Shop foreman John Chapman performs a service recall on a General Motors Co. (GM) 2005 Saturn Ion at Liberty Chevrolet in New Hudson, Michigan, U.S. (Photographer: Jeff Kowalsky/Bloomberg)

GM at Risk of Billions in Ignition Claims After Court Rebuff

(Bloomberg) -- The U.S. Supreme Court cleared the way for General Motors Co. to potentially face billions of dollars in legal claims over a deadly ignition-switch defect, turning away the carmaker’s appeal in a clash connected to its 2009 bankruptcy sale.

The justices, without comment, left intact a federal appeals court ruling that said the bankruptcy accord didn’t block GM from lawsuits over accidents that happened before the sale or claims that the flaw caused vehicles to lose value. Plaintiffs’ lawyers have estimated that claims against the company may total as much as $10 billion.

The Supreme Court’s action is a setback for GM Chief Executive Officer Mary Barra, whose first year in the job was consumed by the ignition flaw linked to at least 124 deaths and recalls of 2.59 million vehicles. The Supreme Court’s decision creates a small risk that GM will have to reach a legal settlement that could interfere with paying out its dividend or buying back stock, said David Whiston, a Morningstar Inc. analyst.

“The market would not like that at all, but I think that’s a very small risk,” Whiston said by phone. “I’d rather they settle this sooner, just to get the overhang off the stock.”

GM rose 0.4 percent to $33.90 as of 3:32 p.m. in New York trading as the benchmark S&P 500 Index climbed 1.1 percent. The Detroit-based company’s shares have dropped 3.5 percent this year.

‘Free and Clear’

The largest U.S. automaker had pointed to a federal bankruptcy law provision that lets a purchaser acquire a debtor’s assets “free and clear” of any liability. The appeals court said the provision doesn’t shield GM, because the company knew about the flaw before the bankruptcy and should have directly notified each affected customer.

Barring the suits would violate the Constitution’s due process clause, the court said.

“New GM essentially asks that we reward debtors who conceal claims against potential creditors,” the appeals court said.

The July 2016 ruling also revived suits by post-sale car buyers who say they wouldn’t have made the purchase had they known about the switch flaw.

In its appeal, GM argued the ruling “will undermine a crucial aspect of one of the biggest and most important bankruptcies in history.”

The court’s action Monday “doesn’t change the landscape much in terms of the GM litigation,” Jim Cain, a company spokesman, said in an emailed statement. Those who sued still must show they have the right to raise their claims and “still have to prove those claims have merit,” he said.

Can’t Hide

Robert Hilliard, the lead lawyer for those who sued, said GM “can hide no more” from the claims.

“These cases are factually some of the most tragic stories, and also some of the strongest in terms of clear liability of GM’s intentional misconduct,” he said in an emailed statement. “Each case will soon be sent back to its local venue and each one will be tried to a verdict.”

GM’s experience so far has been that many of the ignition claims don’t have merit, according to Cain, the company spokesman. The carmaker also has disputed the plaintiffs lawyers’ estimate that it faces as much as $10 billion in liabilities.

The plaintiffs have said GM moved too slowly to recall vehicles in which jostled keys could trigger a shut-off and disable steering, brakes and air bags. While GM has said top executives didn’t know the ignition switch was a persistent problem, the company admitted in a Justice Department settlement that it knew about the defect by 2005 and concealed it from regulators from 2012 to 2014.

Barra set up a compensation fund led by Kenneth Feinberg to deal with litigation related to the ignition switches in 2014. By late 2015, Feinberg concluded 124 people died and another 275 more suffered injuries warranting compensation. GM paid out on less than 10 percent of 4,343 claims submitted for a total of $594 million in settlements.

The case is General Motors v. Elliott, 16-764.