General Motors (GM) cannot use its 2009 bankruptcy as a shield against personal injury, wrongful death, and economic loss claims over its defective and potentially deadly ignition switches, the 2nd U.S. Court of Appeals in Manhattan ruled.
The ruling comes as a major victory to hundreds of plaintiffs who had been barred from seeking damages from GM simply because the automaker reorganized in June 2009, letting the “New GM” off the hook for the “Old GM’s liabilities.”
Bankruptcy Judge Robert Gerber last year issued an order enforcing a “free and clear” provision of the Old GM’s assets, effectively shielding GM’s new incarnation from the liabilities of its former version, including an ignition switch defect that could accidentally cut power to the engine, killing power steering, anti-lock brakes, and airbag protection.
Judge Gerber’s decision meant that anyone injured or killed as a result of an ignition switch malfunction in vehicles made prior to GM’s bankruptcy filing on June 1, 2009, wouldn’t have legal recourse against the company.
The 2nd Circuit Court’s ruling will allow hundreds of plaintiffs to move forward with their complaints against GM. Lawyers representing plaintiffs blocked by the previous ruling successfully argued that while bankruptcy would normally protect a company from liability, GM knew before it filed for Chapter 11 that its ignition switch defect would turn into major debacle, and companies cannot use bankruptcy to sever ties with its misdeeds.
“GM claimed because of their bankruptcy rights, they had a right to walk away or at least be insulated from any liability that occurred before the bankruptcy,” said Beasley Allen Principal & Founder Jere Beasley. “The plaintiffs’ position, one we supported and fought for, was GM would normally be correct, but they knew before the bankruptcy that the ignition switch defect was going to be a problem, and you can’t use bankruptcy for that purpose. Therefore, because GM knew of the issue and never told the purchasers of the cars with the defect, the purchasers were denied Due Process under the law.”
General Motors’ knowledge and alleged cover-up of its faulty ignition switches spanned a decade. The automaker continually denied the existence of a defect until a wrongful death case of Georgia nurse provided proof that GM knew of the problem and had secretly tried to correct it.
It wasn’t until February 2014 that GM began recalling vehicles affected by the bad ignition switches. When it finally did, the automaker sought to enforce the bankruptcy liability shield Judge Gerber’s order provided. Those claims, however, did not exempt the claims based on misconduct by the New GM after it had acquired the Old GM’s assets.
In its Wednesday ruling, the appellate court said that “Due process applies even in a company’s moment of crisis.”
GM has paid about $2 billion in criminal and civil penalties and settlements involving its ignition switches, including a $900-million penalty for its unlawful handling of the problem. The ignition switch defect has been linked to 124 deaths and 275 injuries.