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Detroit - A federal appeals court ruling that General Motors can't use its 2009 bankruptcy to fend off lawsuits over faulty and dangerous ignition switches exposes the automaker to billions in additional liabilities, according to legal experts.
The second US Circuit Court of Appeals in Manhattan on Wednesday (July 13, 2016) ruled that GM knew about the defective switches when it entered bankruptcy seven years ago, but kept them secret from the bankruptcy court.
By failing to disclose the problems, GM prevented crash victims from making claims or contesting the bankruptcy provisions, robbing them of due process, the court ruled.
New vs Old GM
In a 74-page opinion, a three-judge panel said that GM essentially asked the court to reward it for concealing claims. "We decline to do so," the court said.
Under terms of the government-funded bankruptcy, the company that emerged, referred to as New GM, was indemnified against most claims against the pre-bankruptcy company, or Old GM.
Retired US Bankruptcy Judge Robert Gerber ruled in April 2015 that most ignition-switch claimants could not sue New GM for damages because the company should emerge from bankruptcy free of claims against Old GM.
READ: Ignition switch case - GM to forfeit R12-billion
But the appeals court overturned most of that decision and allowed hundreds of pre-bankruptcy claims to proceed, including some lawsuits alleging that GM's actions caused the value of its cars to drop.
Erik Gordon, a lawyer and professor at the University of Michigan's Ross School of Business, said: "I think GM now has to think about its potential exposure as being in the billions."
Steve Berman, a lead attorney in the loss-of-value cases, said the appeals court ruled the bankruptcy order doesn't protect New GM from claims that it misrepresented the safety of cars made by pre-bankruptcy GM. The appeals judges, he said, determined that Old GM knew that the cars could stall and airbags wouldn't work, but didn't reveal those facts during the bankruptcy.
Gerber's ruling took away legal rights of crash victims because they never got a chance to contest the bankruptcy seven years ago, yet they were barred from suing New GM after the defective switches were disclosed, said William Weintraub, an attorney representing ignition switch accident plaintiffs.
1000 death, injury lawsuits
Weintraub said: "The only person who could effectively make an argument in 2009 is somebody who bought a time machine."
About 1000 death and injury lawsuits were put on hold waiting for the appeals court to rule, said Robert Hilliard, another attorney in the case. GM's filings with securities regulators say there are another 101 US lawsuits pending that allege that GM's actions caused vehicle values to decline.
Gordon said the loss-of-value cases will be difficult to prove, but the death and injury cases are problematic for GM.
READ: Angry families want GM prosecuted
GM said on Wednesday that it was reviewing the impact of the ruling, which the company said does not decide whether claims are valid.
GM said: "Many of the claims we face have been brought on behalf of car owners who want to be compensated even though they have not suffered any loss."
The ignition switches, which were put in small cars like the Chevrolet Cobalt, can slip out of the run position and cause cars to stall unexpectedly. They are linked to at least 124 deaths and 275 injuries.
In its ruling, the appeals court said that the desire to move GM through bankruptcy quickly to avoid its collapse was "laudable," but it doesn't do away with basic constitutional principles. It took only 40 days for the bankruptcy to end, an unprecedented period at the time.
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The court wrote: "Due process applies even in a company's moment of crisis."
The ruling also could affect 399 injury and death cases settled for GM by compensation expert Kenneth Feinberg for a total of $594.5-million. GM says those who settled gave up their legal rights to sue the company, but Hilliard said he will look into whether some of those claims could be reopened in light of the court's ruling.