General Motors’ liability for defective ignition switches in its cars is complicated by its bankruptcy in 2009. The federal bankruptcy judge in New York approved a sale order that shielded the “new†company from liability for incidents that took place before July 10, 2009, the day the sale became effective.
Trying to sort it all out has created a storm of confusion.
First, it is important to realize that plaintiffs can sue two potential defendants: the old G.M. or the new G.M. The two, legally speaking, are as separate as Apple and Exxon.
The easier party to sue is the old G.M., particularly because most of the cars with the problem switches were built before 2009. But suing new G.M. is surely much more attractive.
But the normal rule of law is that an asset purchaser does not take on the liabilities of the prior owner. When I sell my car, the new buyer is not responsible for all the “Dukes of Hazard†stuff I did before.
But there is an exception â€" especially strong in California and New Jersey â€" for product liability claims. This exception creates “successor liability,†meaning that new G.M. may be labile under state law for old G.M.’s product liability claims.
But the order from by the bankruptcy court in the G.M. case expressly strips the assets of successor liability claims. And the court’s ability to do so is pretty clear under case law from the Court of Appeals for the Second Circuit, which oversees the G.M. bankruptcy court. And a federal court’s ruling in that regard should trump state law.
So that leaves old G.M. It is clearly liable for its acts, just as I’m still liable for things I did in my old car â€" at least until the statute of limitations runs out.
But claims against the old G.M. are just like any other claim: They get paid as part of the bankruptcy process, and the claims are then discharged as part of that process.
So for people who had an accident in a G.M. car before the company’s bankruptcy, it seems pretty clear that their claim will be paid, if at all, as part of the bankruptcy process. They may have to ask the court for permission to file a late claim, but that would seem to be that. Assuming they would be able to file the late claim, they would get paid the same partial amount as all the other unsecured creditors.
For people who bought a G.M. car before the bankruptcy, but were injured after the bankruptcy was filed, the law is a bit more murky. They probably have a decent argument that their right to due process, protected by the Fifth Amendment in the Bill of Rights, trumps Congress’s power to discharge their claim under the bankruptcy clause of the Constitution. After all, it would seem to violate due process to discharge a claim you couldn’t have known you had.
But even if that analysis is right, these people still have a claim against old G.M. Their claim was not discharged as part of the bankruptcy process, so they retain the right to a full recovery â€" against old G.M.
Given that old G.M. is essentially gone, though, that is not apt to be an attractive option.
So we can expect these plaintiffs to argue that the court should let them file their claims against the new G.M., despite the terms of the bankruptcy court’s order. That is essentially asking the new court to modify the old (bankruptcy) court’s order, and that can’t happen.
Only the bankruptcy court can change its order once the appeals are over. And the bankruptcy court previously found that excluding successor liability claims from the assets was an essential part of the sale.
It would seem that such an exclusion would be even more essential if it turns out that the amount of such claims is even larger than thought at the time of the bankruptcy. In short, it’s hard to see how the court can allow these claims without altering the basic terms of the deal with the United States and Canadian governments and the United Automobile Workers union, and that seems unlikely. These parties are all paid off now, but they sold their shares in the initial public offering on the basis of that deal, and you can be sure that the buyers in the I.P.O. will complain if the terms change.
Over all, it seems that the bankruptcy case will probably mean that G.M. has no legal obligation to pay a good chunk of these claims. Whether it faces political pressure to pay nonetheless is another story.
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.
