GM Escapes Liability

The New York bankruptcy court that oversaw the massive GM bailout in 2009 has dealt what may be a death knell to all claims for ignition-switch related deaths and injuries in crashes that happened before the bankruptcy. After GM’s massive coverup was exposed, some thought the court would surely feel outraged at being tricked into leaving millions of vehicle owners without recourse, but apparently GM waited long enough to make it too cumbersome and costly to undo the damage. The ruling could save GM billions of dollars in personal injury and economic damages payouts – which helps GM pay the lawyers who helped them perpetuate the fraud and use the bankruptcy to shield them.

By way of background, in 2009, GM was hemorrhaging money when the government offered it a lifeline: GM could file for chapter 11 bankruptcy and shed all of its liabilities into a company called “Old GM” while selling its profitable assets to “New GM,” a “new” corporation made up of all the same GM players, with the same products and – it turns out – the same desire to hide lurking defects, only this time backed by federal money. The kicker: New GM would assume the assets free and clear of all successor liability claims, including those for injuries or deaths that occurred even one day before the sale was final on June 29, 2009. Justice is meted out based on a calendar.

The ignition switch defect, while well known in many inside GM, was not easily connected or understood by law enforcement and investigators as the potential reason for loss of control crashes and airbag nondeployments.  Drivers were frequently faulted with the crashes.  Even people involved in their crashes did not realize a defect was to blame.

At least 24 “Old GM” engineers, executives and in-house lawyers, all of whom went to work for “New GM,” had known since 2003 that the defective ignition switch defect was lurking in about 27 million vehicles. But it wasn’t until five years later, in February 2014, that New GM attempted to recall a small portion of the vehicles – after the defect had been outed during discovery in a death case. The plaintiffs’ attorney, Lance Cooper, notified NHTSA that there was more to the story and requested an investigation into the issue.  Cooper represented the family of Brooke Melton, a woman killed when her car lost power and drifted into oncoming traffic in 2010.

New GM’s CEO Mary Barra immediately proclaimed how sorry GM was. As she told the House Committee on Energy and Commerce Subcommittee on Oversight and Investigations in an April 2014 hearing: “As soon as I learned about the problem, we acted without hesitation. We told the world we had a problem that needed to be fixed. We did so because whatever mistakes were made in the past, we will not shirk from our responsibilities now and in the future. Today’s GM will do the right thing.”

More than 140 class actions were filed across the country, alleging that people who owned GM vehicles suffered economic losses, primarily for reduced resale value. These were consolidated into a Multi-District Litigation in the Southern District of New York. Many more cases were filed by families of the deceased or victims who were injured in crashes that occurred before the sale. (Cases involving post-sale crashes with any recalled vehicle and economic claims for vehicles bought after the sale are proceeding in the MDL as planned, with depositions to begin shortly.)

New GM acknowledged that it was liable for incidents that happened after the sale, even for vehicles manufactured and sold by Old GM. It set up a compensation fund, run by Kenneth Feinberg, that agreed to compensate victims whose crashes met certain criteria – for instance, inexplicably, that neither the airbag nor the seatbelt pretensioners deployed – and who submitted all documentation that the crash and/or lack of airbag deployment was likely the result of the defective ignition switch. But GM’s fund excluded many vehicles – including some makes and models covered under the ignition switch recalls.  Feinberg has approved 87 out of 475 death claims, and 157 out of 3,867 injury claims. Although the date for filing a claim has passed, the fund is still reviewing 1,085 claims.

And apparently, GM thinks the “right thing” means being forced to compensate only those people who crashed after it convinced the court to shed its liabilities. New GM refused to pay for incidents that happened, or economic claims for vehicles bought, before June 29, saying those were Old GM’s responsibility.  

“It’s like they have this GM hat. If it says ‘New GM’ on it, they are responsible. If it says ‘Old GM’ on it, they are not,” said Robert Hilliard, co-lead counsel in an MDL. “They’re saying we did this, it’s our fault, but we did it when we were wearing the Old GM hat. Not we’ve got the New GM hat on, so leave us the hell alone.”

