Chrysler Bankruptcy Decision Could Shield GM on Cobalt Claims

Chrysler Group LLC, the Fiat SpA- controlled entity that bought the U.S. carmaker out of bankruptcy, won a courtroom victory this month that helps General Motors Co. avoid some claims arising from ignition switch defects in Chevrolet Cobalts and other vehicles.

Chrysler and GM both went through bankruptcy and were both sold to newly formed companies that benefited from court orders protecting them from claims that could have been asserted against their older incarnations.

“Old” Chrysler, formally known as Old Carco LLC, made Jeeps in the early 2000s with defective air bags. Similarly, “old” GM, now named Motors Liquidation Co., made Cobalts with defective switches before its bankruptcy. Owners of the cars could have filed claims in the bankruptcies had they known about the defects.

In Chrysler’s court-approved sale, the new company assumed liability for recalls after taking ownership and eventually repaired the air bags.

After the air-bag recall was announced, a class action, or group lawsuit, was filed against new Chrysler in federal district court in Detroit seeking monetary damages for owners of the Jeeps. The suit didn’t seek damages for personal injuries.

U.S. District Judge Patrick J. Duggan tossed out the case on March 13. Because Chrysler had repaired the cars and promised to reimburse anyone who fixed the vehicles before the recall, the owners had no right to make any further claims against new Chrysler, the judge said.

Duggan said the case was moot and the plaintiffs lacked “standing,” or eligibility, to sue because they no longer had any valid claims. Given that new Chrysler admitted the cars were defective and was making repairs, there was no longer a live controversy, Duggan said, meaning the federal court didn’t have jurisdiction to entertain the lawsuit.

New GM could cite Duggan to defend claims over defects in the Cobalts. The judge’s decision, however, didn’t address personal-injury claims. It also didn’t speak to the liability of old Chrysler, meaning it may not address the liability, if any, of old GM.

People injured or killed in Cobalt accidents before the bankruptcy sale must overcome several obstacles to mount valid claims against new GM. Otherwise, they’re stuck with whatever rights they have under old GM’s Chapter 11 plan.

To sue new GM, plaintiffs may try to argue that old GM knew about the defects and kept quiet. If old GM knew about the defects and didn’t give car owners notice to file a claim, a plaintiff could argue that their claims weren’t wiped out in bankruptcy.

By itself, a ruling that the claims survive won’t give rise to a claim against new GM because it’s a different company, protected by the sale-approval order. Consequently, Cobalt plaintiffs might try to argue that new GM is a “successor” to old GM and therefore liable for personal-injury or death claims.

It remains to be seen whether new GM decides not to use the bankruptcy shield, out of concern that paying claims is less costly than bad publicity.

Old GM filed for reorganization under Chapter 11 on June 1, 2009, and listed assets of $82.3 billion against debt totaling $172.8 billion. The sale to new GM was completed the next month.

Following its Chapter 11 filing on April 30, 2009, old Chrysler sold the business in June 2009. Old Chrysler confirmed a liquidating Chapter 11 plan in April 2010.

The Jeep case is Hadley v. Chrysler Group LLC, 13-cv-13665, U.S. District Court, Eastern District Michigan (Detroit).

The GM Chapter 11 case is In re Motors Liquidation Co., 09- bk-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The Chrysler case is In re Old Carco LLC, 09- bk-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan).