General Motors (GM) is currently facing two main types of lawsuits linked to its recall of cars with defective ignition switches. For those injured or killed as a result of these switches, GM has set up a special fund to compensate victims and their families.[1] Yet, the very contentious and much more expensive issue concerns car owners suing GM for economic losses related to the defects,[2] and these claims could easily reach into the billions of dollars.[3]
At the heart of the litigation surrounding the economic losses lies an important bankruptcy-related question: Can vehicle owners hold the reorganized “New GM” accountable for the loss of value in their cars, which were manufactured by pre-bankruptcy “Old GM”? This question represents the latest iteration of a long line of cases concerning the scope of the bankruptcy discharge and the treatment of future claims in a bankruptcy case.
Background
An understanding of what happened in GM’s bankruptcy is critical to understand the litigation going on today. In July 2009, the bankruptcy judge approved a sale of substantially all of GM’s assets on a largely free and clear basis to a new entity, General Motors Co., or “New GM.” The “free and clear” aspect of the sale meant that New GM was not liable for most of the liabilities of the predecessor entity, referred to as “Old GM,” including warranties for cars manufactured by Old GM.[4] From GM’s perspective, the sale on a largely free and clear basis was necessary in order to save the company, thousands of jobs and a large portion of the U.S. economy.
Although Old GM is not totally devoid of assets, it is New GM that has the deep pockets; therefore, car owners are attempting to go after New GM for compensation.[5] However, the terms of the sale allows New GM to argue that these claims were essentially extinguished by the bankruptcy discharge and that the owners’ only recourse is to look to Old GM for payment. In response, the owners are alleging that the car company committed fraud by failing to reveal the ignition switch defects and list the owners (and the accident victims) as creditors in its bankruptcy case.[6] In essence, the owners are arguing that because GM neither attempted to recognize these owners as creditors nor notified them that they might have a claim against the company, GM cannot now argue that the owners’ claims were extinguished by the bankruptcy discharge. Now, more than five years after the sale of GM’s assets, the judge must decide whether the owners can look to New GM’s assets to satisfy their claims. The question of whether bankruptcy does in fact bar the plaintiff’s lawsuits against New GM is one that will be contentious, fact-specific and uncertain, and the judge has urged the parties to work out some sort of settlement.[7]
Case Law
Although determining the scope of claims subject to a bankruptcy discharge can be a tricky process, GM is hardly the first company to endure it. For example, in In re Grumman Olson, the U.S. District Court for the Southern District of New York refused to find that a free and clear sales order barred future personal injury accident claims.[8] The court noted that due process requires notice and an opportunity to be heard in a bankruptcy case.
Since the plaintiffs were unknown and unidentified when the debtor filed its bankruptcy petition, the court held that taking away the plaintiffs’ right to bring a claim after the bankruptcy would violate due process.[9] Despite the fact that a “claim” has always been construed as broadly as possible in bankruptcy, the court held that “future” claims, or those that are dependent on future events, do not fall into this category and are not discharged by a confirmed bankruptcy plan.[10] Instead, for a claim to be recognized and discharged in a bankruptcy, some sort of pre-confirmation relationship between the debtor and the claimant must exist.[11]
The difficulty lies in determining what type of pre-confirmation relationship will suffice to turn a future claim into a claim that is dischargeable in bankruptcy. Cases spanning from environmental-discharge claims[12] to asbestos claims[13] have examined this issue over the years, and while some guidance has emerged, the law in this area remains unsettled. It is perhaps for this reason that the GM plaintiffs are asserting, not simply that their claims were unknown and unidentified by GM, but that GM fraudulently concealed the ignition switch defect as to avoid any liability for this defect while in bankruptcy.
What Is Next for GM?
GM’s case and those that have preceded it expose the functional limits of a bankruptcy discharge and raise the question of how far bankruptcy can go in protecting a company that faces future liability stemming from past acts. As companies continue to use the bankruptcy system as a way to address mass tort liability, it is likely that these issues will continue to dominate the discussion. For GM, we will have to wait and see if bankruptcy will continue to shield the company against the owners’ economic-loss claims, or whether the owners’ allegations of fraud will be enough to dismantle the shield.
[1] Todd Spangler and Nathan Bomey, “GM Won’t Waive Bankruptcy Shield in Pre-2009 Ignition Switch Suits,” Detroit Free Press, July 17, 2014, available at www.freep.com/article/20140717/BUSINESS0101/307170101/general-motors-recall-Delphi-Senate (last visited Aug. 15, 2014).
[2] Ashby Jones, “GM Says It Has Shield from Some Liability,” Wall St. J., June 16, 2014, at B1, available at http://online.wsj.com/news/articles/SB20001424052702304292904579626400058894482 (last visited Aug. 15, 2014).
[3] Id.
[4] Linda Sandler, “GM Car Owners Attack Automaker Bid for Recall Protection,” Bloomberg, April 23, 2013, available at www.bloomberg.com/news/print/2014-04-23/gm-car-owners-attack-automaker-bid-for-recall-protection.html (last visited Aug. 15, 2014).
[5] Id.
[6] Id.
[7] Nick Brown, “U.S. Bankruptcy Judge Urges Settlement on GM Ignition Defects,” Reuters, May 2, 2014, available at www.reuters.com/article/2014/05/02/us-gm-recall-hearing-idUSBREA410PT20140502 (last visited Aug. 15, 2014).
[8] Morgan Olson LLC v. Frederico (In re Grumman Olson Indus. Inc.), 467 B.R. 694 (S.D.N.Y. 2012).
[9] Id. at 696.
[10] Id. at 704.
[11] Id. at 705.
[12] See, e.g., In re Chateaugay Corp., 944 F.2d 997, 1003 (2d Cir. 1991) (using hypothetical of company that builds 10,000 bridges to illustrate that defining claims to include any ultimate right to payment arising from pre-petition conduct by the debtor is impractical and “absurd”).
[13] See, e.g., Pettibone Corp. v. Ramirez (In re Pettibone Corp.), 90 B.R. 918, 929 (Bankr. N.D. Ill. 1988) (noting that in asbestos cases, many future claimants are unaware of their unaccrued rights against debtors and that it arguably offends due process to bind these claimants to plan without notice).