GM's fate in hands of bankruptcy judge - again

Thu May 1, 2014 9:07pm EDT
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By Nick Brown and Jessica Dye

NEW YORK (Reuters) - Five years ago, New York bankruptcy Judge Robert Gerber oversaw the historic bankruptcy of General Motors, establishing a new company that is shielded from liability for the actions of its precursor.

Now, with thousands of drivers suing "New GM" for the alleged loss of value in their cars after an ignition defect sparked a massive recall, the same judge must decide whether to lift the shield he put in place.

GM may have the upper hand when it meets for the first time Friday morning in Gerber's courtroom with the plaintiffs' lawyers leading the challenge. The company asked Gerber to enforce the so-called bankruptcy shield, in a pre-emptive move aimed at staving off dozens of lawsuits from customers who say they took a financial hit from the recall.

Most legal experts believe the shield is virtually iron-clad and that Gerber would be unlikely to undo a key part of the bankruptcy sale order he approved in 2009. But the high-stakes issue is not necessarily a slam dunk for GM.

While evidence has already emerged that at least some GM employees were aware of problems with the switch, GM is asking for a clear-cut ruling declaring that it did not intentionally hide anything from the bankruptcy court.

But plaintiffs' lawyers have prepared a multi-pronged attack, raising questions of bankruptcy law and constitutional rights.

Additionally, if plaintiffs can prove that the company knew about the switch problems during its bankruptcy proceedings but failed to notify customers or the court, they may be able to convince Gerber that the company committed fraud on the bankruptcy court. A win for them would mean they could proceed with their lawsuits against New GM.

A finding of fraud may not be enough for Gerber to undo the shield, since the bankruptcy code provides only a six-month window to unwind bankruptcy sales for fraud. However, he could find other ways to let the lawsuits proceed.   Continued...

The General Motors logo is seen outside its headquarters at the Renaissance Center in Detroit, Michigan in this file photograph taken August 25, 2009. REUTERS/Jeff Kowalsky/Files