“Just when I thought I was out…they pull me back in.” That must be what GM’s executives (and counsel) were thinking when the Second Circuit handed down its recent decision overturning portions of the 2015 Bankruptcy Court decision that could have immunized the “New GM” from “Old GM’s” liability related to the ignition switch recall of 2014. The decision also calls into question the 2009 sale order as a potential violation of the victims’ due process rights.
On July 13, 2016, the Second Circuit Federal Court of Appeals reversed parts of a 2015 ruling by now-retired U.S. Bankruptcy Judge Robert Gerber that the sale order could be used to enjoin claims related to the ignition switch defect. The decision considers the limits to which the “New GM” – the new entity that was formed upon the completion of the 2009 bankruptcy sale under 11 U.S.C. Section 363–is shielded by its “free and clear” provisions. In re Motors Liquidation Company, 2009 2016 WL 3766237 (2d Cir. 2016). The Court of Appeals held that because GM did not disclose the ignition switch issues during the bankruptcy (GM did not begin recalling vehicles until 2014) the late disclosure effectively denied plaintiffs the right to have input on the sale, and those plaintiffs cannot be bound by the provisions of the 2009 sale order.
Judge Gerber had considered this issue and concluded that the potential ignition switch claimants were entitled to notice, but that the results of the 2009 asset sale to New GM would have been no different had the defect been disclosed at the time of the sale because he would have approved the sale in any event. The Court of Appeals disagreed. It held, “if a debtor does not reveal claims that it is aware of, bankruptcy law cannot protect it,” saying that New GM was seeking to reward debtors who conceal claims. The Court acknowledged while it “could not say with any certainty” that the outcome would have been different,” the ignition switch claimants could have participated in the negotiations and had some negotiating leverage which would have been meaningful. It pointed out that in the negotiations preceding the sale order concessions had been made to State attorneys general to preserve state “lemon law” claims against New GM. “We do not know,” it said, “what would have happened if counsel representing plaintiffs with billions of dollars in claims had sat across the table from Old GM, New GM and Treasury.”
Another potential consequence of the Second Circuit’s decision is that New GM may have to turn over new stock to creditors due to an “accordion provision” in the sale agreement intended to ensure proper funding of a special trust created to distribute funds to creditors of Old GM if claims against the debtor became too large. The threshold for that provision was $35 billion, but only $33 billion worth of claims were originally asserted. However, now that counsel for numerous GM customers has said attorneys intend to submit another $10 billion in claims against Old GM, the provision may be triggered, requiring New GM to issue to millions of shares to the creditor trust.
The Second Circuit holding applies to both accident claims and claims based on lost economic value of GM vehicles allegedly caused by the ignition switch defects. However, on July 18, 2016, U.S. District Judge Jesse M. Furman entered an order in pending class action proceedings dismissing claims by a proposed class of car owners claiming such economic losses tied to GM ignition switch defects, rejecting the plaintiffs’ “brand devaluation” theory of damages. These claims turned on whether damage to GM’s reputation and brand caused a loss of vehicle resale value for the drivers. Judge Furman held that there was no precedent or legal basis for such claims: “put simply, the law does not treat as cognizable a consumer’s interest in the continuing good reputation of a manufacturer that sells him or her a defect-free product that performs as warranted.”
One thing is certain—there are many chapters to the GM ignition switch litigation saga remaining to be written.