Why GM may never pay in liability claims

The automaker already has acknowledged a link between the faulty ignition switch and 12 deaths and 31 crashes, but a glaring loophole in federal bankruptcy law could impact any payouts.

By The Fiscal Times Mar 25, 2014 10:29AM

General Motors headquarters in Detroit, Mich., on June 6, 2013 (© Jeff Kowalsky/Bloomberg via Getty Images)By Eric Pianin, The Fiscal Times 

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.

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.

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."

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.

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."

More from The Fiscal Times
Tags: GM
Mar 25, 2014 11:40AM
They may not be "legally" accountable, but I am not legally obligated to buy their death traps anymore. 
Mar 25, 2014 11:09AM
These liability issues were widely known and reported on 5 years ago, but the congress and the POTUS thumbed their nose at everyone and went ahead with the bailout anyway, without even considering a restructuring of their scheme.  In case anyone forgot, the unions were in a big hurry to push this through and they got what they paid for.

The way the entire thing went down was ridiculous and shady.  Think about it, the federal gov took over a private company and unilaterally divided it into 2 sections; old and new.  The "old" company was saddled with all the debt and liability and the "new" company got all the assets.  The "old" company was then allowed to file bankruptcy and was immediately dissolved, because they had no assets.   The "new" company was then essentially given to the unions and resumed operations with a clean slate.

Again, these actions are completely illegal and private citizens would go to federal prison in a heartbeat if they tried something like this.  But the gov does it, and it's perfectly fine.

Mar 25, 2014 11:46AM
If they do not pay I would hope that GM never sells another car/truck.  Anybody with a conscience should boycott GM !
Mar 25, 2014 12:00PM




Mar 25, 2014 11:57AM
So Toyota is forced to pay over a Billion for something that has never been proven to be their fault while thse criminals will go on as if nothing happened? 
Mar 25, 2014 10:45AM



think they didn't know this going into bankruptcy court? 


meanwhile, no one will go to jail for allowing such an unethical operation to continue running along scott free....

Mar 25, 2014 11:04AM
Why GM may never pay in liability claims: gov't motors...wonder what else will rise up from the bailout sesspool
Mar 25, 2014 11:46AM
Mar 25, 2014 11:30AM
Some people have commented that the drivers were at least partially at fault because they should have just stopped the car. When the engine shuts off, it turns off all power systems - including power steering and power brakes (in addition to the air bags).  It would be difficult for a young driver (or any driver for that matter) to control the car with no power steering or brakes if the engine shut off while the car was going 55 mph or in city/suburban traffic.
Mar 25, 2014 10:40AM
GM is a ward of the Obama Administration and is above the right thing.
Mar 25, 2014 11:50AM
If gm doesnt step up and take care of these people I will never buy a gm product again!!!!
Mar 25, 2014 11:27AM

so, literally getting away with murder.


only obamamotor corp could pull this off.


scary thing: almost all who did so twice, would still vote for him again.

Mar 25, 2014 11:12AM
Government Motors is a crooked union enterprise that continues to screw the American public along with the TBTF bankers like BAC, C and JPM. Obama and the Fed screwed the average American while driving up the prices of equities. Putin has all the rights he needs to flip off Obama, EU and  the US.
Mar 25, 2014 11:10AM
It's because of the Unions and Obama and the democrats are the Prostitutes of the Unions...."Period"! Especially the UAW (Former Mafia! Just ask Jimmy Hoffa!
Mar 25, 2014 11:28AM
all the executives that were with the company at the time of these problems should be sued and then sent to hell wait coats on
Mar 25, 2014 11:06AM

everyone sing along:

look for, the union label...

Mar 25, 2014 11:12AM

the contributions of those evil koch brothers is but a rounding error in comparison to the union bankrolling of elections.


the unions run this country

Mar 25, 2014 11:29AM

sounds to me like they should get a pay raise!

right liberals?

Mar 25, 2014 12:04PM
just another reason why no one should purchase anything from GM!!
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