General Motors and the Shield of Bankruptcy

General Motors, America's largest auto maker, has been in hot water for a long time. During the deepest days of the recent recession, GM filed for Chapter 11 bankruptcy. The filing reported $82.29 billion in assets and $172.81 billion in debt. As ranked by total assets, this was the fourth-largest corporate Chapter 11 bankruptcy in US history, following Lehman Brothers, Washington Mutual, and WorldCom. Because of the many difficult restructuring choices it made during its Chapter 11 plan, the "new GM" that emerged was leaner and stronger. Although nowhere near as profitable as it had been in its best days, it appeared that--five years after it filed for bankruptcy--GM was well on its way to becoming a competitive company again.

But recently, GM has found itself in legal trouble. The company currently faces dozens of legal claims stemming from defective ignition switches that have led GM to recall 2.6 million small cars. The company admits that at least 13 deaths have been linked to the switch problem and that it knew about the problem for at least a decade, even though it didn't start recalling the cars until February 2014. At least 9 of these deaths occurred before GM's 2009 bankruptcy petition.

Despite any possible moral culpability, GM is now attempting to avoid legal responsibility by invoking the shield of bankruptcy and asking courts to bar claims filed on ignition switch-related injuries that occurred before 2009. As part of its Chapter 11 proceedings, GM was allowed to leave behind legal claims against it because it is legally now a separate corporation known as "new GM," a distinct legal entity from the "old GM." If successful in invoking this shield, the pre-2009 legal claims will have to proceed against the "old GM," a corporation in a much weaker financial condition where victims would realistically receive very little, if any, compensation.

Commentators, such as Boston University School of Law professor Walter Miller, have noted that GM's use of the shield of bankruptcy to fend of lawsuits is "not unexpected." In Miller's opinion, it simply makes sense. "Financial liability from lawsuits based on the type of inaction by GM reported in the media could be high. Any public relations loss will probably dissipate in the long term, but a heavy financial loss while the company is just beginning to recover from one financial crisis could have very serious effects."

Although the "new GM" is shamelessly attempting to limit its legal liability by using the shield of bankruptcy, it has hired renowned attorney Kenneth Feinberg--who handled the compensation fund for 9/11 victims, the Boston Marathon bombing, and the BP oil spill--to explore ways to compensate families of crash victims. However, no compensation decision has been made yet. Even if GM does ultimately craft a fair compensation plan that is agreeable to the victims, its attempt to avoid legal liability by invoking the shield of bankruptcy is an example of what many people might consider the unjustness of bankruptcy law.

Sources:

• http://online.wsj.com/news/articles/SB10001424052702304311204579505812221720276
• http://blogs.wsj.com/law/2014/04/16/gm-seeks-to-fend-off-recall-lawsuits-using-2009-bankruptcy-shield/
• http://features.blogs.fortune.cnn.com/2014/04/16/gm-recall-bankruptcy/
• http://www.huffingtonpost.com/2014/04/16/gm-seeks-lawsuit-protection_n_5157238.html