2nd Circuit Panel Revives Ignition Switch Claims Against General Motors

Mealey's (July 15, 2016, 10:58 AM EDT) -- NEW YORK — People who were allegedly injured as a result of defective General Motors ignition switches in automobiles made before its 2009 bankruptcy can now sue the company, a Second Circuit U.S. Court of Appeals panel ruled July 13 (In Re: Motors Liquidation Company, Nos. 15-2844, 15-2847 and 15-2848, 2nd Cir.; 2016 U.S. App. LEXIS 12848). (Opinion available. Document #77-160727-001Z.) The panel said that the 2009 sale of General Motors Corp.’s (Old GM) assets that shielded the company from liability violated victims’ rights to due process. The ruling allows hundreds of claims involving allegations of economic loss, personal injury and wrongful death to proceed. GM ignition switch problems are linked to at least 124 deaths and 275 injuries, according to The Associated Press. “Old GM’s precarious situation and the need for speed did not obviate basic constitutional principles,” the panel said in an opinion written by Circuit Judge Denny Chin. “Due process applies even in a company’s moment of crisis.” Bankruptcy On June 1, 2009, Old GM, the nation’s largest manufacturer of automobiles, filed for bankruptcy after posting net losses of more than $70 billion over the course of a year and a half. The U.S. Department of the Treasury loaned billions of dollars from the Troubled Asset Relief Program to buy the company time to revamp its business model. When Old GM’s private efforts failed, it petitioned for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York. Only 40 days later, the new General Motors LLC (New GM) emerged. After the bankruptcy, beginning in February 2014, New GM began to recall vehicles because of a potentially lethal defect in their ignition switches: While in motion, a car’s ignition could turn off, shutting down the engine, disabling power steering and braking and deactivating the air bags. “Many of the cars in question were built years before the GM bankruptcy, but individuals claiming harm from the ignition switch defect faced a potential barrier created by the bankruptcy process,” Judge Chin wrote. “In bankruptcy, Old GM had used 11 U.S.C. § 363 of the Bankruptcy Code . . . to sell its assets to New GM ‘free and clear.’ “In plain terms, where individuals might have had claims against Old GM, a ‘free and clear’ provision in the bankruptcy court’s sale order . . . barred those same claims from being brought against New GM as the successor corporation.” Class Actions Filed Despite this, several class action suits were filed against New GM. The cases were consolidated in multidistrict litigation before U.S. Judge Jesse M. Furman of the Southern District of New York. New GM argued that claims could be brought only against Old GM. On April 15, 2015, retired U.S. Bankruptcy Court Judge Robert E. Gerber agreed, finding that some of the claims and allegations against New GM in the MDL are barred by the sale order. “Though the bankruptcy court also determined that these plaintiffs did not have notice of the Sale Order as required by the Due Process Clause of the Fifth Amendment, the bankruptcy court denied plaintiffs relief from the Sale Order on all but a subset of claims,” Judge Chin wrote. “The bankruptcy court entered judgment and certified the judgment for direct review by this Court.” Specifically, Bankruptcy Judge Gerber concluded that only economic loss suits based on post-bankruptcy conduct and personal injury suits based on post-bankruptcy accidents could proceed against new GM. The plaintiffs appealed the Bankruptcy Court’s jurisdiction to enforce the sale order, the scope of the power to sell assets free and clear, the procedural due process requirements with respect to notice of such a sale and the Bankruptcy Court’s ruling that would‐be claims against the bankruptcy plan trust administered by Wilmington Trust Co. are equitably moot. Findings The panel found that the Bankruptcy Court had jurisdiction over the sale order because New GM did not seek a new injunction; rather, it sought to enforce an existing injunction. The panel also affirmed the scope of the power to sell assets free and clear, noting that the “free and clear provision covers pre‐closing accident claims and economic loss claims based on the ignition switch and other defects. It does not cover independent claims or Used Car Purchasersʹ claims.” It affirmed Bankruptcy Judge Gerber’s decision to not enjoin independent claims and reversed his decision to enjoin the used car buyers’ claims. The panel agreed with the plaintiffs that enforcing the sale order violated due process. “The bankruptcy court failed to recognize that the terms of this § 363 sale were not within its exclusive control. Instead, the GM sale was a negotiated deal with input from multiple parties -- Old GM, New GM, Treasury, and other stakeholders,” Judge Chin wrote. “The Sale Order and Sale Agreement reflect this polycentric approach: it includes some fifteen sets of liabilities that New GM voluntarily, and without legal compulsion, took on as its own.” Circuit Judges Chester J. Straub and Susan L. Carney concurred. Counsel New GM is represented by Arthur Jay Steinberg and Scott Davidson of King & Spalding in New York and Richard C. Godfrey and Andrew B. Bloomer of Kirkland & Ellis in Chicago. The plaintiffs are represented by Robert Hilliard of Hilliard, Munoz & Gonzalez in Corpus Christi, Texas. Co-lead counsel for the plaintiffs in the MDL are Steve W. Berman, Sean R. Matt and Andrew M. Volk of Hagens Berman Sobol Shapiro in Seattle and Elizabeth J. Cabraser, Steven E. Fineman, Rachel Geman and Annika K. Martin of Lieff Cabraser Heimann & Bernstein in San Francisco. (Additional documents available.  GM LLC appellee brief.  Document #77-160727-002B.  Wilmington Trust Co. appellee brief.  Document #77-160727-003B.)...