fiasco. They are just doing what corporate thugs do. This is corporate management using every means available to avoid responsibility for their actions. The bailout was about saving the jobs of hundreds of thousands of workers to prevent further losses of homes and businesses and was a good thing. It should not be interjected into the discussion of a completely and clearly unrelated matter.

    It is more appropriate to mention that limiting or eliminating consumers’ rights of redress is a constant theme of corporations and conservative politicians. They want limits on product liability claims and awards. They want to take away consumers’ ability to punish coporate malfeasence so that companies can enter a financial calculation for legal fees and damage claims into their future cost projections and then continue their thuggish ways.

    Justice Holmes suggests that some one should go to jail over this and I agree. Funny how corporations are people when it comes to campaign money or their religious beliefs, but not when they hurt other people. Not only should some individuals serve time, but the corporation it self should suffer consequences which might even put it out of business. That’s what happens to people when they break the law.

  12. GM is seeking a declaratory judgment from a bankruptcy court in New York that it is shielded from products liability suits concerning defects and crashes prior to July 2009, when GM exited bankruptcy. GM is also arguing that it is protected under warranties for “Old GM” products for three years or 36,000 miles after purchase.

  13. Despicable. Justice Holmes, you are absolutely correct, though I fear 100% wrong in what will ultimately happen. Perhaps a more likely outcome is Barra will get a hefty bonus for protecting GM assets.

    He is another simple solution, don’t by a GM product.

  14. GM CEO, Mary Barra should seek spiritual guidance during this time of affliction. Here’s the template. Ready to implement ASAP.

    Milwaukee Documents Reveal Timothy Dolan’s Bankruptcy Scheme and Frustration With Rome.

    Documents released in Milwaukee show that Catholic church leaders, including then archbishop Timothy Dolan, deliberately transferred $59 million to a trust in order to protect it from the claims of people who had been sexually abused by local priests. In a letter to a Vatican official, Dolan, now cardinal archbishop of the Archdiocese of New York, explains that the move will provide “improved protection of these funds from any legal claim and liability.”

    No one will fail to recognize Dolan’s skill as corporate-style turnaround specialist.

  15. It is time for someone at GM to go to jail. When a human lies in bankruptcy court they don’t get immunity or relieved of a liability they lied about.

    Isn’t it interesting that in order to show their sorrow for killing people GM fired its PR guy and the woman in charge of HR. The CEO who lied congress however is still there!

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