A decision by a district judge blew a hole in the notion that the multidistrict litigation in New York is the sole repository for lawsuits against New GM involving defective ignition switches on cars made by Old GM.
The Nov. 9 opinion by District Judge Jesse M. Furman of Manhattan stands for the proposition that the basis for removing a suit to federal court evaporates when the pivotal question of bankruptcy law has been decided. As a result, newly filed suits against New GM can remain in state courts while long-pending suits will continue residing in the multidistrict litigation, or MDL.
Judge Furman admitted that his decision “comes at a cost” because New GM will lose the efficiency of having all ignition suits in the MDL.
Judge Furman’s decision does not mean that thousands of lawsuits will return to state courts, but it is a boon for plaintiffs who cleverly withheld filing lawsuits immediately after the news broke about the faulty switches.
Claims Against New GM
Before its bankruptcy in 2009, General Motors Corp., or Old GM, had not disclosed a known defect in the ignition switches in some of its models. The switches would cut off the electrical system unexpectedly, disabling steering and air bags, causing crashes, injuries, and deaths. The defect was disclosed publicly in 2014, long after Old GM had sold its business in a bankruptcy court sale to General Motors LLC, or New GM. Immediately, plaintiffs began filing lawsuits by the hundreds against New GM because bankruptcy had left Old GM virtually bereft of assets to pay damages.
New GM removed suits in state courts to federal courts, where they were consolidated in the MDL in New York. The bankruptcy court ruled in 2015 that its sale approval order in 2009 barred most of the suits, because New GM had purchased the business free and clear of claims, including successor liability.
On appeal, the Second Circuit reversed in 2016, holding that the demands of due process allowed ignition switch plaintiffs to sue New GM despite the sale approval order because they were known creditors not given notice of the bankruptcy and their right to file claims against Old GM.
The Later Suit in State Court
A Connecticut resident allegedly injured as a result of a defective ignition switch filed suit in a Connecticut state court in late 2016 against New GM and the auto dealer. New GM could not remove the suit to federal court under 28 U.S.C. § 1441 for lack of complete diversity, because the auto dealer was based in Connecticut. As it had done successfully hundreds of times before, New GM removed the suit to federal court by alleging federal question jurisdiction under 28 U.S.C. § 1334(b) on the theory that the suit arose in or related to Old GM’s bankruptcy.
The plaintiff immediately filed a motion for remand to state court, making two arguments. According to the plaintiff, the suit was subject to mandatory abstention, or, there was no bankruptcy jurisdiction because the suit was not even “related to” Old GM’s bankruptcy.
Judge Furman granted the abstention motion in his Nov. 9 opinion, not needing to decide whether there was bankruptcy jurisdiction.
Mandatory Abstention
The mandatory abstention motion turned on 28 U.S.C. § 1334(c)(2), which can apply if there is only “related to” bankruptcy jurisdiction. The court must abstain if, in addition, the suit was commenced “and can be timely adjudicated, in a state forum.”
Without much trouble, Judge Furman decided that there was no “arising under” bankruptcy jurisdiction. New GM most relied on “arising in” jurisdiction, contending the suit was “core” because it required interpretation of the bankruptcy court’s sale approval order giving the assets to New GM free and clear of claims.
Judge Furman said there was no “arising in” jurisdiction because there is no longer any need for interpreting the bankruptcy court’s sale order. The “Second Circuit settled the question” in 2016, he said, by ruling that ignition switch plaintiffs can sue New GM.
Judge Furman further explained that the “mere need for such implementation” of a prior bankruptcy court order “does not transform the case into a ‘core’ proceeding.”
Without “arising in” or “arising under” jurisdiction, the only remaining basis for federal jurisdiction would be “related to” jurisdiction. Judge Furman did not need to decide whether there indeed was “related to” jurisdiction because, he said, all of the conditions were “plainly met” for mandatory abstention.
Since there was no evidence the state courts were backlogged, Judge Furman said the suit could be timely adjudicated in Connecticut. Checking off the last box for mandatory abstention, the judge said that “the law to be applied is exclusively state law,” and there was no evidence that a suit in a Connecticut court would affect or prolong administration of the estate.
Judge Furman conceded that his decision “comes at a cost” by losing the advantages and efficiency of multidistrict litigation. Nonetheless, he said, “efficiency is not the only interest served by the country’s federalist system of state and federal courts.”
Already-pending suits in the MDL cannot be remanded to state court because the deadline for a motion to remand has long since passed under 28 U.S.C. § 1447(c).
Nota Bene
In a footnote, Judge Furman made an interesting statement regarding “arising in” as the basis for federal jurisdiction.
The sale order was not raised in the plaintiff’s complaint. Rather, New GM first raised the sale order as an affirmative defense in its answer.
Judge Furman cited authority for the proposition that federal jurisdiction only exists from the face of the plaintiff’s complaint. Thus, the judge had a second ground for finding no “arising in” jurisdiction and leading to mandatory abstention.