Authored by Ben Feder, and originally published on BankruptcyLawInsights.com.
Judge Robert Gerber will be stepping down at the end of this year, ending a storied judicial career highlighted by his oversight of the 2009 chapter 11 case of General Motors Corporation (“Old GM”). In one of the most frenetic bankruptcy cases of all time, Judge Gerber signed an order (the “Sale Order”) that approved the sale of substantially all of the assets of Old GM to a new entity, General Motors LLC (“New GM”), “free and clear” of claims against Old GM (other than a narrow range
of expressly assumed liabilities), and with an express injunction to prevent Old GM creditors from proceeding against New GM. Now, he will be spending a substantial portion of his remaining time on the bench seeking to resolve the legal quandaries raised by the Sale Order, following the revelations last year that ignition switch defects in cars manufactured prior to 2009, which allegedly caused numerous deaths and injuries, were known by employees of Old GM but were not properly reported (or perhaps were deliberately covered up).
Vehicle owners have sued New GM, seeking compensation for economic damages caused by the defects. New GM responded by bringing a motion in the Old GM bankruptcy case to enforce the Sale Order injunction with respect to all litigation seeking compensation for economic damages. (New GM agreed under the Sale Order to assume liability for death and personal injury claims against Old GM, and has structured a non-judicial compensation arrangement to address such claims arising from ignition switch defects.)
Judge Gerber and lawyers for New GM, the Old GM creditor trust (the successor-in-interest to Old GM) and the vehicle owner plaintiffs spent several months last year identifying the “threshold” legal issues that would need to be addressed. Briefing was completed in January, and Judge Gerber recently heard arguments. (Kelley Drye & Warren LLP represents certain major creditors of Old GM but has had no role in these proceedings.)
The hearing focused primarily on whether there had been a violation of the due process rights of the ignition switch plaintiffs and, if so, what the appropriate remedy should be.
New GM focused its arguments on whether there had in fact could have been any duty to provide notice based on what was known to Old GM back in 2009, and if the lack of notice actually caused any prejudice to the claimants alleging damages stemming from the defective ignition switches. New GM contended that notwithstanding the knowledge on the part of certain employees and officers of Old GM in 2009 of the potential problems that had arisen with the ignition switches, such knowledge could not be imputed to either Old GM or New GM, because the claims in 2009 had not been “reasonably foreseeable”. Accordingly, no direct notice to the ignition switch plaintiffs should have been required at that time, and the general publication notice that was given satisfied the necessary due process requirements.
New GM then focused closely on certain objections that had actually been raised at the time of the 2009 sale. New GM pointed out that extensive arguments were made by numerous parties against the Sale Order, and rejected at the time by Judge Gerber, to the effect that New GM should not be able leave behind potential liabilities nearly identical to those held by the ignition switch plaintiffs. Those parties included the official creditors’ committee and 40 state attorneys general. New GM argued that in 2009 it adamantly refused to take on any “successor liability” for economic loss claims, and that the protection it received in the Sale Order against any such liabilities was applicable to claims which were both known and unknown at the time.
New GM further argued that there was no deprivation of due process because no property rights held by the ignition switch plaintiffs had been affected. The Sale Order did not prejudice any claims that were held by any party – it only directed those claims against the proceeds of the sale and allowed New GM to acquire the assets of Old GM “free and clear”. New GM asserted that it was the subsequent orders establishing a claims bar date and confirming a plan of liquidation for Old GM that impaired the rights of the plaintiffs. It highlighted the point that if the ignition switch plaintiffs were now permitted to go after New GM, they would be in a far better position than all of the other claimants in 2009 who received only a percentage of their allowed claims following the pro rata distribution of the sale proceeds under Old GM’s plan of liquidation.
The ignition switch plaintiffs countered each of these points. They particularly sought to refute the notion that the ignition switch claims were not “reasonably foreseeable” in 2009. Given the requirements to maintain data bases regarding accidents, the plaintiffs argued that the claims should have been “known” in 2009 based on what Old GM was charged with knowing under federal law. Given such knowledge, the plaintiffs stated that there no semblance of the kind of notice that could have satisfied the requirements of due process.
The plaintiffs then took issue with New GM’s argument that there was no due process violation because they were not prejudiced by the lack of notice. The fact that other parties made arguments regarding similar claims in 2009 was not relevant, as there could only be speculation as to what might have happened if the ignition switch plaintiffs had been given the opportunity to appear and argue at that time.
Finally, the ignition switch plaintiffs argued that a significant portion of the claims they are asserting now derive from the post-sale conduct of New GM – especially its failure to institute a recall based on the defective ignition switches until 2014. The plaintiffs sought to highlight for Judge Gerber that regardless of whether the Sale Order provisions protecting New GM from the liabilities of Old GM could be enforced against them, claims arising from New GM’s breach of its duties subsequent to 2009 are beyond the scope of the Sale Order.
During the hearing Judge Gerber appeared to be particularly focused on what he described as efforts by both sides to obtain a “get out of jail free” card. He expressed significant concern that the plaintiffs would in fact have an improper “leg up” over all other Old GM claimants if they were allowed at this time to go after New GM. At the same time, he took New GM to task for what he saw as an attempt to use the Sale Order to insulate itself against post-sale actions (or failures to act), as opposed to Old GM liabilities. He stated that the point where the “rubber hits the road” is where there could be evidence of post-2009 “independent tortious conduct” by New GM involving a car manufactured prior to the 2009 sale.
To no one’s surprise, at the conclusion of the hearing Judge Gerber took the matter under advisement.
