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U.S. bankruptcy judge urges settlement on GM ignition defects

UPDATED: 5/2/14 1:54 pm ET - adds judge's comments

NEW YORK -- A U.S. bankruptcy judge today urged settlement talks in a dispute between General Motors Co. and plaintiffs seeking compensation for the lost value of their cars stemming from a massive recall over a faulty ignition switch.

Judge Robert Gerber, of the U.S. Bankruptcy Court in Manhattan, said he would welcome the prospect of a resolution that avoided a "monstrous battle."

"Frankly, it would be great if whatever money is available for injured people could go to them, and not to litigation costs and attorneys' fees," Gerber said at a court conference with GM and the plaintiffs.

Gerber said he’s inclined to let a customer probe of the automaker’s handling of ignition-switch problems proceed on an “expedited basis.”

He convened a hearing in Manhattan to determine how to address GM’s request that he reaffirm rulings shielding the automaker from damages claims arising from defects in the switches, which spurred a recall of 2.59 million vehicles.

Under the plan approved by Gerber, the former General Motors Corp. channeled its burdensome liabilities into a shell known as "Old GM," while selling its profitable assets to "New GM," a separate corporate entity that took GM out of bankruptcy and now operates as General Motors Co.

Car owners are seeking to recover economic losses for the recalled cars and want a chance to investigate how GM handled the switch problem before and during its 2009 reorganization and government bailout. The dispute, which doesn’t affect accident claims, may hinge on whether GM was candid about the switch defects at the time of its bankruptcy.

The judge said his “tentative” views of how the case should proceed were based on only a partial reading of 3,500 pages that have been filed in the past 10 days. He said he has questions about what kind of economic-loss claims are being raised and how those may overlap with any claims GM already assumed under state lemon laws and “glove box warranties.”

The customers’ investigation would come alongside a probe led by former federal prosecutor Anton Valukas and paid for by GM.

Estimated claims

The car owners said they will focus on what GM, as it existed before and after reorganization, knew about the ignition switches and key systems of Chevrolet Cobalts and Saturn Ions and how they estimated potential claims from drivers injured because of the defects.

This process would be a step toward determining whether GM deceived the bankruptcy court about the defects during its reorganization, when Gerber freed the company from most pre-bankruptcy liabilities, leaving intact some warranty obligations and accident responsibility.

The car owners want to study what GM didn’t tell Gerber during the bankruptcy, to try to see whether the company defrauded the court and the U.S. government during the bailout. They argue that a fraud would negate Gerber’s rulings shielding the company from damages claims.

Gerber said today he may consider new arguments that he should revisit his 2009 order based on a lower threshold than fraud. In court papers filed Thursday, lawyers said they agreed that they’ll pursue an argument that car owners were denied “procedural due process” by being kept in the dark about the ignition flaws.

Whether GM committed fraud in hiding the ignition problems could be addressed after the due process question.

A group of customers has agreed to GM’s request that they temporarily stop suing until Gerber decides if their complaints are valid. The customers said that while they believe they have claims the judge would approve, they’ll refrain from asking him for confirmation until July 31.

A hearing is set for May 29 elsewhere on how to centralize the lawsuits. Gerber said he wouldn’t interfere with that process.

GM is facing 59 lawsuits by car owners demanding as much $10 billion in damages for recalled vehicles with faulty ignition switches, which can shut off engines while driving and prevent airbags from inflating.

GM could benefit strategically by taking the cases from federal district judges in California and Texas to a court with its own special rules, said Stephen Lubben, a bankruptcy law professor.

“The main advantage to GM is keeping the decision in a forum that understands bankruptcy,” said Lubben, who teaches at Seton Hall University School of Law in Newark, N.J. “Presumably most of the plaintiffs’ lawyers are not bankruptcy experts, and thus the change has them off balance.”

100 firms

The customers have had to find their own bankruptcy specialists. This week, about 100 law firms for GM car owners picked three to put their views to Gerber: Edward Weisfelner of Brown Rudnick LLP in New York; Sander Esserman of Stutzman, Bromberg, Esserman & Plifka in Dallas; and Elihu Inselbuch of Caplin & Drysdale in New York.

Most of the current lawsuits relate to loss of value on older cars. Economic losses range from a decline in a vehicle’s value to the loss of use or wages for time spent getting it repaired.

“New GM cannot be held liable for old GM’s alleged conduct,” the carmaker said in a filing.

To set aside a bankruptcy ruling, “you have to establish deliberate fraud and concealment,” said bankruptcy attorney Chip Bowles of Bingham Greenebaum Doll LLP in Louisville, Ky., who isn’t involved in the case.

Weisfelner, in his objection to GM’s request, asked Gerber to lift the bar on damages and other claims for customers, saying the automaker fraudulently hid from the judge its potential ignition-switch liabilities and unlawfully failed to keep car owners informed during the bankruptcy.

Gerber reaffirmed his rulings as recently as 2012, after telling lawyers for customers at an earlier hearing that their briefs were “badly mannered” and they should go to old GM to get their warranties honored.

Arthur Steinberg, a lawyer for GM, said he agreed that settlement talks could be productive eventually, but wanted to wait for recommendations from attorney Kenneth Feinberg, hired by GM to explore legal options for compensating victims of accidents stemming from the switch defect.

"We'd like to see what Mr. Feinberg will or won't do," Steinberg said. "Let's see where the legal issues lie."

Weisfelner today was hesitant to embrace settlement talks right away, citing disruption to Feinberg's study as well as the ongoing investigations into the switch defect by regulators and federal officials. "While we would rather mediate than litigate, I'm not sure the environment is such today that we're being presented with that choice," Weisfelner said.

'Nothing substantive'

“The court will not entertain repetitive comments,” the judge said in his April 22 order arranging today's meeting.

Judges in California and Texas have put the lawsuits on hold and GM wants customers to “voluntarily” refrain from acting while the bankruptcy court considers the matter. The bid for a voluntary stay led the automaker’s proposed agenda.

GM is also facing escalated repair costs and government probes that may end in fines. While trying to beat back lawsuits, the company has hired Kenneth Feinberg, a specialist in victim compensation, to advise on how to help people who had accidents in Chevrolet Cobalts and Saturn Ions. Thirteen deaths have been connected with the faulty switches.

The carmaker, led by CEO Mary Barra, has been dealing with a flood of litigation since shortly after the recalls began.

According to GM, the suits started in March, when a client of Texas lawyer Bob Hilliard demanded compensation for economic loss. Hilliard told Bloomberg News he wants as much as $10 billion so customers can buy new vehicles.

Wrongful death

Hilliard is also participating in what may have been the first wrongful-death suit since the recall, accusing GM of negligence in designing and making the switch. The case, in a Minneapolis court, focuses on two fatalities in a 2006 crash. Hilliard told Bloomberg that his clients are seeking $50 million to $100 million, plus punitive damages.

March also saw the first of two lawsuits drawing from attorney Lance Cooper’s depositions of GM engineers. According to the car owner, who paid $13,718 for a 2010 Cobalt that locked up without warning, GM hadn’t recalled enough model years and the repairs it planned wouldn’t solve the problem.

GM fraudulently concealed the defects for as long as 13 years in the case of the 2003 Saturn Ion, which stalled during testing in 2001, according to the suit Cooper filed in San Francisco. It described a GM engineer’s report to the company after a test drive of a 2005 Cobalt, saying the engine turned off and stalled when his knee bumped the key.

The automaker said its engineers’ “sure solution” of altering the ignition switch and key position was too expensive, according to the suit.

Reuters and Bloomberg contributed to this report.

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