GM Bailout Claims the Legal Rights of Americans

Cobalt victims might not win compensation because of a liability shield


If you own one of the 1.6 million vehicles that 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