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GM's Ignition Switch Legal Issues Escalate

By Gabriella Khorasanee, JD on May 05, 2014 | Last updated on March 21, 2019

In 2009, during GM's reorganization, a new entity was created -- "New GM." Whereas Old GM would stay in bankruptcy and deal with the creditors, New GM bought old GMs profitable assets, essentially giving GM a fresh start.

Part of the reorganization required that pre-existing claims for personal injury and the like would be resolved in Old GM's bankruptcy proceeding. Judge Gerber noted, "the only alternative to an immediate sale is liquidation -- a disastrous result for GM's creditors, its employees, the suppliers who depend on GM for their own existence, and the communities in which GM operates."

But that was all before the ignition switch fiasco. Now what?

Economic Loss Claims

GM has "agreed to address accident and death claims," according to Bloomberg, however financial claims are a different story. Many of the ignition claim lawsuits filed allege economic loss -- that is, plaintiffs are saying they suffered financial loss as a result of the ignition recall. The economic loss claims could potentially "eclipse" personal injury claims with a figure like $10 billion so car owners could buy new vehicles, says Bloomberg.

In a preemptive move, GM has asked Judge Gerber "to enforce the so-called bankruptcy shield" to prevent plaintiffs in these cases from getting to trial, reports Reuters. In a related issue, Judge Gerber is also going to "consider whether claimants for economic damages were discriminated against at the time of the bankruptcy compared with accident victims, in line with car owners' assertions that under bankruptcy law, they are the same type of creditor," reports Bloomberg.

Potential Fraud?

Car owners are also seeking a probe into GM's conduct, but Judge Gerber said he first wants to determine whether GM defrauded the bankruptcy court during the 2009 reorganization proceedings. In his review, he would only "draw on bankruptcy law and publicly available information, not an investigation of who knew what when among the Detroit-based car company's executives," says Bloomberg.

Lessons From GM

The main lesson for law departments is to counsel your client to be honest and transparent with its customers. If GM had been open about the ignition problems when it found out about them, many of these issues would not be issues right now. Yes, honesty and transparency may cut into profits initially when customers or stockholders get bad news -- but the fallout can be so much worse -- and could even mean the demise of your company. As in-house attorneys are increasingly looked to for strategic counsel, keep honesty and transparency at the forefront of business decisions.

What lessons have you taken away from GM? Let us know @FindLawLP on Twitter.

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