GM’s Liability Exposure Limited by Bankruptcy Court Ruling

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By Daniel Gill

General Motors’ civil liability exposure connected to acts before its 2009 bankruptcy sale was limited by a New York bankruptcy court ( In re Motors Liquidation Co. , 2017 BL 239679, Bankr. S.D.N.Y., Chapter 11 Case No. 09-50026 (MG) (Jointly Administered), 7/12/17 ).

The opinion by Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York had three distinct holdings related to holders of claims against the company derived from product liability:

  •  “New GM” can’t be liable for punitive damages attributable to the behavior of “Old GM”;
  •  Only plaintiffs with certain vehicles can assert “ignition switch” claims against New GM; and
  •  Used car purchasers are bound by the bankruptcy sale order to the same degree as their predecessors in interest.
The opinion is the latest in many years of litigation.

New GM Buys Old GM’s Assets

On July 5, 2009, the bankruptcy court approved a sale under Section 363 of the Bankruptcy Code of essentially all of GM’s assets to what’s often called “New GM,” free and clear of liens, claims, encumbrances and interests.

But plaintiffs with claims related to a faulty ignition switch argued that their claims should not be extinguished against New GM because of the “free and clear” language of the sale order. The Second Circuit Court of Appeals agreed with these plaintiffs in an opinion issued July 13, 2016.

The Second Circuit found that these claimants were prejudiced by Old GM’s failure to disclose the defect and by their lack of notice of the impending 363 sale. The circuit court ruled that those plaintiff’s could maintain their claims against New GM.

The July 12 opinion by the bankruptcy court served to answer some “threshold issues” related to New GM’s continuing liability.

No Punitive Damages

Perhaps of greatest significance to New GM is the court’s ruling that punitive damages will not be available to the ignition switch claimants. This ruling is the result of the priority scheme for paying creditors as set forth in the bankruptcy code.

11 U.S.C. §726(a)(4) provides that claims for punitive damages aren’t paid in bankruptcy unless and until all other general unsecured claims, even late-filed claims, are paid in full.

“Because a successor corporation may only be liable to the same extent as its predecessor, New GM cannot be held liable for a claim that its predecessor would never have had to pay under the Bankruptcy Code,” the court explained. “Old GM was deeply insolvent, and it would have never been liable for punitive damages until all higher priority claims were paid in full,” it said.

Accordingly, since Old GM wouldn’t be liable for punitive damages, certainly the purchaser in the 363 sale (New GM) won’t be either, the court explained.

Limited Plaintiffs

Only certain plaintiffs with ignition switch defects in certain specific vehicles will be allowed to continue to assert claims against New GM. The specific vehicles were defined in earlier court decisions and were relisted in the opinion, including some Chevrolet, Pontiac and Saturn models.

The court did not consider whether plaintiffs with vehicles subject to other recalls may be able to prove that their due process rights were violated by the 363 sale or whether it is too late for them to do so.

Used Cars

The other threshold issue considered by the court was whether used car purchasers without the ignition switch defect are bound by the 363 sale order. In other words, could those purchasers assert claims against New GM based on Old GM’s conduct?

The court ruled that they can’t. Although the buyer may have purchased the car after the sale date, without any knowledge of the free and clear sale, the purchaser steps into the shoes of the seller and has the same rights, the court said. Owners of used cars cannot acquire more rights than the seller had, it said.

General Motors LLC was represented by King & Spalding LLP, New York, and Kirkland & Ellis LLP, Chicago.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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