By Margaret Cronin Fisk, Jeff Green and Linda Sandler, Bloomberg News
DETROIT (Nov. 5, 2014) — Jesse Salazar III said an ignition switch flaw in his 2008 Chevrolet HHR has depressed its value, and he wants manufacturer General Motors Co. to make it up to him. GM will argue in court filings later today that it shouldn't owe money to Salazar and hundreds of thousands of people like him.
Mr. Salazar has several thousand dollars at stake in U.S. Bankruptcy Judge Robert Gerber's ruling. Hanging in the balance for GM is more than $2 billion, according to a Bloomberg News calculation.
It's increasingly likely that Judge Gerber may say customers such as Mr. Salazar should be given a shot at collecting, said Chip Bowles, a bankruptcy lawyer at Bingham Greenebaum Doll L.L.P. “He could easily rule that,” said Bowles, who isn't involved in the case.
At issue is whether GM bears liability related to vehicles it built and sold before its July 2009 bankruptcy. The matter came to a head after GM recalled 2.2 million U.S. vehicles with an ignition switch flaw that has been linked to at least 30 deaths.
GM has said it's setting aside as much as $600 million to compensate people who were injured or lost loved ones in those vehicles, including pre-bankruptcy models, that inadvertently lost power. GM said it isn't obligated, however, to pay economic damages to people who claim those same pre-bankruptcy cars are worth less because of the flaw.
“We believe our position is consistent with federal law and previous decisions of the bankruptcy court, which have been upheld on appeal and are cited in GM's motion papers,” the company said in a statement Nov. 4.
That's because the bankruptcy plan shielded the new GM from many of its predecessor's obligations, the company said. GM is expected today to ask Gerber -- who oversaw GM's Chapter 11 proceedings — to uphold that bankruptcy shield. The Nov. 5 filings will also amount to GM's first formal bid to knock out a massive car-price class action filed against it last month.
The challenge to GM comes five years after the Obama administration spent almost $50 billion to save the company, which was costing taxpayers $2 billion a month, according to Overdrive by Steven Rattner, the government's adviser on the GM bailout. In a 40-day reorganization, GM terminated four of its U.S. brands and shed worker costs. That helped put it back on the path to North American operating profits, which in the third quarter amounted to $2.45 billion.
Judge Gerber has said he'll hold a hearing after Jan. 26 and then take more than a month to decide the “difficult” issue of GM's duties to car owners.
GM has said that some engineers and in-house lawyers knew about the potentially defective switches more than a decade ago. But top executives didn't, it has said, so they couldn't have declared potential claims related to the flaw as a liability at the time of the bankruptcy.
Judge Gerber has said that if he determines he was misled about the company's knowledge of the defects, or decides the company knew enough to warn customers, the bankruptcy protection could “self-destruct.”
“In bankruptcy, you have to disclose your assets and liabilities. Those are basic requirements — and GM didn't do it,” said Mr. Bowles. “It would be very easy for Gerber to say, ‘Guess what? If you know someone is a creditor you have to give them notice. If you fail to do so, they aren't constitutionally bound by my orders.' “
Judge Gerber declined to comment on matters pending in his court.
Early this year, GM recalled 2.6 million vehicles — 2.2 million in the in the U.S. — including Chevrolet Cobalts, Saturn Ions and Pontiac G5 small cars, warning of inadvertent ignition-switch shutoffs that cut power to steering, brakes and air bags. It hired lawyer Kenneth Feinberg to settle with victims of accidents related to that pool of vehicles, most built before the bankruptcy.
Many people who still own such cars say that whether they've had accidents or not, they should be compensated for their vehicles' lost value related to the recalls. GM has denied that the recalls set off such devaluations.
Mr. Salazar, a 28-year-old videographer in San Antonio, paid $8,000 in 2010 to buy his used HHR, which he said was good for hauling his film gear. As he was driving to Austin in January, the vehicle lost power, he said. Mr. Salazar said he had to muscle it to the side of the road. Mechanics couldn't figure out what was wrong.
In March, he said, he received a recall notice from GM. His dealer told him it didn't have a replacement ignition switch. Later, Mr. Salazar said, he received a flier saying the car was worth $500 on a trade-in.
