GM Car Owners Claim Bankruptcy Fraud to Keep Lawsuits Alive

Apr 23, 2014 5:29 pm ET

(Adds GM likelihood of success in fourth paragraph.)

April 23 (Bloomberg) -- General Motors Co.’s request for court protection from 50 car-owner lawsuits seeking compensation for millions of recalled autos with defective ignition switches was attacked as legally “unsupportable.”

Car owners challenged GM’s position that it may compensate accident victims but not them, claiming in a court filing yesterday that GM committed fraud by not revealing the defects, allegedly known since 2001, or listing either group as creditors in its 2009 bankruptcy.

In the reorganization, U.S. Bankruptcy Judge Robert Gerber freed GM from most of its liabilities, leaving intact only some warranty obligations and responsibility for accidents. Bankruptcy lawyers said it will be hard for car owners to reopen the bankruptcy, which is good news for GM. Fitch Ratings said last month the automaker faced more risk from recall suits than the cost of fixing cars, or any fines stemming from a federal regulatory probe.

To get around the bankruptcy protections, the ignition switch car owners must prove their fraud allegation, attorney Chip Bowles of Bingham Greenebaum Doll LLP said.

“This is very difficult,” Bowles, a bankruptcy practitioner, said. “However there is a middle ground and that would be the parties requesting discovery,” or pre-trial evidence from GM, to prove fraud. “There is a decent chance that Gerber would allow discovery.”

Missed Deadline

One bankruptcy lawyer said that, even if they can prove fraud, GM customers missed their deadline to do so four years ago, six months after GM’s bankruptcy ended.

“That has to be done within 180 days” said Stephen Lubben, a bankruptcy professor at Seton Hall University School of Law in Newark, New Jersey. “Otherwise the case is final.”

Edward Weisfelner, a lawyer for the California plaintiffs, countered that federal rules allow them to remedy the alleged fraud outside of the deadline.

GM, which has said it isn’t seeking to block lawsuits over accidents that caused injury, loss of life or property, told the judge he must rule before other ignition claims against the company may proceed. A conference on GM’s request is set for May 2 in U.S Bankruptcy Court in Manhattan.

Kevin Kelly, a spokesman for GM, declined to comment on the filing. GM rose 16 cents to $34.39 in New York trading.

Federal Courts

The car owners have sued GM in federal courts in states including Texas and California, with one lawyer demanding as much as $10 billion to replace depreciated GM Cobalts and Ions. The automaker’s move to block those suits, and future claims, has brought GM back to the courthouse where it filed for bankruptcy, and turned the matter into a creditor fight.

Lawsuits against GM have been stopped by judges in California and Texas to await a possible ruling by Gerber.

GM has asked Gerber to reaffirm his 2009 order and block demands for compensation for economic losses, including declining value and loss of use or wages for time spent getting cars repaired. If he does so, it would send car owners back to the drawing board to see if they have any remaining claims that aren’t barred by law.

Gerber reaffirmed his GM rulings once before, telling plaintiffs in 2010 that GM wasn’t liable for its predecessor’s “implied” or stated warranties for Saturn cars. They could file a “far less valuable claim” against the old GM, which has limited assets, he said at a hearing.

Gerber didn’t give GM everything it wanted last time he reaffirmed his 2009 order. He refused to bar the Saturn customers from suing the automaker in Delaware, where their suit started.

Hid Problems

In support of allegations that old GM hid the ignition switch problems from the judge, the car owners alleged the automaker was aware of mounting injuries and deaths before, and during, the 2009 bankruptcy.

That year, GM did its own investigation of faulty ignition switches that caused airbags to malfunction, taking no action, the car owners alleged. They accused GM of continuing the concealment, hurting customers and creditors.

The car owners also cited an internal 2007 e-mail from the National Highway Traffic Safety Administration about a potential probe of faulty airbags in GM Cobalts and Ions.

While GM responded that it didn’t see a pattern of problems, NHTSA’s Greg Magno wrote in the e-mail that the safety administration “perceives a pattern of non-deployment in these vehicles that does not exist in their peers.”

If they had worked, they would have reduced injuries and saved lives, he wrote in the e-mail cited in the filing.

The case is In re Motors Liquidation Co., 09-bk-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Tiffany Kary in New York.