GM Reversals Hinged on Safety, Definition of ‘Claim'

By Martina Barash

July 13 — Safety aspects of the ignition-switch defect in some General Motors Corp. cars led a federal appeals court to reverse a bankruptcy court as to how the company's 2009 bankruptcy sale affected some plaintiffs' claims ( In re Motors Liquidation Co. (Elliott v. Gen. Motors LLC), 2016 BL 224458, 2d Cir., No. 15-2844-bk(L), 7/13/16 ).

The problem allegedly caused vehicles to lose power and stall while in motion, disabling power features and air bags.

The plaintiffs might have had leverage to obtain “accommodations” had GM disclosed the defect, and had they been given direct notice of the bankruptcy proceedings and an opportunity to be heard at the time of the sale, the U.S. Court of Appeals for the Second Circuit said in a July 13 opinion (see related story).

That leverage could have included the threat of litigation during the bankruptcy proceedings which could have opened up the company to the possibility of more daily and weekly costs tied to a delayed sale, the Second Circuit said in an opinion by Judge Denny Chin.

State attorneys general were able to persuade the new company to take responsibility for “Lemon Law” claims in negotiations leading up to the sale, the court said.

The potentially different outcome meant the lack of direct notice harmed plaintiffs who allegedly suffered personal injury or economic loss due to the ignition-switch defect, the appeals court said, reinstating those claims.

Evidence in the record, including a report for GM by attorney Anton Valukas, showed that GM knew, or “surely” should have known, about the ignition-switch defect, the court said.

The court sent claims by plaintiffs alleging injuries from other defects—not the ignition-switch problems—back to the U.S. Bankruptcy Court for the Southern District of New York for more development of facts about GM's knowledge of the defects at the time of the sale.

The lower court left GM's bankruptcy shield largely intact in an April 2015 decision (43 PSLR 499, 4/20/15).

‘Claims' Under Bankruptcy Law

The Second Circuit also addressed a question of bankruptcy law that could have implications in other cases. The successor-liability claims that the bankruptcy court deemed barred against the post-bankruptcy “New GM” under a provision of the sale contract must still qualify as “claims” under Chapter 11 of the Bankruptcy Code, the court said.

Such claims involve a right to payment that arose before the filing of the bankruptcy petition, the Second Circuit said.

It applied that principle, reversing the bankruptcy court's determination about one group of plaintiffs. The lower court said that New GM was immunized against claims by people who bought “Old GM” cars secondhand after the bankruptcy sale.

But the Second Circuit said the used-car purchasers weren't covered under the immunizing language of the bankruptcy sale order. Old GM had no contact or relationship with those plaintiffs, the appeals court said.

To contact the reporter on this story: Martina S. Barash in Washington at mbarash@bna.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bna.com

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