GM’s Attempt to Use Bankruptcy to Avoid Liability Fails

Good news for victims of GM’s deadly ignition switches in their fight to hold GM accountable. GM’s attempt to use a bankruptcy shield to avoid liability for deadly ignition switches was thwarted by the Second Circuit U. S. Court of Appeals. The court decided GM could not hide behind its bankruptcy sale and restructuring in 2009 for deadly defects it knew about as early as 2004. The Appeals Court ruling reverses a bankruptcy court judge ruling and opens up GM to additional litigation that could potentially cost GM billions of dollars from multiple deaths and injuries, and the decreased resale value of millions of vehicles caused by the deadly defect.

In February 2014, GM recalled 2.6 million vehicles to replace defective ignition switches that would move from the “on” to the “accessory” or “off” position, thereby turning off the engine, and disabling safety features including airbags, power brakes, and steering, while the vehicle was being driven. This caused at least 124 deaths and 275 injuries and affects millions more GM vehicles still on U. S. roadways. GM admitted it knew of the problem as early as 2004, yet failed to report the problem until 2014. GM could have corrected the defect with a part that cost less than $1.00 per vehicle.

In reversing the bankruptcy judge, the Appeals Court found GM denied consumers their due process rights by failing to disclose the deadly ignition switch defect it knew about as early as 2004 during the 2009 bankruptcy proceedings. The Court found GM had a duty to disclose the defect, that it failed to do so, and cannot now seek protection through the bankruptcy agreement because on its concealment of the deadly defect. The Appeals Court wrote GM “essentially asks that we reward debtors who conceal claims against potential creditors [and] we decline to do so.”

GM has already paid out nearly $600 million through a compensation fund for victims and has paid an additional $900 million to the U. S. Justice Department to settle criminal charges of wire fraud and conspiracy to conceal material facts involving the defective ignition switches.

GM’s concealment, failure to timely notify federal regulators, and refusal to timely recall millions of affected vehicles, has cost it a great deal, in terms of money and reputation. Hopefully, GM’s case serves as a wake-up call to all automakers that following the law, timely reporting known defects to federal regulators, and recalling defective vehicles is more a cost-effective business decision.