No Easy Road – GM Ignition Switch Litigation Raises Difficult Bankru...

General Motors LLC (“New GM”) came into being in the summer of 2009, when it acquired substantially all of the assets of General Motors Corporation (“Old GM”) in a sale undertaken pursuant to section 363 of the Bankruptcy Code.  The July 2009 Sale Order approved by U.S. Bankruptcy Judge Robert Gerber transferred the assets to New GM “free and clear” of claims against Old GM (other than a narrow range of expressly assumed liabilities), and contained an express injunction to prevent Old GM creditors from proceeding against New GM.  (Kelley Drye & Warren LLP represents certain major creditors of Old GM.)

As has been widely reported, ignition switch defects in cars manufactured prior to 2009 that 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.  These cases have mostly been consolidated into a single class action proceeding before Judge Jesse Furman in the Southern District of New York.  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 is seeking to structure a non-judicial compensation arrangement to address such claims arising from ignition switch defects.)

New GM’s efforts in the Old GM bankruptcy case to enjoin the ignition switch litigation raise numerous difficult issues regarding the Sale Order, and the extent to which purchasers of assets in bankruptcy cases may fully insulate themselves from claims against a seller that arise at a future date.  New GM contends that it is fully protected by the Sale Order from all ignition switch liabilities of Old GM, and that “free and clear” asset sales are an essential component of the Bankruptcy Code.  The plaintiff vehicle owners argue that to enforce the Sale Order against them when they could not have been aware in 2009 of the potential ignition switch defects would violate essential precepts of due process. 

The Supreme Court has long held that due process in bankruptcy cases requires such notice that is “reasonably calculated, under all of the circumstances, to apprise interested parties” that their rights are being affected and provide them with a reasonable opportunity to appear and be heard.  Proper notice to creditors and potential creditors whose claims are being discharged and whose rights are being affected is essentially the life blood of a bankruptcy proceeding; however, in large cases such as Old GM’s, giving direct notice to every potential creditor is simply not possible. The crucial questions here primarily go to what was known about the ignition switch defects, and by whom, within Old GM at the time of the 2009 bankruptcy and, given such knowledge, was the publication notice provided at the time by Old GM reasonable in view of all circumstances.          

The vehicle owner plaintiffs further argue that Old GM’s failure in 2009 to disclose the existence of potential claims arising from ignition switch defects constituted a fraud on the Bankruptcy Court.  New GM has responded that if any such claims do exist, they must be asserted against Old GM.  The creditor trust that is the successor-in-interest to Old GM asserts that Old GM’s plan of liquidation was confirmed and substantially consummated back in 2011, and that even if claims against Old GM can now be asserted, such claims should be denied on the grounds of equitable mootness (i.e., most of the value provided to creditors under the Old GM plan was long ago distributed).    

Since the filing of New GM’s motion earlier this year, Judge Gerber and lawyers for New GM, the Old GM creditor trust and the vehicle owner plaintiffs have focused intensively on the development of a process that would both identify the “threshold” issues that must be addressed before taking any further steps towards addressing the merits of the claims, and permit an expeditious adjudication of such issues.  So far, the parties have agreed that the following “threshold” issues can be resolved with minimal discovery or based on stipulated facts: (i) whether the plaintiffs’ due process rights were violated by the entry of the Sale Order in July 2009, (ii) if so, what remedies could be fashioned, (iii) should the remedies be asserted against New GM or Old GM (effectively, the creditor trust), and (iv) if against Old GM, the applicability of the doctrine of equitable mootness and related arguments.  In addition, the parties have agreed to brief and set forth their respective views as to the legal standards that would need to be met in order to prove that a “fraud on the court” occurred based on the failure by Old GM in 2009 to disclose information regarding the ignition switch defects.

Judge Gerber last week approved a proposed briefing schedule regarding the “threshold” issues.  It is likely that he will rule early in 2015.