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GM case illustrates limits of business bankruptcy protections

Earlier this month, dozens of claims tied to the recent General Motors defective ignition switch recall scandal were consolidated and sent before a federal court for matters of pretrial discovery. General Motors hopes that the process will continue to progress in such a way that federal courts will honor certain terms of the company’s business bankruptcy so that the company will not be held liable for harm done to certain plaintiffs currently pursuing action against it.

How can bankruptcy protections keep GM from liability for harm done in accidents tied to its defective ignition switches? When GM was restructured under business bankruptcy protections several years ago, a federal bankruptcy judge held that GM would be shielded from liability for harm caused by models manufactured before the company was restructured in bankruptcy.

Given that many of the models containing defective ignition switches were manufactured before the company’s bankruptcy, it is possible that GM will indeed continue to be shielded from liability tied to accidents involving these models.

However, it is important to note that because GM executives learned about this defect before the company’s bankruptcy and failed to act upon that knowledge that a federal judge could find a way to honor plaintiffs’ claims despite the company’s bankruptcy shield. If a judge finds that GM fraudulently concealed evidence or otherwise defrauded the public, it is possible that the bankruptcy shield may be circumvented. Bankruptcy protections can help businesses avoid certain liabilities but these protections are not necessarily unbreakable in cases of wrongdoing.

Source: HutchNews.com, “Lawyers: GM seeks bankruptcy shield from lawsuit,” June 12, 2014

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