Potential bidders for Takata may balk at GM bankruptcy precedent

Sun Nov 6, 2016 10:30pm EST
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By Tom Hals

WILMINGTON, Del. (Reuters) - As auto supplier Takata Corp (7312.T: Quote) prepares for a possible U.S. bankruptcy filing, potential bidders are poring over a recent U.S. court ruling that could expose a buyer to liability for the company's defective air bags, sources have told Reuters.

Takata faces potentially billions of dollars in costs from the world's largest automotive recall, stemming from millions of its air bags that were equipped with malfunctioning inflators.

The Japanese company has said it is seeking a financial backer. But interested bidders, if the parts maker goes up for sale, want Takata to put its U.S. business into bankruptcy first, the sources said.

Generally, U.S. bankruptcy law allows a bidder to buy assets free and clear of lawsuits and other liabilities, and the selling company uses the money to repay its creditors.

General Motors used the strategy when it filed for Chapter 11 bankruptcy in 2009. The automaker quickly sold its best assets to a so-called "new GM," scrubbed free of billions of dollars of debt, which enabled the company to withstand an economic crisis.

In July, the 2nd U.S. Circuit Court of Appeals in Manhattan held that General Motors Co (GM.N: Quote), the "new GM," could be sued over faulty ignition switches made by "old GM."

The ruling set what some see as a troubling precedent.

"What that says to me: buyer beware," said Henry Jaffe, a bankruptcy lawyer with Pepper Hamilton in Wilmington, Delaware who represents debtors and creditors. Jaffe said the ruling could undercut what bidders are willing to pay for Takata.   Continued...

A logo of Takata Corp is seen with its display as people are reflected in a window at a showroom for vehicles in Tokyo, November 6, 2015. REUTERS/Toru Hanai/File Photo