Will Chapter 11 shield GM and Delphi from liability?

GM ignition recall may haunt Delphi

Will Chapter 11 shield GM and Delphi from liability?

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DETROIT -- A faulty part in as many as 1.6 million vehicles could ignite legal and financial calamity for Delphi Automotive plc if it is held responsible for the actions of its bankrupt predecessor.

The supplier of the defective ignition switch at the center of a massive recall, investigation and public shaming of General Motors Co. could face mounting scrutiny over the hot-button issue.

However, the unanswered questions in the inquiry has left legal experts unsure of Delphi's plight.

Delphi, as well as GM, is protected under Chapter 11 bankruptcy code from certain product liability obligations that occurred before they emerged from bankruptcy, but it still may not be able to avoid penalties, experts say.

Delphi declined to comment on the issue for this article.

The issue comes down to whether the product liability discharge for bankrupt Delphi Corp. is upheld in the face of civil suits and potential fraud under a criminal investigation.

"This is relatively unprecedented and will make for a great law school class," said Mark Aiello, partner at Foley & Lardner LLP in Detroit. "Forget about the complexity of a component that has failed. Now you have the complexity of federal investigations, bankruptcy, etc.

"A lot of facts that are going to come out; it's not as simple as it seems," Aiello said.

Chapter 11 protection?

Delphi, along with GM, has protection under Chapter 11 because the issues allegedly occurred before it emerged from bankruptcy on Oct. 6, 2009, but the laws are too ambiguous to predict what will occur, said Judith Elkin, partner at New York City law firm Haynes and Boone LLP.

"This case is interesting, and the laws have always been murky in product liability," Elkin said. "There's no question that Delphi will argue that they are free of any liability that happened before or during its bankruptcy proceeding, but that doesn't necessarily mean they are protected."

Elkin was involved in the 1990s bankruptcy of drywall manufacturer National Gypsum Co. and the subsequent asbestos liability litigation that ensued. She represented the entity that emerged from bankruptcy after a successor company acquired National Gypsum's assets.

Despite no definitive link to liability, the new Gypsum ended up paying into a trust fund in 2004 to settle the case, Elkin said.

"There was never a finding of successor liability or an acknowledgement of any liability," Elkin said. "It just came time to be done with the litigation and move on."

Elkin also represented Highland Capital Management LP in its unsuccessful bid to buy Delphi during its Chapter 11 case.

GM CEO Mary Barra said she would likely testify before Congress -- the hearing is set for April 1. It's unclear whether Delphi executives will be called to testify.

The crux of the issue for regulators and Congress will be timing. Did Delphi, or GM, commit fraud by not informing regulators of the ignition defect, which caused cars to shut off during operation? If so, regulators could make them pay.

Toyota Motor Corp. last week announced it would pay $1.2 billion to avoid criminal prosecution for hiding information during its rapid acceleration recalls.

Court decisions

The belief among attorneys is that if GM pays out, Delphi will follow suit, either in civil cases or after GM seeks a payout for the defective part Delphi supplied.

Civil plaintiff attorneys' first line of attack against GM is to ask U.S. Bankruptcy Judge Robert Gerber to lift the liability discharge for GM on the grounds that the automaker knowingly deceived the judge by not informing the court about the ignition defect.

A proposed class action was filed last week in a federal court in California asking a judge to permit plaintiffs to sue GM "because of the active concealment by Old GM and GM," Reuters reported.

The lawsuit alleges that pre-bankruptcy GM knew about the ignition problems as early as 2001, continued to use the defective part until 2007 and that post-bankruptcy GM continued to deceive the public, Reuters reported.

Delphi's bankruptcy could also be reopened if the company is found to have deceived its judge about the issue as well.

Elkin said that is unlikely to happen, but an appeals court could reopen the cases.

The issue could also play out in the state court system, said Richard Levin, partner at New York City law firm Cravath, Swaine & Moore LLP.

"When a claimant tries to pursue a liability claim, they do it in state court, not bankruptcy court," Levin said. "State courts haven't always been as friendly to the free and clear ruling of bankruptcy court."

Victim fund

In the meantime, Clarence Ditlow, executive director of the Washington, D.C.-based Center for Auto Safety, has asked GM to set up a fund to resolve claims over the ignition defect, according to Bloomberg News.

If GM pays any claimants, Delphi or its suppliers may come under target from the same claimants, said Tom Manganello, partner at Warner Norcross & Judd LP in Southfield.

In this scenario, GM would likely settle with claimants on the condition they agree not to sue any of GM's suppliers, including Delphi, Manganello said.

In turn, GM may seek to share the costs of the settlement with Delphi.

"GM's goal is to put this issue behind them, and the only way to do this via the settlement route would be to require all claimants to sign a waiver releasing GM and its entire supply chain," Manganello said.

You can reach Dustin Walsh at dwalsh@crain.com.


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