By Nick Brown and Jessica Dye
NEW YORK (Reuters) - Five years ago, New York bankruptcy Judge Robert Gerber oversaw the historic bankruptcy of General Motors, establishing a new company that is shielded from liability for the actions of its precursor.
Now, with thousands of drivers suing "New GM" for the alleged loss of value in their cars after an ignition defect sparked a massive recall, the same judge must decide whether to lift the shield he put in place.
GM may have the upper hand when it meets for the first time Friday morning in Gerber's courtroom with the plaintiffs' lawyers leading the challenge. The company asked Gerber to enforce the so-called bankruptcy shield, in a pre-emptive move aimed at staving off dozens of lawsuits from customers who say they took a financial hit from the recall.
Most legal experts believe the shield is virtually iron-clad and that Gerber would be unlikely to undo a key part of the bankruptcy sale order he approved in 2009. But the high-stakes issue is not necessarily a slam dunk for GM.
While evidence has already emerged that at least some GM employees were aware of problems with the switch, GM is asking for a clear-cut ruling declaring that it did not intentionally hide anything from the bankruptcy court.
But plaintiffs' lawyers have prepared a multi-pronged attack, raising questions of bankruptcy law and constitutional rights.
Additionally, if plaintiffs can prove that the company knew about the switch problems during its bankruptcy proceedings but failed to notify customers or the court, they may be able to convince Gerber that the company committed fraud on the bankruptcy court. A win for them would mean they could proceed with their lawsuits against New GM.
A finding of fraud may not be enough for Gerber to undo the shield, since the bankruptcy code provides only a six-month window to unwind bankruptcy sales for fraud. However, he could find other ways to let the lawsuits proceed.
The bankruptcy court's role in exploring GM's conduct during the bankruptcy proceedings is unrelated to ongoing investigations by the U.S. Department of Justice and the National Highway Traffic Safety Administration, which are looking specifically at potential criminal or civil violations.
But federal officials may well take notice if Gerber identifies any misconduct on GM's part.
Moreover, even if Gerber upholds the shield, he could rebuke GM for any deception, adding to mounting pressure on the automaker to settle with the thousands of customers who claim the value of their vehicles has plummeted.
A review of Gerber's track record shows he's not above admonishing the company for actions he considers underhanded. In a 2012 trial stemming from the GM bankruptcy, for instance, he expressed "shock" at revelations that GM did not tell him about a $367 million payment to certain creditors.
THE SHIELD IS THE SWORD
When GM declared its roughly $91 billion bankruptcy in 2009, unwanted parts of its business, including environmental and other legal liabilities, were transferred to a shell now known as "Old GM". Profitable assets were purchased by "New GM."
New GM did agree to inherit some potential liability claims from Old GM, including those for injuries, property damage and wrongful deaths that occurred after the bankruptcy, even if they involved cars made before the bankruptcy.
But so-called economic damages, such as those related to loss of car value, were not expressly transferred, GM argued last week in court filings.
GM has excluded from its motion to enforce the shield any claims related to injuries, deaths or property damage linked to the switch. It has retained Kenneth Feinberg, the architect of high-profile compensation funds, to explore legal options for compensating those victims.
The company is now asking Gerber to declare that economic-damage claims belong with Old GM, whose cash is all but dried up.
"The plaintiffs do not have the choice of simply ignoring the court's sale order," Arthur Steinberg, a lawyer for GM, said in court papers in April.
Plaintiffs argue the shield should not be enforced because GM concealed the ignition defect. If plaintiffs were not aware of the extent of the switch problems when the court imposed the protective shield, they should not be restricted by it, they contend.
Jim Cain, a spokesman for GM, declined to comment on the Friday hearing, which is expected to be focused on procedural matters such as scheduling, but said in a statement that the company has acknowledged it has "civic and legal obligations relating to injuries that may relate to recalled vehicles."
WHAT WILL GERBER DO?
On Friday, all eyes will be on Judge Gerber - a 14-year veteran of the bench who is known as a thoughtful if occasionally ornery courtroom sheriff - for any hint about his leanings on the shield issue.
"I think we'll get an understanding of what it is Judge Gerber wants to do," said Mark Robinson, a lead lawyer for GM plaintiffs. "That's what everybody wants to know."
Gerber's record so far offers encouragement to both sides.
In 2012, a creditor trust sought to unwind the sale that brought GM out of bankruptcy, citing GM's alleged failure to disclose a $367 million payment to certain hedge fund creditors. This issue is reminiscent of current claims by plaintiffs' lawyers that GM hid key facts from the court.
In the 2012 matter, Gerber said the revelation "wasn't just a surprise, it was a shock."
"This matter is huge," he said at a hearing in July 2012, according to a transcript, "and if these things had been disclosed to me then I would have been as concerned about them then as I am now."
GM eventually settled the litigation for $50 million.
But on more straight-forward matters not involving allegations of fraud, Gerber enforced the shield.
In a case involving allegedly faulty rear-wheel spindle rods in 2007 and 2008 Chevrolet Impalas, Gerber said that while consumers could sue New GM to force it to honor repair obligations under Old GM's warranty, the bankruptcy prohibited them from seeking purely monetary damages.
GM also has another point in its favor. Court records show that Gerber was aware in 2009 that the bankruptcy would bar claims that were not yet known to their claimants - such as the ones now pursued by plaintiffs who argue they could not have known about their defective cars until after the bankruptcy.
In approving the bankruptcy terms, he wrote that established case law in New York holds that a court "should, and indeed must, rule that property can be sold free and clear of successor liability claims."
Such "free and clear" sales, in which buyers do not inherit liabilities of the sellers, are "old hat" in bankruptcy, Charles Tabb, a bankruptcy expert and professor at the University of Illinois College of Law, told Reuters.
FRAMING THE ARGUMENTS
Different plaintiff groups may try different tacks to get around the liability shield, and Friday's conference is a chance for Gerber to gauge the parties on what, exactly, they plan to allege.
Lawyer Ed Weisfelner, who represents a group of plaintiffs, said he plans to argue that it would be unconstitutional to apply the shield to their cases.
Wesifelner argues that the shield violates plaintiffs' due process. Having not known their cars were defective, he said, they could not have known they would have claims against GM, and therefore cannot be bound by a shield to which they were not properly notified.
That argument could appeal to Gerber. In his 2009 order approving GM's reorganization, he specified in a passage relating to asbestos claimants that the bankruptcy shield was enforceable only "to the fullest extent constitutionally permissible."
"The court is not of a mind to do anything that might be constitutionally suspect," Gerber wrote.
(Reporting by Jessica Dye and Nick Brown; Editing by Eric Effron and Ken Wills)