GM Customers Face Uphill Fight to Reignite $10 Billion Suit

Drivers of Chevy Cobalts and Saturn Ions met with skepticism when they tried to restart a $10 billion lawsuit accusing General Motors Co. of exposing them to falling car prices.

U.S. Bankruptcy Judge Robert Gerber has the sole power to decide whether they can demand money for their old, often second-hand, cars. Tuesday, he opened his New York courtroom to lawyers who say they speak for 27 million drivers of recalled cars, many with faulty ignition switches.

The judge cast doubt on their hopes of demanding billions of dollars in damages from the automaker when he asked why they should be allowed to sue the company for the lost value of their vehicles when many accident victims can’t sue for death or injury.

“What reason would I have to grant that to people claiming they were inconvenienced when I denied relief to those who were injured or killed?” Gerber said to lawyer Ed Weisfelner, who represents hundreds of GM car owners in the bankruptcy court.

To help the U.S. with its $49.5 billion GM bailout, Gerber ruled in 2009 that, after bankruptcy, the automaker wouldn’t be responsible for cars made by its defunct predecessor, which is referred to in the lawsuits as “old GM.” The carmaker is now profitable enough that Harry Wilson, the former presidential aide who helped the Treasury Department bail the company out, has said it can afford to spend $8 billion on a stock buyback.

Ban Suits

GM has asked Gerber to stick with the ban on lawsuits. The car owners will have to convince the judge that orders he signed six years ago shouldn’t apply to them.

His decision hangs on whether the Detroit-based carmaker violated bankruptcy law, which requires telling people who have a claim that they can come to court and object.

The drivers argue that because they weren’t told about the switch defect -- and that they might have a claim -- they aren’t barred from suing “new GM.”

Back in 2009, no one told drivers they had a claim, said Weisfelner.

“If I’d shown up in court and said GM knew of the safety defect, and has known for the better part of seven years without telling anyone, resulting in numerous deaths, injuries and depreciation of value, who knows what Gerber might have said?” Weisfelner said before the hearing.

Mail Notification

The drivers should have been mailed letters notifying them of the hearing on the bailout and how their claims might be affected, said Weisfelner, who heads the bankruptcy practice at Brown Rudnick LLP in New York.

The judge said Tuesday that it was “debatable” whether GM knew enough to issue a recall. Suppose 24 or 25 people at the company could have called in the defective cars long before the bankruptcy, what would it have cost to notify 27 million people individually that each might have a claim, he asked.

Assuming they had come to court to protest his orders, would the result have been any different, as the faults were old GM’s, he asked Weisfelner.

His orders protected GM from being sued for what wasn’t its fault, to enable it to survive, and he overruled customers who also wanted to sue new GM at the time, Gerber said.

‘Unknown Creditors’

GM said no rules were broken because, back then, the switches weren’t known to be a “persistent” problem. Most of the cars were fine, so the owners were considered “unknown creditors,” GM said. People who did have faulty switches could have read general notices of the bankruptcy in the newspapers, the company told Gerber in a January filing.

The car owners originally planned to accuse GM of something much worse than not sending a letter: deliberately deceiving Gerber by hiding the switch liabilities.

Their lawyers backed off when Gerber suggested they show him that a top GM executive had stood up in court and withheld information. They said it would be hard to nail that down, leaving them mainly with their current argument for suing.

“They are going to have a difficult time,” said Erik Gordon, a law professor at the University of Michigan’s business school who’s following the case. “The fresh start for the company goes out the window if claimants can show up after the reorganization has been approved and plead that the company improperly deprived them of their rights.”

Wild Card

The wild card is whether Gerber might want to help customers after seeing GM’s serial recalls of cars with faulty switches. The recalls sparked congressional hearings, investigations and more than 200 lawsuits. Worldwide, GM called in 36 million vehicles last year, spending $2.9 billion on repairs and loaner cars.

“The judge has to be aware that there are some issues here,” said Carl Tobias, who teaches product-liability law at the University of Richmond in Virginia. “I’m sure he’s not happy that all the information wasn’t available at the time.”

Even then, Gerber could tell the owners to file their claims with old GM, the bankrupt predecessor that has little money to pay.

GM said drivers don’t deserve a “windfall,” especially on used cars. It denies it had a duty to tell them their switches might shut off if jarred, cutting power to the engine and deactivating airbags.

“The initial manufacturer has no duty or liability to a plaintiff who acquired a used vehicle in a secondary market transaction,” GM told Gerber in a filing.

The bankruptcy case is In re Motors Liquidation Co., 09-bk-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The car-price suits are In re General Motors LLC Ignition Switch Litigation, 14-md-02543, U.S. District Court, Southern District of New York (Manhattan).

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