General Motors and the Obama administration have reached a deal for the carmaker to assume responsibility for product liability claims filed after it emerges from bankruptcy as a new company, even those claims involving vehicles made by the old company, according to documents filed in bankruptcy court late Friday.
The deal resolves a problem that could have upended GM’s plan for a quick restructuring.
GM and the administration’s auto task force have been negotiating with more than a dozen state attorneys general who have objected to the company’s plan to sell its desirable assets to a new, government-financed entity. A hearing to approve the plan is scheduled Tuesday in federal bankruptcy court in Manhattan.
The chief concern for GM and the government is whether customers who have claims about existing products but have not yet filed lawsuits can sue the company in state courts. Because bankruptcy case law is murky on the matter, GM and the auto task force chose to assume the liability instead of risking a delay of the company’s emergence from bankruptcy.
The negotiations were initially reported by The Wall Street Journal and The Washington Post.
Other legal responsibility, including previously filed product liability claims and the closures of GM dealers, are likely to remain tied to the GM entity that will be left behind in the bankruptcy.
Courts typically allow companies under bankruptcy protection to leave claims behind in bankruptcy and emerge with a clean slate, a precedent GM and the government are relying upon.
Chrysler, for example, which completed its own government-backed restructuring this month, left both product liability claims and unwanted dealers with its old estate, now known as Old CarCo. Claims left behind in bankruptcy generally have only a slim chance of being paid.
“While the sacrifices being made in this process — by workers, retirees, creditors, dealers, suppliers, communities and individuals injured by GM products — are painful, there is nothing exceptional about these bankruptcy terms,” said an administration official, who requested anonymity amid ongoing talks.
But GM raises questions because of its much larger size. Last year, GM set aside more than $900 million for product liability litigation.
An ad hoc committee of consumer complainants, which says it represents $1.25 billion in personal injury claims, has objected to GM’s plan.
Auto dealers, too, have complained that GM and the administration are improperly trying to use the federal bankruptcy code to overrule state laws meant to protect car dealerships.