The Examiners: Mark Roe 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?

Can GM run from its bad cars?

GM’s faulty ignition switches killed people. As a matter of ethics and public relations, GM should stand behind its cars. But does bankruptcy law require it to do so?

Technically, no. Bankruptcy law says that an “old GM” was sold to a “new GM” and the “new GM” excluded product liability from the debts it picked up in the sales agreement. But it’d take a bankruptcy expert to know the difference between the old and the new GM; GM today is the same organization as the one that put the bad switches into is cars and, the media reports, knew about it years ago.

True, law and policy lines here are not clear cut. The economy needs a way for crippled debtors to sell assets without those assets dragging along liabilities larger than the assets themselves. Otherwise, we risk having “zombie assets” that can never be sold. The best rule is to make the seller use the sales payment to pay off liabilities, as best it can, with the assets freely saleable without liabilities.

And that’s just what the bankruptcy law provides. (Exceptions exist, and occasional deference to state law rules on the subject.)

But the GM “sale” was an odd one. The old GM sold assets to the new GM, but the two look awfully similar, with the difference being an infusion of government money to tide the company over until the economy recovered. GM’s sale was no arms-length deal with a third-party organization, as a sale to Toyota or Fiat or a hedge fund would be.  So it’s not so clear what bankruptcy law ought to be here. If anyone bought GM, the government did, and it’s doubtful the government would have cut out the tort claimants had it focused on them.

Bankruptcy courts should worry about a company selling its assets back to itself, or its ongoing owners, to wash itself clean of preexisting tort liabilities. Such sales may really be reorganizations of existing debts, not true sales to third parties.

What if GM were viewed as being reorganized, rather than sold? Concealed debts do not get the same full discharge as debts that were fully listed and disclosed. Whether the judge who oversaw GM’s “sale” to itself would backtrack and consider it a reorganization will be interesting to watch. Don’t expect that to happen. (And, in GM’s favor, it’s unclear how well the crash claims would have done in a reorganization—unlike secured credit, they’re not highly prioritized.)

GM is more likely than not to win, if they fight, and it has reason to fight for fear that tort lawyers will rake GM over the coals if it waives its bankruptcy defenses. But GM’s winning would look to the country, its leaders, and car buyers as hiding behind a bankruptcy technicality.

Mark Roe is a professor of law at Harvard Law School in Cambridge, Mass.