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Will Bankruptcy Law Shield General Motors From Products Liability Lawsuits?

Will Bankruptcy Law Shield General Motors from Products Liability Lawsuits?

In a previous post on this blog, we discussed the recall of over 1 million cars linked to an ignition switch defect by auto manufacturer General Motors (GM). In the last several months, the number of cars recalled has ballooned to 2.6 million, according to an article published by the Wall Street Journal. GM has publicly acknowledged that the ignition switch defect, which prevented airbags from deploying in the event of a crash, has been linked to 13 deaths and at least 54 crashes. In addition, more than 80 personal injury and product liability lawsuits have been filed against GM as a result of the ignition switch issue.

Unfortunately for many of those who have been injured as a result of the defect, GM may receive protection from many of the lawsuits as a result of its 2009 bankruptcy filing. Although bankruptcy law and products liability law are different bodies of law, GM may present an unusual example of how bankruptcy protections can affect the ability of those who have been injured by a defective product to recover damages for their injuries.

Bankruptcy Law Basics

When a company like GM files for bankruptcy, one of the first steps is to create a repayment plan, which details how the company proposes to pay off its debts. The repayment plan is subject to confirmation by a bankruptcy court, which determines whether the plan is fair and equitable, and in good faith.

Under the plan, creditors of the company are divided into two classes: secured and unsecured. Secured creditors receive priority treatment under the repayment plan; however, unsecured creditors are often repaid only a fraction of what they are owed.

In GM’s bankruptcy, the company sold most of its major assets to a new company, named General Motors Company LLC (“New GM”). The old company, which is responsible for repaying GM’s creditors with claims originating before July 2009, was renamed Motors Liquidation Company.

How Will GM’s Bankruptcy Affect Product Liability Claims?

Most of the cars with the GM ignition defect were manufactured prior to July 2009. And many, but not all, of the accidents that resulted from the switch defect occurred before 2009. Because of this, many of the persons who have a products liability claim against GM may be limited to bringing their claim against Motors Liquidation Company, the “Old GM.” Because these claimants are unsecured creditors, they may receive only cents on the dollar for their claims.

Persons who have been injured by the ignition switch defect fall into three categories:

  1. The defective car was manufactured prior to July 2009 and the accident occurred prior to July 2009. These claimants may be limited to bringing a products liability claim against Old GM.
  1. The defective car was manufactured prior to July 2009, but the accident occurred after July 2009. These claimants are able to bring a products liability claim against New GM.
  1. The defective car was manufactured after July 2009. These claimants are able to bring a products liability claim against New GM.

However, if GM knew about the defect and defrauded the bankruptcy court by covering up or concealing the defect, GM may have violated the bankruptcy’s requirement of “good faith.” This could potentially allow claimants who were injured before July 2009 to recover their damages from New GM rather than from Old GM.

Based on a recent investigative report by former United States Attorney Anton Valukas, this appears unlikely to happen. The report determined that for years many GM employees neglected to repair the ignition switch defect and issue a recall. However, Mr. Valukas failed to find any evidence of a deliberate cover-up by GM’s CEO Mary Barra and other top officers.

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