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Jason L. Weiner
March, 2015

General Motors Fights to Retain its “Bankruptcy Shield”

As most of the public knows, General Motors is currently fighting to retain the “bankruptcy shield” granted to it in the 2009 Chapter 11 case to protect it from litigation related to the infamous ignition switch defect and cover-up (see, for example, http://www.bloomberg.com/news/articles/2015-03-16/gm-switch-victim-s-lawyer-says-ignition-documents-show-cover-up, http://www.foxbusiness.com/markets/2015/02/18/consumers-look-for-exceptions-to-gm-bankruptcy-law-protection-in-2-day-federal/ and http://www.wsj.com/articles/judge-weighs-challenge-to-gm-bankruptcy-shield-1424213316).  Last month, Judge Robert Gerber, the Bankruptcy Judge in the Southern District of New York who presided over the GM bankruptcy case, heard arguments regarding whether the bankruptcy shield should continue to protect GM. The bankruptcy shield protects GM from injury claims and claims that cars lost value because of the ignition switch defect.  Plaintiffs argued, among other things, that the bankruptcy shield should not protect GM because GM concealed the ignition switch problem. 

When GM filed for bankruptcy in 2009 and soon thereafter sold its assets to “New GM” on an emergency basis, Judge Gerber entered an order approving the sale that effectively, among other things, protected, or “shielded,” “New GM” from certain liabilities. Although New GM assumed liability for future accident claims, New GM was shielded from, and did not assume, among other things, liability for accident claims against “Old GM” that arose prior to the sale.  The problem currently before the court stems from Old GM’s failure during the bankruptcy case to disclose problems relating to the ignition switch defect.

Under section 363 of the Bankruptcy Code, a debtor’s property may be sold “free and clear of any interest in such property of an entity other than the estate….”  Courts have interpreted the term “interests” in this provision to include successor liability claims. See In re TWA, 322 F.3d 283, 289-90 (3d Cir. Del. 2003). The offer of protection against successor liability claims is a primary driver for companies toward filing Chapter 11.  Extensive provisions protecting against successor liability, that help to promote and enhance the sale of assets, are commonplace in bankruptcy sale orders.

At the hearing last month, Judge Gerber told a GM lawyer that “[y]our problem is to convince me I would’ve issued the same exact order” had Old GM disclosed the problem.  The court was referring to the fact that before assets can be sold “free and clear,” due process requires that people who may be affected by the bankruptcy process receive proper notice of the intended sale.   Failing to disclose the ignition switch defects prior to the sale may have precluded plaintiffs from receiving proper notice that they had a claim, and may have prevented plaintiffs from meaningfully participating in the bankruptcy process.  Had plaintiffs known that they were affected by the ignition switch defect, they may have objected to the sale, and the judge must now effectively decide how he would have ruled on those objections.  

Once issued, Judge Gerber’s opinion could help define the parameters of notice and disclosure that satisfies due process under §363 of the Bankruptcy Code, and, specifically, whether purchasers of assets in bankruptcy may be shielded where the debtor failed to disclose potentially critical information to potential claimants.  Judge Gerber did not indicate when he may issue a ruling.