GM Plays Legal Games With Its Recall Liability: Four Blunt Points

General Motors CEO Mary Barra speaks during a Senate Consumer Protection, Product Safety, and Insurance subcommittee hearing on April 2 Photograph by Andrew Harrer/Bloomberg

When it comes to its ignition-switch debacle, General Motors wants to play it both ways. “Our full efforts are on our customers’ safety and fixing their vehicles as quickly as we can,” says spokesman Kevin Kelly. But that’s not quite accurate. Some of the company’s efforts—those undertaken by its well-paid lawyers—are being devoted to using the bankruptcy laws to erect a liability shield protecting GM from claims by those very customers.

Herewith, four blunt points to sort out GM’s too-clever-by-half crisis control strategy:

1. GM is playing the Chapter 11 card after all. If you frequent this website, you probably don’t need reminding that GM is grappling with its worst corporate disaster since seeking bankruptcy court protection in 2009, a rescue that required a $50 billion taxpayer bailout. So far the company has recalled 2.59 million cars with ignition problems linked to 13 deaths and a bunch of other injuries. Bloomberg News reports that the company faces at least three dozen lawsuits as well as regulatory and criminal probes, raising the troubling question of why GM waited a decade or more to fix the defects it now admits. In filings in Texas and California, the company has signaled that it intends to use the terms of its Chapter 11 reorganization to block claims—possibly thousands—related to pre-2009 mechanical flaws and accidents.

2. From a legal standpoint, this is a plausible tactic. The “new” GM that emerged from bankruptcy declared it was leaving “old” GM’s liability behind. That’s often the way Chapter 11′s “fresh start” works.

3. In moral and public-relations terms, the Chapter 11 gambit stinks. This company continues to exist—and thank goodness it does—because of the generosity of the American taxpayer and the possibly too-credulous faith of its customers. That changes the calculus: GM owes “we the people.” Playing games in bankruptcy court is not the way to repay us. GM has historic problems with reliability and quality. Its new chief executive officer, Mary Barra, promised that the new GM had overcome that sad legacy. Then the ignition-switch fiasco came into focus. If Barra intends to remake this company and change its profile in the marketplace, she’ll need to rein in the legal pitbulls and convey in clear terms that GM will take proper care of everyone harmed by its shoddy practices.

4. At some level, GM already know all of this. The company has said it will charge off about $1.3 billion in the first quarter, mostly for repairs. Is that going to be enough? Who knows. But its top executives have already conceded that the fault is theirs and the bill will be large. The smartest thing Barra has done so far, beyond apologizing, is hiring Kenneth Feinberg to advise how to compensate drivers who had accidents in faulty Cobalts and other GM models. Feinberg, based in Washington, specializes in distributing money to large groups of victims, as he has in the wake of the Sept. 11 attacks, the 2010 BP oil spill in the Gulf of Mexico, and other disasters. His presence underscores that the company recognizes it needs to write some big checks.

So the Chapter 11-shield strategy is really more of a warning to plaintiffs’ lawyers not to overreach than an all-out declaration of war. In that light, GM should send a clearer message by committing to the creation of a substantial claims fund to be supervised by Feinberg and dedicated strictly to making consumers whole. All legitimate claims will be paid—and swiftly. Bankruptcy-law technicalities won’t prevent loyal customers from enjoying the cars they paid for and won’t inhibit compensation for injuries and deaths. If fake claims or greedy plaintiffs’-lawyer demands materialize, there will be time enough for GM to fight those. First, do the right thing.

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