GM Bailout Claims the Legal Rights of Americans

Cobalt victims might not win compensation because of a liability shield

If you are own one of the 1.6 million vehicles General Motors has recalled since February with faulty ignitions and you or a loved one had an accident in the car, there's some more bad news. Your right to collect damages from GM has been signed away. If your accident happened in the years before the old GM's 2009 bankruptcy reorganization, the managers of the auto industry bailout gave immunity to the new GM that emerged.

The GM bailout, which ultimately cost U.S. taxpayers more than $10 billion, is the gift that keeps on giving to the auto giant. Unless courts overturn that immunity, many victims of GM's delayed response in recalling cars with faulty ignition switches will recover few damages.

GM knew there was a problem with the cars, now linked to at least 31 crashes and a dozen deaths, before the launch of the 2005 Chevy Cobalt. An accidental bump could push its key into the "accessory" or "off" position, shutting down the moving vehicle and preventing its air bag from deploying as it crashed.

But GM ignored the problem and put the Cobalt on the road — followed by six other models sharing a similar design — because of the "lead time, cost and effectiveness" involved in any redesign, according to a timeline GM submitted to the National Highway Transportation Safety Administration (NHTSA).

Within a year after Cobalt hit the road, field reports about crashes started surfacing. GM's legal department opened a file on a victim whose airbags failed to deploy in 2005, but it didn't inform GM's safety engineers or NHTSA until two years later. The file was opened four years before the bankruptcy reorganization.

One reason for the lapse is GM's disarray at the time. But another is that the 2000 Transportation Recall Enhancement, Accountability and Documentation Act created a perverse incentive for automakers to refrain from fully airing safety concerns internally — the exact opposite of its purpose. Once the matter reaches company higher-ups, NHTSA has to be informed within five days, inviting intrusive investigations. Hence, there was an unwritten code that evidence not be moved up the chain of command until necessary.

Owners of the recalled cars, along with the families of two teenagers killed in a 2006 Cobalt crash in Wisconsin, filed a class-action lawsuit last week seeking $6 billion to $10 billion in damages for GM's alleged negligence. But GM enjoys legal immunity from all incidents before its 2009 restructuring.

A liability shield isn't unusual in bankruptcy cases, notes George Mason University's Todd Zywicki, but what is unusual is that GM and Chrysler, which also filed for bankruptcy protection, weren't required to put money in special trust funds for prospective victims. (Chrysler's shield extends to post-bankrutpcy incidents involving cars already on the road at the time of the restructuring, a deal that GM wanted but was denied.) Instead, the corporate giants can treat injured customers as shabbily as unsecured creditors. What little compensation that is available will come from the sale of closed GM plants being held in a shell corporation.

The only way victims can get adequate compensation is by suing the restructured GM, but that would require proving that the company knowingly withheld information to obtain its shield. That is why the Congressional investigations are of vital importance to the victims.

However, what is now mostly a legal and regulatory story could explode into politics if it turns out during the investigations that GM disclosed the potential liability to Treasury officials and still received a shield. If NHTSA knew about the problems, why didn't Treasury?

Car owners aren't the only ones hurt by the bailout deal. GM's competitors are being harmed, too.

For example, notes Center for Automotive Research's Sean McAlinden, the shield gives GM an unfair competitive advantage. GM saves close to $300 million in annual product-liability claims because it is on the hook for a fewer of them. And this is on top of the lower debt-service costs and special post-bankruptcy tax write-offs that GM received through the bailout that its competitors don't.

GM CEO Mary Barra announced that she's setting aside $300 million to pay for fixes for various recalls. In addition, GM could have to pay a $35 million civil fine for its delay in revealing problems with the Cobalt.

That's a pittance compared with what the company stands to lose if courts overturn its liability shield. From the standpoint of GM's customers and competitors, the bailout isn't a success; it's a travesty.

A version of this column originally appreared in USA Today

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  • Mickey Rat||

    Once the government determines you are too big to fail, the rights everyone who does business with that organization is secondary to keeping that organization alive. On the other hand, why would you buy product or be a vendor to that organization as they can duck their responsibilities?

  • Brandon||

    No, and neither will a lot of people. Which is why GM will be getting bailed out again in a few years, and they won't be liable for the current defective vehicles they are making, either. So if you bought a Volt, you may want to double up on the homeowner's insurance.

  • steve sturm||

    You're overstating the benefits of the bailout relative to what would have happened in a regular bankruptcy. Where would the money for the future victims have come from? GM didn't have any money to put into a fund to cover future claimants (they didn't have money for much of anything). In fact, since the 'value' of GM was less than GM's secured debt, evidenced by the haircut they took, there wouldn't have been any money coming from whomever purchased GM's assets out of bankruptcy. And bankruptcy law doesn't allow future claimants (especially for unknown and unpredictable events) to claim a share of the new company.

    It's one thing to dislike the bailouts, as I do. It's another things to blame them for things that would have happened anyway.

