NEW YORK -- In a blow to General Motors, a U.S. appeals court on Wednesday reversed part of a bankruptcy court ruling that protected the automaker from some lawsuits over an ignition-switch defect that prompted the recall of 2.6 million vehicles in 2014.
The 2nd U.S. Circuit Court of Appeals in Manhattan said barring plaintiffs from suing the automaker over crashes and lost vehicle value stemming from the faulty switch would violate their constitutional rights to due process, since they had not been notified of the defect prior to GM's 2009 bankruptcy.
The ruling effectively rebuffs GM's attempts to shield itself from hundreds of customer lawsuits over faulty ignition switches, and other vehicles components, on grounds that they were automatically barred by the company's 2009 bankruptcy sale to a new corporate entity.
"Due process applies even in a company's moment of crisis," the opinion stated.
The 2nd Circuit's decision affects injury and death cases stemming from pre-bankruptcy crashes, as well as claims for lost vehicle value. Plaintiffs had filed lawsuits over the ignition switch, as well as dozens of other parts in GM vehicles that were subject to recalls in 2014.
A lead lawyer for ignition switch plaintiffs, Robert Hilliard, said Wednesday's decision will give plaintiffs whose claims had been stayed by the bankruptcy order their day in court.
"The 2nd Circuit, in a sound and substantive way, called GM out for its cover-up, its lies and its attempts to use bankruptcy as a way to hide from the victims," Hilliard said.
GM spokesman James Cain said the company is reviewing the decision and its impact.
"The Second Circuit’s ruling neither addresses nor decides the merits of any claims," he said in an email statement. "Many of the claims we face have been brought on behalf of car owners who want to be compensated even though they have not suffered any loss."
Bankruptcy court ruling
The appeal stemmed from a 2015 decision from the judge who oversaw GM's 2009 bankruptcy, which created "New GM" to contain valuable assets while leaving behind most of its burdensome liabilities with "Old GM."
U.S. Bankruptcy Judge Robert Gerber, now retired, ruled in 2015 that New GM was shielded from liability over Old GM's pre-bankruptcy actions, but he allowed some "independent" claims based solely on New GM's conduct to proceed.
Some lawyers for GM customers argued that New GM should not be protected because it knowingly concealed the switch defect for more than a decade before it recalled the vehicles in 2014.
"Old GM -- if reasonably diligent -- surely should have known about the defect," the 2nd Circuit wrote.
GM has already paid $2 billion in criminal and civil penalties and settlements over the switch, which has been linked to 124 deaths and 275 injuries, according to a compensation fund set up by GM for claims involving the ignition switch.
The fund was administered by Washington lawyer Kenneth Feinberg, who has also administered claims funds for victims of the Sept. 11, 2001 attacks and the 2013 Boston Marathon bombings, among other prominent cases.
Cases involving injuries or deaths in post-bankruptcy crashes were not affected by the bankruptcy court order.