Judge Robert Gerber ruled last week that General Motors LLC (“New GM”), the entity formed in 2009 to acquire the assets of General Motors Corporation (“Old GM”), is shielded from a substantial portion of the lawsuits based on ignition switch defects in cars manufactured prior to New GM’s acquisition of the assets of Old GM in 2009. Judge Gerber determined that the lawsuits 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.

The ignition switch plaintiffs argued that they should not now be bound by the Sale Order because they were never given proper notice of the sale in 2009 and were therefore denied due process. Although Judge Gerber agreed with the ignition switch plaintiffs’ contentions that the publication notice given at the time of the sale had failed to satisfy the requirements of due process, he determined that the plaintiffs mostly had not suffered prejudice as a result. Judge Gerber held that the lack of required notice did not constitute a due process violation without some showing of prejudice, and that there was no prejudice because most of the plaintiffs’ arguments regarding New GM’s post-sale liability had been made at the time by other parties and rejected.

However, he noted that one argument now being pressed by the ignition switch plaintiffs, regarding the extent to which New GM could claim protection under the Sale Order against liabilities based solely on its post-sale conduct, had not been raised by any party in 2009, and that in such respect the plaintiffs had in fact suffered prejudice from the lack of direct notice. Judge Gerber stated that because he likely would have agreed in 2009 that utilizing the Sale Order protections to cover liabilities stemming solely from post-sale actions of New GM was overbroad and impermissible, he will permit lawsuits based on such allegations against New GM to move forward.

Background

As has been widely reported, ignition switch defects in cars manufactured prior to 2009 that allegedly caused numerous deaths and injuries were known by employees of Old GM but were not properly reported (or perhaps were deliberately covered up).  Vehicle owners have sued New GM, seeking compensation for economic damages caused by the defects.  These cases have mostly been consolidated into a single class action proceeding before Judge Jesse Furman in the Southern District of New York.  New GM responded by bringing a motion in the Old GM bankruptcy case to enforce the Sale Order injunction with respect to all litigation seeking compensation for economic damages. (New GM agreed under the Sale Order to assume liability for death and personal injury claims against Old GM, and has structured a non-judicial compensation arrangement to address such claims arising from ignition switch defects.)

Judge Gerber and lawyers for New GM, the creditor trust that is the successor-in-interest to Old GM, and the vehicle owner plaintiffs spent several months last year identifying the “threshold” legal issues that would need to be addressed. At a mid-February hearing, the parties focused on whether there had been a violation of the due process rights of the ignition switch plaintiffs due to the lack of direct notice and, if so, what the appropriate remedy should be. (Kelley Drye & Warren LLP represents certain major creditors of Old GM but has had no role in these proceedings.)

Judge Gerber’s Ruling

In his opinion, Judge Gerber first considered whether the publication notice given at the time satisfied the requirements of due process. He noted that publication notice sufficed under most circumstances with respect to “unknown” claimants. As to the owners of vehicles with ignition switch defects, however, he agreed with the plaintiffs’ contention that there had been sufficient knowledge of the potential problems on the part of certain employees and officers of Old GM in 2009 to impute such knowledge to Old GM. Given the requirements to maintain data bases regarding accidents under the National Traffic and Motor Vehicle Safety Act, the plaintiffs argued, and Judge Gerber concurred, that the claimants should have been “known” in 2009 based on what Old GM was charged with knowing under federal law.  Since there had been no direct notice given to the vehicle owners, the requirements of due process with respect to “known” creditors was not satisfied.

He made clear, however, that the sufficiency of the notice given in 2009 was only part of the inquiry, and strongly disagreed with the plaintiffs’ contention that the lack of proper notice meant that they should not be bound by the Sale Order. He ruled that the plaintiffs were entitled only to “the full and fair hearing [they were] initially denied, with the Court then focusing on the extent to which prejudice actually resulted[.]” In addition, he held that he needed to consider both the appropriate remedy, and the extent to which the Sale Order could be modified.

New GM, in its briefs and during the hearing, contended that regardless of whether proper notice had been given, there was no prejudice to the plaintiffs. New GM pointed out that extensive arguments had been made by numerous parties in 2009 against the Sale Order, and rejected then by Judge Gerber, to the effect that New GM should not be able leave behind potential liabilities of Old GM nearly identical to those held by the ignition switch plaintiffs. Judge Gerber agreed. The plaintiffs, he stated, “[have not] advanced any arguments on successor liability that were not previously made, and made exceedingly well before.”

But he went on to note that the plaintiffs were making one important argument that was not based on theories of successor liability, and that had not been advanced by any other party in 2009. The Sale Order protects New GM from any liabilities (other than a few narrow categories expressly assumed) involving vehicles and parts involving Old GM. The plaintiffs contended that the breadth of this exclusion was so broad that it would effectively shield New GM from defective ignition switch lawsuits even if the only wrongful conduct alleged were on the part of New GM subsequent to the sale. Judge Gerber observed that he had in fact agreed with a similar argument that was made in 2009 with respect to environmental liabilities, and therefore would likely have agreed with the plaintiffs if they had been given the chance to make the same argument at that time. He held that the plaintiffs, by not having had the chance to make such argument, had thus shown prejudice from the lack of proper notice.

Judge Gerber then considered the appropriate remedy for the plaintiffs. He noted his agreement with New GM regarding the importance of finality in bankruptcy sales, and of protecting the expectations of purchasers of assets in bankruptcy cases that they are acquiring assets “free and clear” of any claims against the bankrupt seller or claims based on successor liability. But he then noted that due process considerations are constitutional in nature, and determined that “[a] doctrine that would bar modification of the Sale Order under less extreme circumstances has to give way to constitutional concerns.” He also disagreed with New GM’s assertion that because the provisions of the Sale Order were non-severable, the Sale Order had to be either enforced or voided in full. He held that if an order could be voided in full, then the non-severability provisions of such order could be voided, so that a court could uphold the order while simultaneously denying the enforcement of “cherry-picked components . . . that have been entered with denials of due process.”

He emphasized that New GM remained protected against all liabilities of Old GM and any claims based on theories of successor liability. But New GM will now be required to defend itself in lawsuits that seek damages based solely on New GM’s post-sale actions and conduct. The fact that such claims may happen to involve automobiles or parts manufactured by Old GM will no longer provide New GM with a shield under the Sale Order.