The Examiners: J. Scott Victor on GM’s Liability

It’s up to the courts to decide whether old or new GM is liable for faulty ignition-switch claims. But what do you think? From a legal, practical or ethical point of view, should it be?

The arguments of new GM’s lawyers seem compelling. The July 5, 2009, GM sale order and the amended purchase agreement clearly state that “the sale shall be free and clear of all claims…including rights or claims based on any successor or transferee liability…” and specifically exempts new GM from liability on vehicles produced prior to the date of closing, including all product liability and accident claims.

However, the bar date notice states that “acts or omissions of the debtors that arose before June 1, 2009, [the date of GM’s bankruptcy filing] may give rise to claims against the debtors that must be filed by the applicable bar date notwithstanding that such claims may not have matured or become fixed or liquidated or certain prior to June 1, 2009.” That inexplicable logic would have required all customers to file a claim even if they didn’t know they had a claim and may not have received actual notice of the bar date.

Today, GM is besieged by over 13 million vehicle recalls, including faulty ignition-switch claims that date prior to the bankruptcy sale. The interplay between potential product liability claims and companies in Chapter 11 isn’t new, and the issue of successor liability for the buyer of assets is well-settled. The procedure to deal with future tort claims arising after the sale or restructuring of a company in Chapter 11 has been in use for a generation now and includes the establishment of a claim trust with a futures representative. GM created several such trusts under its confirmed restructuring plan—trusts for environmental, asbestos, general unsecured and avoidance claims—but it failed to establish a trust for future liability claims relating to its products.

Without good notice that claims existed or the establishment of a product liability trust, new GM should be held liable for tort claims that “arose” before the sale.

J. Scott Victor is a founding partner and managing director of investment banking firm SSG Capital Advisors LLC and a member of the Turnaround Management Association’s global board of trustees.