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GM Barred from Using 2009 Bankruptcy as a Way Out for Ignition Switch Claims

Max Kellogg | Legal Staff Writer

The Second Circuit Court of Appeals on July 13, 2016 found that the claims against General Motors (“GM”) regarding its faulty ignition switch could proceed. 

Approximately 1,000 lawsuits were brought against the company in 2014 arising from claims that the ignition switches on the GM’s vehicles, such as the Chevrolet Cobalt and Saturn Ion, were prone to slipping out of their run position, causing the vehicles to suddenly stall and preventing airbags from deploying in the event of a crash. Some of the cases were for personal injury and wrongful death, while others were based on claims that the defect decreased the value of the vehicles. However, all claims were put on hold pending the outcome of this appeal from a bankruptcy court determination.
Prior to the lawsuits against GM over its ignition switches, the company’s predecessor, “Old GM,” filed for bankruptcy in 2009 and sold its assets to GM, also referred to as the “New GM.” In those proceedings, the bankruptcy judge, Hon. Robert Gerber, issued a Sale Order ruling that the New GM was ʺfree and clear of liens, claims, encumbrances, and other interests . . . including rights or claims . . . based on any successor or transferee liability.ʺ 

In this case, it was alleged that GM concealed the ignition-switch defect in its vehicles from the bankruptcy court back in 2009, and thus, despite the Sale Order, New GM should be liable for its conduct post-sale. GM had previously admitted to the Department of Justice that it knew of the defect in 2005.

The defect was finally disclosed in 2014 when GM issued a recall on the 2005 Cobalt. In April 2015, the bankruptcy judge held that, although he was upset that GM did not disclose the faulty ignition switch at the time of its bankruptcy, the claims against the new company would have been barred by the Sale Order.

The three-judge panel of the Second Circuit disagreed, finding that because New GM knew of the defect in the ignition switch and did not inform the public or the court, it violated due process of the United States Constitution. The court wrote that even though GM filed for bankruptcy, “due process applies even in a company’s moment of crisis.” In support of its conclusion, the court stated, “we can imagine that some claims involve misrepresentations by New GM as to the safety of Old GM cars. These sorts of claims are based on New GMʹs post‐petition conduct and are not claims that are based on a right to payment that arose before the filing of petition or that are based on pre‐petition conduct. Thus, these claims are outside the scope of the Sale Orderʹs ‘free and clear’ provision.”

The outcome of this decision could affect GM in the billions of dollars. While this allows hundreds of claims to proceed, victims who had qualified for a previous settlement of $594.5 million are looking at whether their cases could possibly be reopened in light of court’s ruling. The company is discussing their options now, including an appeal to the U.S. Supreme Court.

This case is: In Re General Motors LLC Ignition Switch Litigation, 14-MD-2543 (JMF); 14-MC-2434 (JMF).

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