Mr. Salazar is among the car owners who have joined with others to file more than 100 lawsuits seeking to recover lost value connected to the recalls.
“We wanted to get a new car, but we can't do anything with this one,” Mr. Salazar said, adding that he doesn't understand why GM wouldn't be responsible. “It's not like someone else made the vehicle.”
The 100-plus suits, filed on Oct. 14 as two proposed class actions on behalf of all owners of recalled cars, are combined before U.S. District Judge Jesse Furman in federal court in Manhattan.
One of the actions is on behalf of drivers of vehicles purchased after the bankruptcy that were recalled for various defects. It seeks more than $10 billion in compensation and damages for fallen car prices. More than 20 million customers could join that suit, said plaintiffs' lawyer Steve Berman, of Hagens Berman Sobol Shapiro L.L.P. The claim of Mr. Salazar, who bought his used car in 2010, would be covered by this class.
The other action filed last month is for recalled vehicles that were purchased before GM emerged from bankruptcy.
GM claims bankruptcy-shield protection for vehicles in both actions. Both are awaiting Judge Gerber's decision.
When Judge Gerber freed GM from most obligations for its predecessor's cars in 2009, he said that was the U.S. Treasury's price for buying the revamped auto maker's stock. In a shaky economy, Treasury officials wanted GM to take on minimal liabilities so it could prosper, leaving the big burdens with its bankrupt predecessor, he said.
Since then, the company has built a new lineup of critically acclaimed cars, helping it return to profitability and maintain the buffer of cash it gained in the bankruptcy. GM's available liquidity was $36.6 billion at the end of September, down from $37.3 billion a year earlier, in part because of lingering costs to cover recall expenses.
As recently as 2012, Judge Gerber decided his rulings were still valid, rejecting Saturn owners' requests for payments related to transmission repairs.
Then came the ignition switch recall. In June, an investigator paid by GM reported the company's decade-long knowledge of the faulty switch.
If then-CEO Fritz Henderson “knew about the switch problem and intended to keep it from me, that might constitute fraud on the court,” Judge Gerber said at a July court conference in Manhattan. Mr. Henderson has said he didn't know about the issue.
To understand GM's potential liabilities, Bloomberg News examined price data and locations for the pool of 2.2 million cars subject to the initial recalls. The analysis used recoveries available under each state's deceptive trade practices or consumer protection laws.
In 21 states, owners can claim a fixed amount, regardless of actual lost value — from $25 per model in Massachusetts to $10,000 in Kansas. In Texas and 15 other states, owners can automatically triple their lost value. Other states allow the judge to decide to triple the value on a case-by-case basis.
Bloomberg News determined the state-by-state location of 1.96 million vehicles using Polk data provided by Edmunds.com, a vehicle pricing and sales website. The rest weren't in the Edmunds.com data, possibly because they aren't still on the road. Estimated values for the models in January and August — before and after the recall, respectively — were provided by Kelley Blue Book, which tracks car and truck prices.
Relatively few of the vehicles subject to the initial recall were made after GM's bankruptcy. For those, GM would be liable for more than $472 million in economic-loss payments.
If Judge Gerber rules that vehicle owners can try to collect economic damages on pre-bankruptcy cars, it would add about $2 billion to the potential payout — making GM's liability for statutory damages roughly $2.5 billion in all, according to this analysis.
GM declined to comment on any potential costs associated with losing its bankruptcy shield.
For an auto maker, $2 billion is a “princely sum” that could be used to create an entire new vehicle platform and engine, said Larry Dominique, a former vice president of product planning for Nissan Motor Co. Or, it could cover the cost of retrofitting an existing factory for a new product or developing two new models off an existing platform, said Mr. Dominique, who is now president of ALG, which estimates vehicle resale values.
Most states also allow for punitive damages as well as recovery for attorney fees, which could push the potential liability higher.
If Judge Gerber cracks open the shield, that may be only the beginning. Beyond the 2.2 million vehicles, GM has recalled more than 9.6 million cars and trucks for other ignition issues. More than 90 percent of those were built before the company emerged from bankruptcy.
GM, anticipating suits over all old GM car defects, has asked Gerber to knock them out along with the ignition switch actions.
This Bloomberg News report appeared on the website of Automotive News, a Detroit-based sister publication of Tire Business.