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GM Bankruptcy Judge to Review Recall Legal-Dispute Rules

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July 2 (Bloomberg) -- General Motors Co. customers demanding compensation for the eroded value of recalled Cobalts and Ions will hear today how their lawyers plan to fight for the right to sue the carmaker.

In the Manhattan court where the U.S. financed the automaker’s turnaround five years ago, U.S. Bankruptcy Judge Robert Gerber will probably hear that rulings he made freeing GM from responsibility for decreased car values don’t apply to owners of vehicles recalled over faulty ignition switches. The automaker never gave those car buyers a chance to have their say in his court during its 2009 bankruptcy, their lawyers contend.

GM knew about the defective switches and broke the rules by not informing customers, the lawyers have said. For its part, GM wants Gerber to affirm his earlier rulings that it’s protected from liabilities after its reorganization.

The stakes are high with regard to how the case proceeds. Customers injured in cars tied to the initial 2.59 million vehicles recalled for switch repairs might be paid about $3 billion, a Barclays analyst estimated in March. By contrast, one lawyer with a car-price suit has demanded as much as $10 billion so customers can buy new vehicles.

After Gerber’s last court session on GM in May, the Detroit-based automaker moved about 90 lawsuits to Chicago, where judges bundled them and sent them to another federal court in Manhattan.

Toyota Cases

The judge in that court has chosen three lawyers who handled car-value suits against Toyota Motor Corp. to represent GM customers, although Gerber hasn’t given them permission to mount a group lawsuit against the company.

That question will be addressed today, he has said.

Gerber originally told the car buyers to hold off on their lawsuits at least until September while he decided whether they have a right to sue. The delay could stretch further as lawyers comb through new facts for material that might bolster their fight, according to attorneys involved in the case.

In May, regulators fined GM $35 million for its flawed handling of the switch problem. Last month, former Chicago U.S. Attorney Anton Valukas published an investigation that exposed incompetence at the company.

GM, which has recalled 25.7 million cars in the U.S. this year, is using a two-pronged strategy to deal with customers driving Cobalts and Ions covered by the earlier recall. While compensation expert Ken Feinberg said this week that the automaker will spend “whatever it takes” to pay accident victims, GM is asking Gerber to knock out about 90 lawsuits over car prices, saying its bankrupt predecessor is responsible for those claims.

Bankrupt Predecessor

In the 2009 reorganization, Gerber freed Detroit-based GM from most liabilities tied to its bankrupt predecessor’s cars, leaving intact only some warranty obligations and responsibility for post-2009 accidents. Property damages on old GM cars, and any punitive damages related to them, were disavowed by the new GM with Gerber’s approval.

GM has said that the U.S. Treasury’s price for saving the company was that it leave behind as many liabilities as possible.

To get over this hurdle, lawyer Edward Weisfelner told the judge in May that customers’ best bet might be taking advantage of the bankruptcy court principle that all creditors must be kept informed about the case and given a chance to speak in the proceedings.

Cobalt drivers were creditors, he said, because they were driving cars with defective switches. GM knew it might owe them money for the defect and should have told them, he said. By failing to do so, the company forfeited the protection of Gerber’s rulings when it came to the current car-price suits.

‘Defective Product’

“Old GM did nothing to let those people know that they had a defective product, didn’t give them notice of the bankruptcy,” he told the judge on May 2. “Isn’t it the case these individuals were deprived of due process? In that context, should the sale order apply to them?”

Weisfelner, of Brown Rudnick LLP in New York, is one of three bankruptcy specialists chosen by customers’ lawyers to speak to Gerber on their behalf. While many car-price suits accuse GM of fraud, it would be hard to prove the carmaker deliberately deceived its customers and the judge, the specialists say.

In a written order after the May hearing, Gerber said he also wanted to hear arguments on whether the ignition switch claims should be paid by old GM. As recently as 2012, Gerber told some customers to take their warranty claims to the predecessor rather than the wealthier new company created in the government bailout.

The old GM has little left after five years of paying creditors by selling assets that the reorganized GM didn’t want. As of March 31, the old firm had $1.1 billion on hand to pay existing claims of $32 billion, it reported.

The bankruptcy is In re Motors Liquidation Co., 09-bk-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Linda Sandler in New York at

To contact the editors responsible for this story: Stephen Farr at Fred Strasser, Michael Hytha

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