By Linda Sandler, Bloomberg News
NEW YORK (Feb. 17, 2015) — Drivers of Chevy Cobalts and Saturn Ions get a last shot this week at restarting a $10 billion lawsuit in which General Motors Co. is accused of exposing them to danger and falling car prices.
U.S. Bankruptcy Judge Robert Gerber has the sole power to decide whether they can demand money for their old, often second-hand, cars. He'll open his New York courtroom today (Feb. 17) to lawyers who say they speak for 27 million drivers of recalled cars, many with faulty ignition switches.
Depending on his ruling, drivers may be able to seek billions of dollars in damages from the auto maker.
To help the U.S. with its $49.5 billion GM bailout, Judge Gerber ruled in 2009 that, after bankruptcy, the auto maker wouldn't be responsible for cars made by its defunct predecessor, which is referred to in the lawsuits as “Old GM.” The auto maker is now profitable enough that Harry Wilson, the former presidential aide who helped the Treasury Department bail it out, has said it can afford to spend $8 billion on a stock buyback.
GM has asked the judge to stick with that ban on lawsuits. The car owners will have to convince Judge Gerber that orders he signed six years ago shouldn't apply to them.
His decision hangs on whether the GM violated bankruptcy law, which requires telling people who have a claim that they can come to court and object.
The drivers argue that because they weren't told about the switch defect — and that they might have a claim — they aren't barred from suing “New GM.”
Back in 2009, no one told his clients they had a claim, said lawyer Ed Weisfelner, who represents hundreds of GM car owners in Judge Gerber's court.
“If I'd shown up in court and said GM knew of the safety defect, and has known for the better part of seven years without telling anyone, resulting in numerous deaths, injuries and depreciation of value, who knows what Gerber might have said?” Mr. Weisfelner said.
The drivers should have been mailed letters notifying them of the hearing on the bailout and how their claims might be affected, said Mr. Weisfelner, who heads the bankruptcy practice at Brown Rudnick L.L.P. in New York.
GM said no rules were broken because, back then, the switches weren't known to be a “persistent” problem. Most of the cars were fine, so the owners were considered “unknown creditors,” GM said. People who did have faulty switches could have read general notices of the bankruptcy in the newspapers, the company told Gerber in a January filing.
The car owners originally planned to accuse GM of something much worse than not sending a letter: deliberately deceiving Judge Gerber by hiding the switch liabilities.
Their lawyers backed off when Judge Gerber suggested they show him that a top GM executive had stood up in court and withheld information. They said it would be hard to nail that down, leaving them mainly with their current argument for suing.
“They are going to have a difficult time,” said Erik Gordon, a law professor at the University of Michigan's business school who is following the case. “The fresh start for the company goes out the window if claimants can show up after the reorganization has been approved and plead that the company improperly deprived them of their rights.”
The wild card is whether Judge Gerber might want to help customers after seeing GM's serial recalls of cars with faulty switches. The recalls sparked congressional hearings, investigations and more than 200 lawsuits. Worldwide, GM called in 36 million vehicles last year, spending $2.9 billion on repairs and loaner cars.
“The judge has to be aware that there are some issues here,” said Carl Tobias, who teaches product liability law at the University of Richmond in Virginia. “I'm sure he's not happy that all the information wasn't available at the time.”
Even then, Judge Gerber could tell the owners to file their claims with Old GM, the bankrupt predecessor that has little money to pay.
GM said drivers don't deserve a “windfall,” especially on used cars. It denies it had a duty to tell them their switches might shut off if jarred, cutting power to the engine and deactivating airbags.
“The initial manufacturer has no duty or liability to a plaintiff who acquired a used vehicle in a secondary market transaction,” GM told Judge Gerber in a filing.
This Bloomberg News report appeared on the website of Automotive News, a Detroit-based sister publication of Tire Business.