Surprising some who thought the court would at least carve out an exception to the ban on successor liability for people who had been injured before the sale, Judge Robert Gerber ruled last week that all of the claims by pre-sale crash victims and most of the claims by economic damages plaintiffs are barred.  

Judge Gerber made several observations that should have been feathers in the plaintiffs’ caps: He found that at the time of the sale, Old GM knew it should issue a recall to owners of about 27 million vehicles with defective switches, which it could easily identify and send notices to. Old GM also knew that people had been injured or killed because of the defect and that more people would be injured or killed in the future. Because Old GM did not issue a recall notice nor inform owners of those vehicles that they might be a creditor who can object to the sale, it deprived the plaintiffs of their Due Process rights.

To the plaintiffs, that should have been enough to void the free and clear provision. Not so fast, the court said. What the plaintiffs lack is proof that the insufficient notice actually prejudiced them. During the bankruptcy sale hearing, about 850 entities objected to the provisions releasing New GM from liability for most claims and making it free and clear of successor liability. The court heard the arguments and rejected them in granting the sale.

“[N]either Plaintiff group has advanced any arguments on successor liability that were not previously made, and made exceedingly well before,” Judge Gerber ruled. “Their principle contention – that they would have won by reason of public outrage, political pressure, or the U.S. Treasury’s anger with Old GM, when they would not have won in the courtroom – is the very speculation that they rightfully criticize. Thus, insofar as successor liability is concerned, while the Plaintiffs established a failure to provide them with the notice due process requires, they did not establish a due process violation. The Free and Clear Provisions stand.”

What Judge Gerber didn’t say was how many of the objectors at the sale hearing were there because they had a vehicle with an ignition switch defect – which is likely none because they didn’t know about the defect.

“That’s the disconnect for me,” said Hilliard. “I really believe that if the families and victims had shown up, and the court had understood the breadth of the recall that should have been issued, the court would not have let the sale go forward.”

The only exception is that the economic damages plaintiffs alleged a new argument that the free and clear provision was overbroad because it precluded New GM’s liability for its own conduct. Thus, the economic damages plaintiffs have leave to file late claims that focus solely on New GM’s conduct after the sale. Given that all of the New GM decision makers were also Old GM decision makers, it’s unclear right now how easily the plaintiffs will be able to disentangle them to rely only on New GM’s conduct in their attempt to proceed.

Judge Gerber already certified the opinion for the Second Circuit. And there’s a chance that Judge Jesse Furman, who is overseeing the MDL, could decide to let the cases go forward anyway, in which case it would still end up before the Second Circuit. But for now, all claims related to pre-sale crashes are barred.

That means no recourse for one of Hilliard’s clients, a man whose pregnant wife died after an ignition switch-related crash in a vehicle not covered by the Feinberg fund. Hilliard said the man told him, “I can totally understand on a normal bankruptcy but when GM deliberately committed fraud and knowingly murdered innocent people destroying the lives of so many, that is just a straight up unethical violation of rights.”

Or for Rose Thompson, the mother of college student Teriel Thompson, who died in September 2006 after her 2005 Chevy Cobalt suddenly veered left on an Arkansas interstate, slid sideways and then rolled over multiple times before landing on the opposite side, where it was hit by another car. The airbag did not deploy, and Teriel, who was just 21, was ejected. Her mother contacted attorney Lance Cooper for representation years later, when the GM scandal came to light. Feinberg denied her claim, saying there wasn’t enough proximate cause evidence to tie it to the ignition switch defect.

“[GM CEO] Ms. Barra said they were going to do the right thing for these people, even the pre-bankruptcy claims. But they set it up so it’s Feinberg or nothing,” said Cooper. “It’s not what GM represented to the public when it said it was going to do the right thing.”

But one group made out really well: King & Spalding, the law firm that represented GM in the Melton case and offered the testimony of an engineer who later admitted to perjury for denying that GM knew about the ignition switch defect, will earn plenty for its representation of GM before Judge Gerber. Ironic that the same law firm that helped perpetuate the coverup is now getting paid to shield them from the ramifications now that they are caught.

If this were a thriller, movie-goers might be disappointed the good guy didn’t quite emerge the victor, but that may be the ending we’ve come to expect.