GM Legal Strategy Could Reduce Compensation Payouts by Billions

General Motors Co.’s move to freeze ignition-defect lawsuits in California and Texas has solid legal precedent behind it and could help slash customer demands for compensation by billions of dollars.

GM asked federal judges in both states last week to delay litigation over the defect in several of its models until a U.S. bankruptcy judge in New York rules whether some accident victims’ claims can be brought without violating a sale order in its 2009 reorganization.

The aggressive legal strategy runs the risk of further damaging GM’s image with lawmakers and the public. Offsetting that impact is GM’s customer-focused hiring of lawyer Kenneth Feinberg to advise on how to compensate people who had accidents in recalled Cobalts, Saturns and other GM models. Feinberg ran funds for victims of the Sept. 11 terror attacks and the BP Plc oil spill in the Gulf of Mexico.

“They’re running on parallel tracks but the trains are going to different stations,” said Chip Bowles, a bankruptcy lawyer at Bingham Greenebaum Doll LLP, who called the freeze maneuver “clever.”

A win in bankruptcy court would allow GM to declare it’s not responsible for defect liabilities, Bowles said. Then the automaker can invoke a Feinberg-recommended fund to say: “As a matter of law we don’t have to pay anybody a nickel, but we recognize our responsibility to people who were harmed by our product, so we are going to help them.”

U.S. Bankruptcy Judge Robert Gerber’s 2009 order let the current GM reject its predecessor’s liabilities, including claims for damages based on design defects, the automaker said in filings in San Francisco and Corpus Christi, Texas.

In the California case, filed by Galdina Maciel, the plaintiffs don’t acknowledge the limits of the bankruptcy court ruling, GM said in an April 11 filing. The automaker said it will soon ask Gerber to enforce his July 2009 injunction, which bars anyone from suing GM for claims it rejected in bankruptcy.

If the judge agrees, it might force plaintiffs’ lawyers to rewrite their complaints. It also may stop plans by one of them, Bob Hilliard of Texas, to challenge new GM’s immunity from old GM’s liabilities, including pre-reorganization crashes.

Gerber’s original ruling on liability is “quite clear,” said Stephen Lubben, a bankruptcy professor at Seton Hall University School of Law in Newark, New Jersey. “Having the court reaffirm its order could head off attempts to litigate the issue before some other court, which might not be as well-versed in bankruptcy and the broad reach of the bankruptcy code.”

GM Chief Executive Officer Mary Barra announced Feinberg’s hiring April 1 after U.S. Senator Richard Blumenthal urged Detroit-based GM to establish a fund to compensate victims. Separately, Barra, 52, was urged by the Washington-based Center for Auto Safety to create a $1 billion fund for car customer claims it rejected in bankruptcy.

The new GM accepted claims for compensation by victims of accidents occurring after it emerged from bankruptcy, leaving pre-reorganization customers to get little or nothing from old GM, whose best assets it stripped away for itself.

After recalling 2.59 million cars with ignition problems linked to 13 deaths, the automaker, founded in 1908, is grappling with its biggest challenges since its bankruptcy.

They range from customer lawsuits to regulators’ probes on why it waited a decade or more to fix the defects. GM said in the April 11 filing in San Francisco that it faces at least 36 lawsuits similar to that filed by Maciel.

“They’re trying to hide behind bankruptcy to keep from fixing the cars the way they should be fixing them,” said Lance Cooper, a Marietta, Georgia-based attorney helping represent the Maciel plaintiffs.

“GM’s recent actions in litigation demonstrate clearly its intent to use the bankruptcy process to prevent many victims and their families from obtaining relief for the harms they have suffered,” Blumenthal, a Democrat from Connecticut, said yesterday in a statement. “Whatever GM’s lawyers may argue, the judges in these cases should deny GM this shield.”

GM, which started fixing faulty ignition switches last week, has said it will charge off about $1.3 billion in the first quarter, mostly for repairs. The automaker’s fix isn’t far-reaching enough to stop the cars’ engines from stalling when the key shifts, according to Cooper.

A senior GM engineer, Antonio Antonucci, said in an affidavit filed in the Corpus Christi court April 2 that the automaker has conducted hundreds of tests to determine what makes the ignition switch change position. He concluded, as Barra has said she believes, that the recalled cars are safe to drive using the production ignition key with nothing else attached.

New GM took on only limited warranty obligations for old GM’s cars, which it is fulfilling by repairing recalled vehicles, it said in the California filing.

Texas lawyer Hilliard said he wants the automaker to “disgorge” to all customers the full amount of their original purchase price so they can buy new cars. GM knew about the problem and deceived its customers as it deceived the bankruptcy judge, he alleged yesterday.

Hilliard estimates all damages for replacement of recalled cars could run as high as $10 billion if Gerber rejects GM’s bid to reaffirm the 2009 injunction.

“Our full efforts are on our customers’ safety and fixing their vehicles as quickly as we can,” Kevin Kelly, a spokesman for GM, said in an e-mailed statement. “We also are conducting an unsparing, comprehensive review of the circumstances leading to the ignition switch recall to make sure something like this does not happen again.”

Kelly declined to comment on the litigation.

The California case is Maciel v. General Motors, 14- cv-01339, U.S. District Court, Northern District of California (San Francisco).