At a hearing in late August, Judge Robert Gerber expressed his annoyance with both sides in the ongoing battle to determine whether General Motors LLC (“New GM”), the entity formed in 2009 to acquire the assets of General Motors Corporation (“Old GM”), is shielded from lawsuits based on ignition switch defects in cars manufactured prior to New GM’s acquisition of the assets of Old GM in 2009. He chastised the parties for being “insufficiently nuanced” in their interpretations of his decisions earlier this year on the extent to which New GM could face liability for economic damages stemming from the defects, which allegedly caused numerous deaths and injuries, and which were known by employees of Old GM but were not properly reported (or may have been deliberately covered up).

Not surprisingly, a lengthy opinion issued by Judge Gerber last week on two crucial ancillary issues – could knowledge of Old GM regarding the scope of the ignition switch defects be attributed to New GM, and, relatedly, whether New GM is liable for punitive as well as compensatory damages – was an exemplar of nuance.  Judge Gerber finely parsed those questions and made subtle but meaningful distinctions between Old GM actions, which cannot be a basis for New GM liability, and knowledge of Old GM that became knowledge of New GM under principles of imputation and for which New GM could be liable.  (Kelley Drye & Warren LLP represents certain major creditors of Old GM but has had no role in these proceedings.)

As widely reported, Judge Gerber previously ruled that most of the lawsuits against New GM are barred by the provisions of the Sale Order he entered at that time, which transferred the assets to New GM “free and clear” of claims against Old GM (other than a narrow range of expressly assumed liabilities) and protected New GM from any claims based on theories of successor liability.  However, he also held that New GM could not claim protection under the Sale Order against liabilities based solely on its own post-sale conduct, and said that he would permit lawsuits in other courts based on such allegations against New GM to move forward.  The August hearing was held to determine which of the pending actions satisfied Judge Gerber’s requirement of being independent claims against New GM.

At the end of that hearing, Judge Gerber directed counsel for New GM to submit to him marked copies of the complaints in the pending lawsuits, showing specifically which causes of action New GM believes are grounded in the behavior of Old GM and should be barred by the Sale Order. He also requested briefs with regard to the issues of imputation of knowledge and punitive damages.  Judge Gerber was determined, as he put it at a subsequent hearing in October, to fulfill the role of “gatekeeper” in terms of construing the Sale Order and his opinions from earlier this year, and to decide once and for all (albeit subject to appeals) the types of claims which could get past the “bankruptcy gate” and proceed in other courts.

Judge Gerber made clear during the October hearing just how narrow a needle’s eye he intended to thread.  He stated that he would have no tolerance for causes of action based on theories of successor liability, no matter how they might be “dressed up” to resemble something different.  On the other hand, he also said that independent claims against New GM could be based on “inherited” knowledge.  The distinction would depend on the specificity of the allegations of knowledge and the rules governing imputation under the state law governing each specific action.

Thus, for example, Judge Gerber ruled in last week’s opinion that any causes of actions referring to New GM as a “mere continuation” of Old GM, or that elided the distinctions between Old GM and New GM, would be barred as grounded in successor liability.  Claims stating that “New GM knew,” however, would be permitted to go forward and satisfy a high but by no means impossible standard:

[P]laintiffs will have to prove the New GM knowledge they allege, on the part of identified human beings, and by identified documents to the satisfaction of . . . any . . . court hearing those claims – and by competent proof, not on theories that New GM was a “successor” to Old GM.

Judge Gerber applied a similar analysis to the issue of punitive damages. While making clear that punitive damages could not be based on the knowledge or conduct of Old GM, “or anything else that took place at Old GM[,]” and had to be based on “New GM knowledge and conduct alone[,]” he nevertheless also ruled that “New GM might have acquired relevant knowledge when former Old GM employees came over to New GM or New GM took custody of what previously were Old GM records.”  But the plaintiffs would need to show that such knowledge was “acquired in fact, and not by operation of law (such as any kind of successorship theory).”

Judge Gerber emphasized that imputation and punitive damages were ultimately matters to be determined under applicable nonbankruptcy law, and that he was not making any substantive rulings on these issues:

[The Court] has ruled simply that allegations of imputation to New GM premised on the knowledge of New GM employees, or documents in New GM’s files, get through the bankruptcy gate. After that, issues as to the propriety of imputation in particular contexts in particular cases are up to the judges hearing those cases.

It was clear from Judge Gerber’s earlier rulings that New GM would be required to defend itself in lawsuits that seek damages based solely on New GM’s post-sale actions and conduct, and the fact that such claims would possibly involve automobiles or parts manufactured by Old GM would not provide New GM with a shield under the Sale Order. Last week’s decision splits innumerable hairs, but delineates the extent to which the Sale Order protects New GM and the hurdles that the plaintiffs will need to clear to the satisfaction of other judges in order to get their claims past the bankruptcy “gate.”