As you may have
heard, today, GM’s CEO Mary Barra testified before Congress about the company’s
handling of a defect in one of its cars, the Chevy Cobalt. While this type of
case would normally not concern us here, there seems to have been an interesting
bankruptcy plot twist in the story of the Chevy Cobalt and the
failure of GM to correct the defects.
Background
In
February, General Motors issued a recall for several models (primarily the
Chevy Cobalt) suspected of having an engine defect that causes the engine to
turn off if bumped. To date, the defect
has been linked to thirteen deaths and more than 2.6 million cars have been recalled.
The House Energy and Commerce Committee is investigating GM for their handling
of the recall and whether they concealed the defect from the public and government regulators. There is evidence that GM first became aware of the defect in
2001 and was warned of the defect after four deaths in 2007.
Bankruptcy Plot
Twist
The Justice Department is now looking into whether GM committed bankruptcy fraud when it failed to disclose
the defects in its bankruptcy filings.
GM filed for bankruptcy in 2009 and
received substantial government assistance as part of President Obama’s
auto-industry bailout and restructuring plan. As part of the restructuring
plan, GM was split into old and new corporate entities. GM’s existing assets were
divided between the old and new entities. “Bad assets,” such as obsolete assembly plants and liability from accidents
that occurred before the bankruptcy, were assigned to the old entity as part of the restructuring plan. Therefore, the new GM is shielded from
liability for any defect-related crashes that occurred prior to the 2009
bankruptcy filing. While private attorneys have already levied challenges to
this aspect of the bankruptcy agreement on behalf of their clients that were
injured by the defect prior to 2009, the Justice department has just now thrown
its hat in the ring by investigating GM for bankruptcy fraud. The Justice Department argues that, if GM
knew about the defect when it filed its Bankruptcy petition, the automaker committed bankruptcy fraud by not
disclosing defects that could lead to expensive future liabilities. The
section of the code that covers bankruptcy fraud can be found at 18 U.S. §157. The
statute reads:
A person who, having
devised or intending to devise a scheme or artifice to defraud and for the
purpose of executing or concealing such a scheme or artifice or attempting to
do so—
(1) files a petition
under title 11, including a fraudulent involuntary petition under section 303
of such title;
(2) files a document in
a proceeding under title 11; or
(3) makes a false or
fraudulent representation, claim, or promise concerning or in relation to a
proceeding under title 11, at any time before or after the filing of the
petition, or in relation to a proceeding falsely asserted to be pending under
such title,
shall be fined under
this title, imprisoned not more than 5 years, or both.
It
seems like §157(3) may be
pertinent in this case. There is evidence that GM knew of the defect as early
as 2001 and failed to list the potential liability as a claim. This omission
could be considered a scheme to conceal material information for the purpose of
defrauding creditors and the bankruptcy court. The battleground
issue in the Justice Department’s pursuit of GM is whether, or to what extent, GM
had knowledge of the defect and potential liabilities during bankruptcy. If GM did
not have adequate knowledge of the defect or liabilities, there can be no bankruptcy fraud. The House Committee hearings, which continue throughout the week,
will hopefully shed a little more light on what the executives at GM knew and
did not know about the problems with the Cobalt.
For the Website
that Brought This issue to my attention:
For More
Information on the Cobalt Recall:
http://www.nytimes.com/2014/03/03/business/in-general-motors-recalls-inaction-and-trail-of-fatal-crashes.html?action=click&module=Search®ion=searchResults%230&version=&url=http%3A%2F%2Fquery.nytimes.com%2Fsearch%2Fsitesearch%2F%23%2Fchevrolet%2520cobalt%2F
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