Many car crash victims who were in the middle of lawsuits against the automakers ended up left behind because of the government bailout. Restructuring their companies after receiving government money allowed them to wash away legal responsibility for car-accident victims who had won damages or had pending lawsuits before its bankruptcy filing. This was the was case with Chrysler as well as General Motors Co., which discarded the liabilities as part of its own $50 billion bailout and restructuring.
In rescuing the car makers, the U.S. government prevented a potential meltdown of the auto industry and further shocks to the economy. But in the process, it created a wide universe of relative winners and losers. The U.S. Treasury received large ownerships stakes in the restructured auto makers, as did union retiree trusts. Chrysler's banks got some, not all, of their loans repaid in cash, and GM's lenders were fully repaid. On the other side, thousands of dealers, asbestos victims and other creditors received little to no recompense.
Among the creditors who suffered most, car-accident victims represent a distinct mold. Unlike banks and bondholders, this group didn't choose to extend credit to the auto makers. As consumers, they became creditors only after suffering injuries in vehicles they purchased.
"This was not a normal case. The government was deciding who was going to be taken care of and who was not," said David Skeel, a University of Pennsylvania law school professor and bankruptcy expert who has testified before Congress on the auto bailouts. Even if the auto makers had legal rights to leave behind product-liability claims, "there is a deep unfairness," he said. "It would have been easy enough to set something aside for them."
Chrysler and GM were insolvent and "came to the taxpayer and asked for help," says Ron Bloom, the president's chief adviser on manufacturing policy and a member of the auto task force that negotiated the car makers' restructurings. "In a situation like that everybody simply cannot get everything they were promised or the check would have been a multitude of what we in fact spent."
Under a special section of the federal bankruptcy code, Chrysler and GM's key assets were sold to new companies owned by Fiat SpA and the U.S. government, respectively. None of the car makers' creditors would have fared better had the companies liquidated, a scenario prevented by the sales. Still, the auto rescues raised a vexing legal question: Should companies be allowed to discard responsibility for previous product-liability lawsuits and other legal burdens through bankruptcy sales?
In court papers, U.S. Bankruptcy Judge Robert Gerber, who oversaw GM's restructuring, said the question represented "the only truly debatable issues in this case." Legal precedents on the matter were mixed, he wrote, and the bankruptcy code's intent remained "inconclusive." Still, he allowed GM to leave the liabilities behind in large part because Chrysler's judge made a similar decision and other recent cases had allowed it.
Judge Arthur Gonzalez, who umpired Chrysler's case, said in court papers that legal precedents allowed the auto maker to be sold "free and clear" of such liabilities.
Leaving behind product-liability claims didn't initially raise red flags for the president's auto task force, said people familiar with the negotiations. In part, that was because such methods had been used in other bankruptcy sales. But also, setting aside more money for accident victims, these people said, could have prompted complaints from others who felt shortchanged by the restructurings, at a time when government bailouts were unpopular.
President Barack Obama instructed the task force to avoid playing favorites, follow the broad parameters of the bankruptcy code and defer to the companies in areas where they appeared knowledgeable and experienced, Mr. Bloom said. "We were cautious about substituting our judgment for long-established legal precedent for how you deal with this," he said.
After protests from more than a dozen Republican and Democratic state attorneys general, GM agreed to remain exposed to lawsuits involving car accidents that occurred after the bankruptcy sales, regardless of when the vehicles were purchased. Chrysler soon followed suit. But those who had cases pending, or had won damages, before the bankruptcies, will likely receive far less than they believe they're owed.
All told, more than 2,500 litigation claims totaling roughly $3.3 billion have been asserted against Motors Liquidation Co., the formal name for GM's bankruptcy estate, according to the most recently tally, nearly all of them stemming from product-liability lawsuits.
Plaintiffs have been bargaining with Motors Liquidation lawyers in conference rooms across the U.S. to get whatever they can, often 30 cents on the dollar in the form of shares and warrants from an unsecured creditors' trust that received 10% of new GM stock.
Some have settled. Others have refused to accept terms offered in mediation. Callan Campbell, who was rendered a quadriplegic in 2004 when a GMC Jimmy sport-utility vehicle she was riding in flipped and the roof caved in, says she rejected an offer from lawyers with Motors Liquidation, and hopes to go to trial to recoup more.
GM has argued in similar cases that such injuries are caused by drivers falling into the roof rather than the roof collapsing.
Chrysler has no money set aside for unsecured creditors, so no detailed tally has been made of claims against it, and accident victims who weren't compensated before the bankruptcy are unlikely to get much.