  • creech||

    Having been involved in a few acquisitions, I must say the acquirer frequently takes on product liability for previously produced products just to guard the goodwill of the brand and protect one's installed base from competitors and to secure the repair parts market.

  • Ron||

    Valid point, thanks

  • R C Dean||

    Its not entirely clear to me that a non-politicized bankruptcy would have discharged these kinds of debts. Some tort liability claims tend to be discharged, and some don't. I'm no bankruptcy lawyer (I'm more in the bankrupting biz than the reorg biz), but I wouldn't assume that these folks would have been left totally out in the cold.

  • BuSab Agent||

    No I don't think they would. See the toxic nightmares for companies that is Asbestos litigation, where a company that bought a bankrupt company that bought a bankrupt company that had a division that once made an asbestos product still has to pay out.

  • Brandon||

    Market failure. Evil corporations. Needs more government.

    -Saving Tony from having to post.

  • ||

    Because those in government are motivated to do good for only teh peoplez! Self interest just doesn't exist in the transparent and profit less public sector.

  • C. S. P. Schofield||

    Tony's need to post has nothing to do with actually making any argument. It's a matter of his compulsion to make an annoying fool of himself; sort of a Jerry Lewis syndrome, only minus any talent. Competent therapeutic care and medication (say 396 mg. of cyanide, taken internally) would put an end to it.

  • The Late P Brooks||

    What are the chances Treasury suddenly decided to dump their GM shares early based on knowledge of this impending disaster?

    I'm sure the SEC will be poring over copies of all internal communications.

  • Pathogen||

    That sort of talk is.. seditious. Why do you hate America?

  • Almanian!||

    Why does the Southeast Conference always get involved with teh money issues? Big 10 not good enough?

    /March Mad Hatter

  • Cdr Lytton||

    Only if they beat the SEC staffers to the sell window.

  • Ken Shultz||

    The UAW is a cancerous tumor.

  • The Late P Brooks||

    But GM ignored the problem and put the Cobalt on the road

    In 2005 (I think), I rented a brand new Chevrolet Cruze, and drove it about 3500 miles. Based on that experience, I don't think those morons ever do any product testing whatsoever. They just shove horrible shitboxes out the door, and tell the dealers to figure out how to unload the damn things.

    What a piece of shit. After that experience, I vowed never to own another GM car. The bailout was just the cherry on a shit sundae.

  • Andrew S.||

    For most of the mid-to-late 00's, every time I'd rent a car it seemed it would end up being a HHR. It's certainly the worst car I've ever driven, and seen. Both visually and the way it drives. Ugh.

  • EDG reppin' LBC||

    shitboxes
    What a piece of shit.
    shit sundae.

    "Fuck off, Lahey!"

    /Ricky

  • gimmeasammich||

    +1 Shit hawk

  • Ken Shultz||

    Shit moths, Randy.

    https://www.youtube.com/watch?v=OEvjV1jtvl4

    Honestly, that "I am the liquor" speech is one of the best things I've ever seen on television.

  • ||

    Okay, but what does this have to do about immigration?

  • R C Dean||

    I'm sure some of those who were robbed were illegal immigrants.

    But really, its the gay couples who bought Cobalts that we're worried about.

  • Yegg Central||

    Protection for GM's faulty designs, but a $1.2B settlement against Toyota for something that turned out to be mostly driver error. The free market at work!

  • Ken Shultz||

    There isn't anything free market about that.

  • Almanian!||

    Then, Market Faylyoor!

  • RJ The Terrible||

    The tragedy of the GM bailout was the overturning of 230+ years of contract law. The bond holders got screwed. The bond holders were first in line to be paid at the bankruptcy. Who in their right mind is going to by bonds now? Oh wait never mind. As a nation we are that stupid.

    The unions where given the corporation? Why?

    Look at what the Unions did, everyone who has been hired since the bailout gets paid about 2/3rds of what the they would have been paid prior to the bailout. The difference is that the evil stock holder's not the saintly union thugs were running the show.

    This was theft. This was the plundering of an industry to payback a favored political allies. This was lawlessness. Why is no one going to jail?

  • Ken Shultz||

    "The unions where given the corporation? Why?"

    It all came out of TARP funds, too.

    Obama decided that since GMAC was part of GM, GM's auto finance arm, then GM qualified for TARP bailout money as a financial institution.

    It was just Barack Obama paying off his cronies...

    It's probably not fair to call the UAW "Obama's cronies" because that would imply that the UAW was working for Obama, when it's really the other way around.

    If you look at the free trade agreements Obama made with South Korea and Colombia, they were both rewritten so as to be acceptable to the UAW. The UAW isn't working for Obama; Obama is working for them.

    And since Obama financed them out of your future paychecks, you're working for the UAW, too! How's it feel?

    We're all in this thing together.

  • RJ The Terrible||

    "And since Obama financed them out of your future paychecks, you're working for the UAW, too! How's it feel?"
    Like it should. Being raped is no fun at all.

