Manhattan Bankruptcy Judge Stays Lawsuits Against GM

NEW YORK (The Deal) -- A Manhattan bankruptcy judge has put lawsuits against General Motors LLC on hold.

Judge Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan on Wednesday, May 27, entered an order staying actions brought against the automaker, referred to in court papers as New GM. The lawsuits allege harm from defects in automobiles made by General Motors Corp., or Old GM, the predecessor to the current automaker.

Gerber's order halts the lawsuits from plaintiffs who were victims of accidents due to faulty ignition switches. It also applies to those plaintiffs who seek damages from New GM based on economic harm, which include the alleged reduction in the resale value of recalled vehicles.

The order notes an exception, though, for suits relating to any Old GM liabilities that New GM assumed. It also exempts plaintiffs prosecuting damages claims relating to conduct by New GM alone, not any based on the actions of Old GM.

The order comes after Gerber penned an April 15 opinion that found a July 5, 2009, sale order in the Chapter 11 case of Old GM protected New GM from successor liability. Specifically, New GM, which purchased the assets of Old GM through a Section 363 sale, was not on the hook for billions of dollars of damages stemming from actions taken by its predecessor.

"Any claims and/or causes of action brought by the ignition switch pre-closing accident plaintiffs that seek to hold New GM liable for accidents or incidents that occurred prior to the closing of the 363 sale are barred and enjoined pursuant to the sale order," court papers read.

Starting in March 2014, following the company's announcement that various Chevy, Pontiac and Saturn models contained faulty ignition switches, New GM was hit with a barrage of lawsuits alleging damages related to accidents involving the affected models as well as damages for economic losses tied to a decline in value of GM vehicles, both recalled and nonrecalled models, because of the company's tarnished reputation.

New GM had asserted in court papers that litigation claims against Old GM were not assumed under the sale and thus were barred under the sale order.

"As a practical matter, [Gerber] decided to stay rather than dismiss the cases that are impacted by his ruling, but the net effect is the same: The cases won't proceed," GM spokesman Jim Cain said on Thursday.

"If for some reason the ruling is reversed, then we'd have to consider our options," Cain said. The claims are "mostly economic claims that are unproven. We have very strong factual and legal defenses," he added.

Gerber's ruling allows an ignition switch preclosing accident plaintiff that believes he or she has a "good-faith basis" to continue a lawsuit against New GM by filing a motion seeking permission to continue the case. A plaintiff, however, only could proceed if new justifications for the legal action could be made. Court filings said pleadings "shall not reargue issues that were already decided" by the court.

"I think the judge is being cautious in order to protect the rights of those that were not active in the bankruptcy court. But they are going to ... raise an issue that has not already been addressed, which is going to be tough to do," said Bill Weintraub of Goodwin Procter LLP. Weintraub is bankruptcy counsel for the co-lead plaintiffs in the multidistrict litigation involving issues relating to personal injury claims for Old GM vehicles.

If a plaintiff disagrees with the merits of the decision, he or she should appeal rather than submit a no-stay pleading, Weintraub said. He declined to comment on what points of Gerber's decision might be appealed or where the plaintiffs would seek review of the ruling.

Other attorneys representing the plaintiffs filed an April 29 letter with the U.S. District Court for the Southern District of New York in Manhattan addressed to Judge Jesse M. Furman that indicated they would forgo an expedited appeal. Instead, an appeal would be heard by the district court.

The quicker process would take the appeal straight to the U.S. Court of Appeals for the 2nd Circuit, and the bankruptcy court had signaled it might sanction such a request. The letter, however, noted benefits of having the district court examine Gerber's ruling.

Plaintiff counsel Steve W. Berman of Hagens Berman Sobol Shapiro LLP, Elizabeth J. Cabraser of Lieff Cabraser Heimann & Bernstein LLP and Robert C. Hilliard of Hilliard Munoz Gonzales LLP wrote that, depending on the circuit court's interpretation of some of the case's issues, it was "reasonably likely the circuit would remand the matter back to the bankruptcy court for further fact finding." As the district court oversees the "relevant discovery germane to those issues ... bypassing this court would lead to inefficiencies and waste," the attorneys said.

The Wednesday order listed almost three dozen economic loss cases that will be stricken. Those plaintiffs can submit a motion requesting their cases not be eliminated.

The class actions New GM faces over economic losses alone, which include the alleged reduction in the resale value of recalled vehicles, total more than 140 cases and seek up to an estimated $10 billion in damages, according to court papers. The opinion did not disclose the amount of suits pending related to accident claims or brand damage for other models.

Gerber's justification in his 134-page opinion for shielding New GM from the damages hinged mostly on the issue of due process and notice to creditors and other claimants during the case about the Section 363 asset sale and the opportunity to assert claims against Old GM. The ruling found Old GM car owners asserting damages were denied their due process rights but nevertheless were not prejudiced by the sale order in large part.

Also Gerber turned back many of the arguments of the economic-loss plaintiffs, explaining he heard similar assertions in court while considering the asset sale. The plaintiffs, however, prevailed on one point: The sale order entered by the court was broader than it should have been.

To the extent that the plaintiffs could craft a claim against the independent conduct of New GM not related to actions of the Old GM, they might have a case. Any claims, though, could not be related to successor liability issues, conduct of the Old GM or the pre-petition company's vehicles, as the liabilities were not assumed by New GM under the sale order.

Old GM filed for Chapter 11 on June 1, 2009, in the biggest-ever bankruptcy filing by an industrial company. Its $33.3 billion debtor-in-possession loan from the Treasury Department remains the largest postpetition loan ever.

The U.S. Treasury in June 2009 formed New GM to purchase substantially all assets of the debtor. The sale closed on July 10, 2009, with the Treasury Department taking a 60.8% stake, the United Autoworkers a 17.5% stake, Export Development Canada an 11.7% stake and unsecured creditors the remaining 10%. The bankruptcy estate became Motors Liquidation Co. following the sale and on March 31, 2011, implemented a liquidation plan.

Both the U.S. and Canadian government entities have since sold off their stakes in GM.

Shares in General Motors LLC affiliate General Motors Co.  (GM) rose 1.65% on Thursday afternoon to $36.40. 

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