Shell of old GM surfaces in court fight over ignition flaw

Bill Vlasic & Neal E. Boudette
In this April 1, 2014 file photo, families of victims of a General Motors safety defects in small cars hold photos of their loved ones as they gather on the lawn on Capitol Hill in Washington.
J. Scott Applewhite | AP

For eight years, the shell of prebankruptcy General Motors has lingered on in the form of "old G.M." — first as a corporate entity and now as an obscure trust designed to settle debts and claims left over from the company's huge financial collapse.

With the help of a $50 billion government bailout in 2009, a reborn G.M. emerged from the bankruptcy process as a healthy company. Meanwhile, old G.M. — officially called Motors Liquidation Company — had the task of selling off factories and other leftover assets to compensate legions of creditors.

But just as the business of old G.M. seemed to be winding down, the company has suddenly been thrust into the legal battle over responsibility for the worst safety scandal in the automaker's history.

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Last week, the trust negotiated a deal for victims of the automaker's defective ignition switches, which have caused 124 deaths and prompted the recall of millions of small cars in 2014. The switches had a tendency to turn off by themselves, leaving the car without power and disabling its airbags.

The agreement with the plaintiffs' lawyers called for the trust to accept liability for hundreds of outstanding legal claims and, in the process, force the up-and-running G.M. to fund the cost of potential settlements by turning over $1 billion of its stock.

And that was when old G.M. ran afoul of new G.M. — still the nation's largest automaker.

On Thursday, in an unusual turn of events, G.M. blocked the deal reached by the trust and the accident victims' lawyers. Instead, it made its own deal with the trust.

At an hourlong hearing in United States Bankruptcy Court in New York, both versions of G.M. said they would work together on bankruptcy-related issues.

The plaintiffs' lawyers did not take kindly to the development. One lawyer, Robert C. Hilliard, said old G.M. "has been shut down by new G.M." from compensating victims — "all at the 11th hour and with all documents finalized and agreed to by all parties."

That agreement called for the trust to pay $15 million to settle class-action cases covering cars sold before the G.M. bankruptcy with defective switches and to accept $10 billion in claims on its balance sheet.

The $10 billion would push the total claims against old G.M. since 2009 to more than $35 billion — a threshold that would require the current G.M., under the terms of the bankruptcy, to hand over $1 billion in stock to keep the trust financially solvent.

G.M. called that deal "an unfair, unjust and improper scheme" to circumvent a series of so-called bellwether trials intended to set damages for remaining lawsuits over accidents involving owners of defective vehicles. Several of the trials have resulted in legal victories for the company.

"This is a ridiculous attempt to have G.M. fund the trust's outrageously overstated settlement of meritless claims," the company said in a statement.

Before the settlement could be filed with the court, General Motors persuaded the trust to change course. The trust did, agreeing to not pursue a settlement with victims' lawyers as long as a crucial legal issue was unresolved: so-called late claims against old G.M.

At Thursday's hearing, tempers ran high, and Judge Martin Glenn scolded lawyers on all sides.

One of the plaintiffs' lawyers, Edward Weisfelner, suggested that the collapse of the liability agreement might have been the result of "very serious threats issued either by new G.M. or new G.M.'s professionals" to old G.M.

Keith R. Martorana, representing old G.M., said General Motors had simply offered greater financial security for the trust, assuaging concerns that further litigation costs would drain its resources.

Judge Glenn ordered the parties to exchange information about the collapse of the liability deal and to return to him in early September.

The court hearing was a rare public glimpse into the workings of old G.M.

Immediately after the automaker's bankruptcy, old G.M. was a bustling operation, responsible for selling more than 200 properties and other assets that were separated from the new company. Those included a factory in Pontiac, Mich., that for a time became a movie studio; another plant in Wilmington, Del.; and dozens of properties scattered around the Midwest.

For a time, old G.M. occupied offices in the Renaissance Center in Detroit, where General Motors has its headquarters. As its operations wound down, old G.M. moved out, and its remaining affairs are managed by a Delaware company, Wilmington Trust.

Under the original Chapter 11 proceedings, the timetable for filing claims against old G.M. expired in 2011. But because the fatal defect in older prebankruptcy cars was not discovered until 2014, plaintiffs' lawyers have pushed to reopen the filing window. Until that issue is resolved, the trust agreed to hold off on settlement discussions.

Plaintiffs' attorneys say 400 to 500 people have prebankruptcy claims involving injuries or death. G.M. has suggested that many or perhaps most of those claims may not be valid, since it can be difficult to prove conclusively in court that an accident was caused by the ignition switch.

Some cases have been dismissed at trial because crashes were found have been related to other causes, such as impaired driving, or had other contributing factors.

The faulty ignition switch at the center of the case was used in the Chevrolet Cobalt and Saturn Ion compact cars that G.M. began making in 2002 and 2003.

G.M. engineers knew of the problems for years before the company issued limited recalls of affected models. The matter was obscured as G.M. went through bankruptcy in 2009.

In 2014, links between the switch and some fatal crashes became clear, and G.M. recalled 2.6 million vehicles. Eventually, G.M. paid $900 million to settle a federal criminal investigation and set aside $594.5 million for a fund to compensate victims of switch-related crashes.