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Appeals Court deals blow to General Motors-Restores many lawsuits from ignition switch defects

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The Second Circuit of the United States Court of Appeals held that General Motors failed to properly disclose its knowledge of ignition switch defects and accordingly it will now have to face many lawsuits for injuries and other damages, that were once dismissed as part of its bankruptcy filing.

In 2009 General Motors declared bankruptcy.  In doing so, it sought to take any of its viable assets and in an organized sale, transfer them to a new entity now known as “new GM”.  When a company files for bankruptcy they must disclose claims known or likely to be known.  The reason is that when bankruptcy is granted, all debts known or likely to be known are wiped out and the company gets to move forward as a new “reorganized” entity.

Though GM was near financial collapse and the Court did want to maintain a company with thousands of employees, they are not above the law.  The safety of many was at risk and many injuries and deaths had occurred due to defective ignition switches which had caused movement stalls and air-bag non-deployment.  The cause was simple: the poorly improperly designed  ignition switch could slip from the run position and therefore cause many features to fail while in operation.

Ignition switch

The problems with the ignition switch was known to executives at GM for at least a decade prior to its disclosure in 2014.  During the process of selling “old GM” to “new GM” the Bankruptcy Court felt that GM had properly disclosed all possible claims and allowed this transfer to occur; wiping out many claims that were never disclosed.

The Second Circuit of the US Court of Appeal in Manhattan reversed a this decision in what some call a scathing decision.  The panel of judges stated “at minimum, Old GM knew about moving stalls and air-bag non-deployment in certain models and should have revealed those facts in Bankrputcy.  Those claims would still be the basis of claims.”  Moreover, the Court held GM “essentially asks that reward debtors who conceal claims against potential debtors.  We decline to do so.”

The Wall Street Journal reported this story on Thusday and the decision has reopened the door to those who wish to seek justice.  At the time of the bankruptcy filing, GM worked out an agreement that allowed only some victims who chose to receive funds from a limited compensation fund to allow those cases to proceed.  Of course if many other claimants who wished to seek redress had been allowed to pursue their claims, the creditors would have had greater negotiating power and that fund may have been larger or allowed for lawsuits to proceed.  Fortunately, those cases can now proceed.  One attorney who represents some plaintiffs, indicated that “finally, a majority of the victims whose claims have been languishing under a bankruptcy stay will have their day in Court.”

The Court concluded that while the Bankrtpucty Court’s intent to move GM through the Bankrptucy process in an swift manner was needed,  it can not do so if sacrificing due process and basic constitutional principles.