Bankruptcy May Not Bar Tort Claims

In July, the Second Circuit issued an opinion that allowed hundreds of personal injury and economic damage claims arising from faulty ignition switches to proceed against General Motors (“GM”), even though the claims arose prior to GM’s sale of its assets in bankruptcy.

General Motors Corporation (“Old GM”) petitioned for Chapter 11 bankruptcy protection on June 1, 2009. Rather than preparing a traditional Chapter 11 reorganization plan, Old GM decided to sell its assets to a successor corporation. Under the Sale Agreement, which the bankruptcy court approved (the “Sale Order”), General Motors LLC (“New GM”) acquired all of Old GM’s assets “free and clear of all liens, claims, encumbrances, and other interest of any kind or nature whatsoever, including rights or claims based on any successor or transferee liability.”

Thereafter, in early 2014, New GM issued its first recall related to the ignition switch defect. Within months, plaintiffs filed dozens of class action lawsuits alleging that the faulty ignition switch caused personal injuries and economic losses both before and after the Sale Order was issued.

In front of the bankruptcy court, GM contended that any accident claims raised by plaintiffs that occurred prior to the Sale Order and economic loss claims based on the ignition switch defect were barred. The bankruptcy court agreed and the plaintiffs appealed to the Second Circuit.

The Second Circuit reversed the bankruptcy court’s determination, holding that while the “free and clear” provision of the Sale Agreement covered any personal injury that occurred prior to the Sale Order and any economic claims arising from the ignition switch defect, the plaintiffs could not be bound by the terms of the Sale Agreement.

In reaching its conclusion, the Court reasoned that procedural due process required that GM provide direct mail notice of the bankruptcy proceedings to plaintiffs with ignition switch claims. The Court determined that Old GM knew or should have known that the defect caused stalls and was linked to airbag non-deployments by May 2009, and thus, the claimants were entitled to notice beyond mere publication. The Court further held that absent such notice, the plaintiffs were prejudiced since it was not certain that the outcome of the § 363 sale proceeding would have been the same had Old GM disclosed the ignition switch defect and had plaintiffs been given an opportunity to object to the “free and clear” provision. Thus, the Court concluded the Sale Order could not be enforced so as to enjoin those plaintiffs’ claims.

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