  • Free Society||

    FDR is still fucking up the economy. Best prezident eva

  • C. S. P. Schofield||

    "The unions where given the corporation? Why?"

    Because they deserved it. Sadly, we probably won't follow up on that inspired idea by allowing them to sink slowly into the mire with GM tied around their collective-barganing neck like a dead albatross.

  • Rhywun||

    Why is no one going to jail?

    "That's a nice presidency you've got there. Shame if anything happened to it."

  • I. B. McGinty||

    "An accidental bump could push its key into the "accessory" or "off" position, shutting down the moving vehicle and preventing its air bag from deploying as it crashed."

    GM recommends restarting the vehicle prior to crashing as a fix.

  • Free Society||

    When people say "Buy American" what they're really saying is "financially support government protected unions and corporations or you're a traitor."

    I think it would be more patriotic to buy some SE Asian rice burner of a car.

  • C. S. P. Schofield||

    I will buy American when it supports an American craftsman, mechanic, or engineer. I do. When it's a choice between fat, self-satisfied Union drones and exploited Third-World brown people, I'll go to the Third World, because historically demand for manufactured goods made factory workers important enough to the wealthy that their treatment improved. When they get enough ahead, they'll start demanding more, organize Unions, and drive the work to other places …. that need the opportunity to get out of the cycle of growing too little food, with stoop labor and human excrement.

  • ChrisO||

    My Toyota Camry is more American-made than most GM or Ford products these days.

  • ChrisO||

    Anyone who has bought a GM car since about 1980 has clearly not been doing so based on sound judgment. My 1977 Buick LeSabre was a truly grand Land Yacht, but it wasn't long afterwards that the company lost the plot with crap like the X-Cars and the V8-6-4 engine (remember those?).

    Despite that, I'm a little dubious on this whole "deaths caused by the faulty ignition" thing. Sounds suspiciously trial lawyer-ish to me.

    A battle between the tort lawyers and the UAW could be entertaining, on the other hand...

  • iEagleHammer||

    You can still control a car without the engine running, but it takes much more physical force and may catch you off guard. That could cause a crash, and if your airbags don't deploy...

  • poppavein||

    Yeah, but without the bailout there would have been thousands of Democrat voters out of work.

  • RJ The Terrible||

    You mean the f-wads on wall street? We have regressed back to Mercantilism. The oligarhy and the crown get to pick the winnahs. The rest of us get bent over a box and raped. No reach around either.

  • DH||

    http://m.youtube.com/watch?v=VdyKAIhLdNs

    This article reminded me of this.

  • Byte Me||

    Your right to collect damages from GM has been signed away. If your accident happened in the years before the old GM's 2009 bankruptcy reorganization, the managers of the auto industry bailout gave immunity to the new GM that emerged.

    Didn't the USG fine Toyota $1.5 billion after finding no credible technological malfunction in their systems that could be linked to the crashing incidents that occurred with their cars? I guess it pays to be Government Motors.

  • iEagleHammer||

    This is precisely why I'll never buy another GM vehicle again. I've had 2 chevys, decent cars too. But never again... Fuck em.

    Buy a Ford and encourage anyone you know that's buying a car to do the same.

  • iEagleHammer||

    I should have included Chrysler in that too, but no one buys those anyway.

  • Curtisls87||

    Funny thing, since Fiat invested, Chrysler quality, volume and profits are all up.

  • iEagleHammer||

    "since Fiat invested, Chrysler quality, volume and profits are all up."

    Well, it couldn't have gotten any worse...

  • steve baker||

    Quality goes with Fiat like Gloves go with Fish.

  • seguin||

    I honestly don't get the hate for GM products. Their corporate culture and union BS? Yeah. My girlfriend drives a cobalt XFE atm, and it's a perfectly serviceable, reliable automobile. It has started squeaking a bit near the passenger A-pillar, but that's about it. The interior doesn't feel any more cheap than, say, my sister-in-law's Infiniti G35, and it gets great gas mileage. My dad's business's HHR SS is one of the most useful AND fun to drive front-wheel drive vehicle I've ever driven - it can haul a palette's worth of LS heads and still snap your head back - it handles pretty well for such a little piggy too - not as well as a Mini, but those things are unreliable as heck (otherwise he'd probably have a Clubman instead).

    That being said, I personally don't buy anything newer than, oh, say, 1995 - the part of my personal fleet that runs consists of a Merkur XR4Ti, a Maserati 430, and a Honda CB900F2, so YMMV.

  • iEagleHammer||

    You, sir, have awesome taste. I don't get the hate for GM products themselves either. But I still strongly dislike the company itself.

    How's that Merkur treatin ya? Isn't that the one that's basically an SVO foxbody?

  • Christophe||

  • tripnjive||

    Please correct the first sentence to read "If you own one of.."
    It currently says, "If you are own one of..."

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