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Cleveland, Ohio – You would have lost anyway.
That’s the basic message of a 134-page opinion (pdf) that U.S. Bankruptcy Court for the Southern District of New York Judge Robert Gerber issued this week to plaintiffs trying to sue General Motors for cars with defective ignition switches.
Gerber’s decision effectively protects GM from claims that could have cost as much as $10 billion.
A quick recap for those of you who haven’t been following the case:
- GM filed for bankruptcy in 2009 as part of its federal bailout
- In Bankruptcy Court, GM sold all of the good, viable parts of its business to new General Motors, leaving all of the bad stuff – including liabilities for faulty products – with the old company
- New GM agreed to support its old vehicles in terms of recalls and parts, but it rejected any legal liabilities
- Last year, GM recalled 2.6 million vehicles for faulty ignition switches – a flaw that led to at least 84 deaths
- Attorneys for accident victims and people who say the value of their GM vehicles dropped because of the recalls sued in massive numbers
GM has rejected any legal obligation to deal with the suits, saying any liabilities for wrongdoing lay with the old company.
But it’s sometimes very hard to tell old GM from new GM. Most of the executives – including at least 24 who knew about the faulty switches – are still with the company. And plaintiffs’ attorneys argued in Bankruptcy Court that new GM’s failure to disclose problems denied their clients of a day in court, so those clients should be able to pursue claims against the new company.
In his lengthy ruling, Gerber argues that the plaintiffs have a valid point. New GM’s failure to acknowledge part flaws denied many people the opportunity to argue their case and seek compensation.
But he goes on to say that if they had been given the chance to fight, they would have lost.
”It is undisputed that although the plaintiffs did not get adequate notice of the [sale of old GM to new GM] hearing, over 4 million others did, including a very large number who vigorously argued against the [denial of legal liability] provisions, but ultimately failed,” Gerber says in his ruling. He later adds, “In fact, they offer no legally based arguments as to why they would have, or even could have, succeeded on the successor liability legal argument when all of the other objectors failed.”
Gerber’s argument effectively goes back to 2009 when he held hearings in which hundreds of people with claims against GM opposed the deal because it would have left them fighting for scraps of a defunct company while a perfectly healthy company remained.
Agreeing with opponents in 2009 would have delayed the sale of old GM to new GM, and the U.S. and Canadian governments had made it clear that they wouldn’t fund the deal if it didn’t conclude in a 40-day window.
At the time, Gerber said he had a basic choice – agree with plaintiffs and reject the sale agreement or overrule opposition and let the deal go through. So effectively, siding with plaintiffs would have meant rejecting the bailout deal, a move that would have led to GM’s liquidation as no other funding groups would agree to handle a restructuring.
Creditors, including accident victims, would have gotten more money from the sale than they would have in liquidation, Gerber ruled, so he agreed to the sale terms that rejected some product liability claims.
So even though he agreed that new GM acted badly and violated the law, Gerber says in his ruling that the arguments in 2014 weren’t any different from the arguments made in 2009.
”[Plaintiffs] ask the court to rely on the speculation they prefer; they ask the court to accept the likelihood that by reason of public outrage or public pressure, they could have required old GM or Treasury to rewrite the deal to accede to their desires,” Gerber writes. “And they know, or should, the fundamental principle of bankruptcy law that a buyer of assets cannot be required to take on liabilities it doesn’t want.”
Gerber’s lengthy filing goes on to say that an injustice has occurred because GM failed to inform vehicle owners that they should have been filing claims against the company.
”We here have a constitutional violation – a denial of due process.”
The easy solution would have been to let the people trying to sue new GM for the defects make their claims against old GM’s assets – a trust set up to pay creditors of the defunct company.
At that point, the legal issues get even more arcane. The simple version is that most of those assets have already been handed out to other creditors, so there’s nothing left for new claims.
The legal maneuvering is a bit more complicated. The trust handling old GM’s assets made a payout late last year. Gerber notes that plaintiffs could have argued to block that payment, saying that new information about vehicle defects made them creditors with legal rights to the estate.
But for strategic reasons – basically going after the scraps of the old company would have meant giving up on the bigger prize of the profitable new GM – plaintiffs chose not to go after the old assets, effectively agreeing that they had no rights to those funds.
Gerber’s decision applies to suits filed before GM exited bankruptcy in 2009 and several “economic loss” cases – people arguing that the value of their GM products has fallen because of the company’s poor behavior.