In separate statements, Chrysler and GM each expressed sympathy for those with product-liability claims while emphasizing that they were among many stakeholders called upon to sacrifice. Jobs were lost when factories and dealerships closed. Tens of thousands of asbestos claimants who allegedly got sick working on car brakes and clutches were left behind. Even though Chrysler lenders received $2 billion and GM bondholders took equity for their claims, they couldn't be fully repaid.
Car-accident victims "shouldn't get a higher percentage" of distributions than others, said Harold John, a 64-year-old consultant in Chesterfield, Mo., and former GM bondholder. "I put up hundreds of thousands of dollars of bonds," said Mr. John, who held more than $500,000 of the securities. "We were the largest group of unsecured creditors. We're the ones that had the most money into General Motors."
Dealers are also struggling in the aftermath of the bailouts. Glen Rapp, a 72-year-old Chevrolet dealer in rural South Dakota, says he can't sell new GM vehicles or perform warranty work since the auto maker terminated his contract in bankruptcy court. The move "probably cut our income by about 50%," said Mr. Rapp.
Legal precedent is mixed for discarding exposure to product-liability lawsuits through bankruptcy sales. In 1995, a Texas bankruptcy court ruled that the purchaser of Fairchild Aircraft Corp. remained responsible for lawsuits arising from one of the company's old planes that later crashed. That case was cited by the state attorneys general and others who argued the auto makers had to take on liability for future accidents involving old vehicles.
Still, lawsuits arising before a bankruptcy sale closes have a much tougher time surviving, and some recent precedents give companies wide latitude to abandon such claims. American Airlines, for instance, didn't have to assume Trans World Airlines' liabilities related to employment discrimination complaints when buying the airline out of bankruptcy.
Among the largest unpaid awards is nearly $23 million owed to the parents of Joshua Flax, an eight-month-old infant who died when the Dodge Caravan minivan he was riding in was rear-ended. On Jun 30, 2001, Rachel Arnold, Joshua's mother, was with a group knocking on doors as part of a Jehovah's Witness ministry in a Nashville suburb. By midmorning, the group had finished visiting a house beside a curved, two-lane road surrounded by trees and brush. Ms. Arnold's father, Jim Sparkman, drove the group down the winding driveway and turned left into the far lane.
As he turned, a speeding pickup truck rear-ended the minivan. The front passenger seat flew backward, according to reconstruction experts, and the passenger's head collided with Joshua's forehead. The infant died the next day.
Nearly a year later, the parents sued DaimlerChrysler AG, then Chrysler's parent. During the trial, Chrysler said the passenger seats were designed to "yield" on impact because if they were too rigid, they could cause injuries to people sitting in them in more serious crashes. But a former Chrysler employee testified that the auto maker knew eight years before that the seats had safety problems and covered them up.
Chrysler in a statement emphasized the accident was caused by the pickup-truck driver and that the minivan's seat designs exceeded federal safety standards.
After years of litigation and appeals by Chrysler, the Tennessee Supreme Court ruled in July 2008 that Jeremy Flax, the child's father, and Ms. Arnold were entitled to punitive damages for the wrongful death of their son.
The company appealed again. In May 2009, weeks after Chrysler filed for bankruptcy protection, the U.S. Supreme Court declined to hear the case, preserving the damages owed.
Mr. Sparkman, Joshua's grandfather, still seethes that the auto maker hasn't paid his daughter's damages.
"We did what we were supposed to do, we went through the legal system," he says. "This is a real person. It's not just something to write off on the ledger book."
About a year after Chrysler filed for bankruptcy protection, Ms. Arnold and Mr. Flax were able to get about $5.8 million from the auto maker's product-liability insurer, a policy that kicked in partly because the damages were so high. A large chunk of it went toward legal fees and expenses, leaving roughly $2 million for them to split.
Ms. Arnold, 34, recently purchased a new 4,600 square-foot house, a luxury she says sometimes weighs on her. Mr. Flax, 39, says he had trouble running several music stores he owned after Joshua died and was forced to file for personal bankruptcy. His proceeds from the Chrysler insurer went toward paying his own creditors.
Mr. Bloom, the former member of the auto task force, says the bankruptcy sales required difficult trade-offs: "It was terrible because in the case of product liability, you're talking about individual human beings who, through obviously no fault of their own, suffered."
But, he adds, "They are victims of a company and a system that simply doesn't have the resources to deal with the promises made. Taxpayers do have a right that when the government helps, that the help comes with conditions. I don't think it should be open-ended."