Judge Rules Bankruptcy Shields GM From Some Ignition Switch Suits

General Motors Co will not have to face dozens of lawsuits accusing it of concealing an ignition-switch defect that led to the recall of 2.6 million vehicles, a U.S. bankruptcy judge ruled on Wednesday.

GM had argued it was protected from claims on vehicles pre-dating its 2009 exit from Chapter 11 bankruptcy, while plaintiffs in the lawsuits said the company violated their constitutional rights by failing to disclose the defect.

The decision by U.S. Bankruptcy Judge Robert Gerber means GM may avoid potentially billions of dollars in liability, as well as the cost of defending those lawsuits, although claims arising from GM’s conduct after its bankruptcy will not be affected.

The plaintiffs will have to file their claims against the financially strapped “Old GM,” the shell company comprised of bad assets GM shed in bankruptcy. As of October, Old GM’s main assets were worth about $9.25 billion, versus roughly $32 billion in claims, a recovery of about 29 cents on the dollar for trust creditors.

Judge Gerber held that GM economic-loss plaintiffs can still bring claims against New GM based solely on its post-bankruptcy conduct.

A lead lawyer for ignition-switch plaintiffs, Steve Berman, said that he was pleased the judge would let claims based on New GM’s conduct proceed. However, he said, plaintiffs intended to fight the ruling on appeal.

Gerber said he would certify the case for direct review by the 2nd U.S. Circuit Court of Appeals.

A GM spokesman, Jim Cain, said that Gerber properly concluded that claims based on old GM’s conduct were barred and that the plaintiffs still had to prove the merits of their claims against new GM.

Plaintiffs’ claims center on a faulty ignition switch in some older vehicle models that could slip out of position, cutting power to brakes, steering and airbags. Last year GM recalled 2.6 million vehicles with the switch, and later issued additional recalls for other safety issues. The defect was linked to nearly 160 injuries and 84 deaths.

The claims mostly allege loss in vehicle value, as GM has already agreed to compensate most injury and death claimants through a separate fund. However, some personal injury and death claimants who were not compensated through the fund, because they were either ineligible or opted out, are among those now suing the company.

Shares in GM rose 45 cents to $37.39 in after-hours trading following the decision.

GM’s 2009 bankruptcy essentially split the company, with New GM purchasing the profitable business operations and Old GM retaining burdensome liabilities. Under the sale, New GM expressly disavowed responsibility for most product-related claims on cars made before the bankruptcy.

Plaintiffs sought to pierce that shield on grounds that they could not have known they might have legal claims at the time of the bankruptcy. Despite having been given notice of the sale, they said, GM covered up the switch defect and deprived them of their day in court.

In his ruling, Gerber cited due process “failures” but said they did not rise to the level of a violation because plaintiffs failed to show they were prejudiced by insufficient notice.

“A denial of notice need not result in an automatic win for the party that failed to get appropriate notice the first time around,” Gerber said.

Nearly 200 lawsuits, many of which have been brought on behalf of potentially millions of economic-loss plaintiffs, have been consolidated in New York federal court. Plaintiffs are seeking an estimated $7 billion to $10 billion in lost vehicle value, the ruling said.

GM feared a damaging financial hit if the judge ruled that the bankruptcy settlement did not shield GM from lawsuits over vehicles made before its bankruptcy. GM executives cited the risk among the reasons why they were reluctant earlier this year to return to investors a larger share of its $25 billion cash trove.

In March, after a group of investors mounted a public push for $8 billion in stock buybacks, GM announced it would launch a $5 billion stock buyback and boost dividend payouts by another $5 billion through 2016.

(Additional reporting by Jonathan Stempel and Joe White; Editing by Christian Plumb, Ted Botha and Noeleen Walder)