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Car Liability, Dealers Pose New Hurdles for GM Plan

Source: WSJ

Posted on 26 Jun 2009

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The U.S. Treasury Department is negotiating with more than a dozen state attorneys general to roll back two key features of General Motors Corp.'s bankruptcy plan that would have wiped out billions of dollars in potential claims from car-accident victims and closed auto dealers.

The discussions show how the federal government's GM rescue is brushing up against the limits of its ambitious legal approach, which attempted to use the Bankruptcy Code to override many state legal contracts and protections.

This could ultimately expand the cost of GM's $60 billion bailout, though government officials say it shouldn't delay the emergence of a "new GM" from bankruptcy protection.

President Barack Obama's auto task force is considering a plan that would allow those injured in past or future accidents involving GM vehicles to sue the auto maker in state courts after the company emerges from bankruptcy protection, people involved in the discussions said.

Under the current reorganization plan, hundreds of car-accident victims have lawsuits against GM in various stages of the legal process that would be effectively washed away.

An ad hoc committee of consumer victims objecting to GM's plan says it represents more than 300 people with personal injury claims exceeding $1.25 billion.

Following pressure from the attorneys general, the administration is also discussing how it might yield on mounting challenges from GM's auto dealers. More than 1,300 dealers are slated to be shut down under the current reorganization plan, but many of them say the plan violates standing state franchise law. If they get their way, dealers who want compensation from GM for terminating their contracts could take their cases to court.

If a "new GM" is forced to take on product-liability claims and compensate dealers more than it planned, the company might be less attractive to a private buyer when the government attempts to divest itself of its stake.

Settlement talks are still at an early stage and could be scuttled. But if a settlement is reached, it would represent a major victory for auto dealers, consumer-rights groups and a handful of state attorneys general. A GM spokesman declined to comment on the talks.

Dealers have been lobbying Capitol Hill to try to stop GM's plan to shutter dealerships in every state except Alaska. The dealers say the plan could cost more than 57,000 jobs.

The exact nature of any potential settlement remains unclear, including how victorious product-liability plaintiffs could later collect. A trust fund for product-liability claims hasn't been discussed, said people familiar with the matter.

The Obama administration's current plan is to direct accident victims who have already won damages, as well as those with pending lawsuits, to make claims against GM's old estate. They would be unable to bring claims against the new GM and would probably receive little or no recompense. This approach was already approved in Chrysler's bankruptcy case.

But the government is getting more pushback in the case of GM, in part because of the scale involved: GM has some 69 million cars and trucks on the road, more than twice what Chrysler has. In some cases, the legal battle is also pitting the White House against political allies.

Settlement talks have heated up in recent days ahead of GM's Tuesday court date, when it will ask a judge to bless its plan to move desired assets to a new government-owned company.

Another lengthy round of talks is slated for Friday. So far the two sides have made more progress on the auto-dealer dispute than the product-liability issue, said people involved in the talks.

"The case law is unclear and ambiguous on the issue of future product-liability claims. So when the case law is all over the map, a lot of times it makes sense for both sides to settle," said one administration official.

Not all pending lawsuits against GM would be successful in any case. The auto maker, like many large companies, faces many lawsuits stemming from alleged product defects that are often deemed meritless.

In addition, GM's plan to leave any potential claims behind through a bankruptcy sale is a court-sanctioned method used by many companies when they reorganize under Chapter 11.

But companies don't always leave such claims behind. In a landmark bankruptcy case, A.H. Robins, a company that marketed intrauterine contraceptives, sold itself to new owners that set aside money to cover potential legal claims.

Last year, GM set aside $921 million for product-liability litigation, and in 2007 it had $1.1 billion available.

"Everyone agrees there has to be some access to the courts," said Maryland Attorney General Douglas Gansler, a Democrat who co-chaired Mr. Obama's presidential campaign in the state.

The auto task force has been caught off guard by the recent outcry from attorneys general and consumer groups.

The task force modeled GM's bankruptcy plan after Chrysler's, without giving much weight to the potential fallout from leaving product-liability claims behind, said people familiar with the matter.

The administration was "simply trying to come up with the most commercially viable GM possible," said one of the people.

In opposing GM's product-liability plan, state attorneys general are raising a number of complex legal issues, ranging from the power of federal bankruptcy courts to supercede state law to constitutional due-process rights of Americans to sue GM if they're injured by the auto maker's vehicles in the months and years ahead.

GM, though a new company when it emerges from Chapter 11, will still make cars.

The attorneys general say the Bankruptcy Code forbids companies to leave behind product-liability claims when the exiting company amounts to the same business that sought bankruptcy in the first place.

"The new GM is clearly the old GM for manufacturing and operational purposes," said Connecticut Attorney General Richard Blumenthal.

Critics also say bankruptcy courts have limited jurisdiction and can't make a sweeping decision that affects all 50 states as well as millions of Americans who aren't aware they might have claims because they haven't yet been in accidents.

Case law on the issue of so-called "successor liability" isn't well settled. But many court decisions have limited the ability of a bankruptcy court to discharge future claims, in part because companies can't give fair notice to people who haven't yet suffered injuries.

U.S. Supreme Court Justice Ruth Bader Ginsburg voiced concern about the transfer of these liabilities in a case on asbestos claims decided earlier this month.

But other legal experts say the Bankruptcy Code trumps state laws governing product liability.

They argue that honoring claims of unsecured creditors would violate the code's tenet of paying secured creditors first and treating unsecured claims the same way those of bondholders and others are treated.

Callan Campbell, a recent high-school graduate, was a week away from starting classes at a local community college in August 2004 when the 1996 GMC Jimmy sport-utility vehicle she was riding in flipped over and rolled several times.

Today, she's a quadriplegic, confined to a wheel chair and suffering regular back spasms. Ms. Campbell, now 23 years old, sued GM in a Pennsylvania court, alleging that faulty manufacturing caused the SUV's roof to crush in and paralyze her.

Ms. Campbell has since had hip surgery and developed arthritis. A life planner estimates her future medical bills and future need for durable equipment and home modifications would cost more than $4.5 million, according to court papers.

A GM spokesman declined to comment on Ms. Campbell's case, which has yet to go to trial.

Ms. Campbell's mother, Deborah Glosek, says she refuses to believe Mr. Obama would allow GM to discharge any damages her daughter might win in court. "If someone would just tap him on the shoulder," she says, "I can't imagine he wouldn't think of these people."

Ms. Campbell says she wants justice for life-altering injuries that shortchanged her plans to run a flower shop. "It's more than me losing any potential for a job," she says. "I lost so much more than that. And they need to repay me."