Products Liability Law Daily New GM gets another chance to litigate issue of Old GM’s knowledge of ignition switch defect
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Thursday, August 25, 2016

New GM gets another chance to litigate issue of Old GM’s knowledge of ignition switch defect

By Pamela C. Maloney, J.D.

Despite a recent opinion factual finding by the U.S. Court of Appeals for the Second Circuit that General Motors knew or should have known of defects in ignition switches installed on vehicles prior to its 2009 bankruptcy filing, the collateral estoppel doctrine did not preclude New GM from re-litigating this issue in the bellwether trial scheduled to begin in September 2016, the judge overseeing the multidistrict litigation pending in a federal district court in New York ruled (In re: General Motors LLC Ignition Switch Litigation, August 24, 2016, Furman, J.).

After GM filed for Chapter 11 bankruptcy in June 2009, the company used Bankruptcy Code Sec. 363 to sell its assets "free and clear" of Old GM’s liabilities to a new entity, New GM, thereby avoiding a protracted traditional bankruptcy reorganization. The "free and clear" provision contained in the bankruptcy court’s sale order barred all successor liability claims against New GM except for those liabilities the new entity contractually assumed. After New GM announced in March 2014 that it would begin recalling vehicles due to ignition switch defects, a number of class actions were filed against it; these actions were consolidated as part of the MDL. New GM filed a motion to enforce the sale order, asserting that most of the claims in the various class actions were prohibited by the "free and clear" provision. In response to New GM’s motion, the bankruptcy court determined, among other findings, that the ignition switch defects were either known to or reasonably ascertainable by Old GM prior to approval of the sale order and that New GM could not be sued for ignition switch defect claims that otherwise could have been brought against Old GM (see Products Liability Daily’s April 16, 2015 analysis).

On direct appeal, the Second Circuit found that based on the evidence, there was no clear error in the bankruptcy court’s finding that Old GM knew, or should have known, about problems associated with its ignition switch from the time of its development (see Products Liability Daily’s July 14, 2016 analysis). In anticipation of the start of the next bellwether trial, the plaintiff moved to apply collateral estoppel against New GM on the basis of the Second Circuit’s decision, asking the MDL court to preclude New GM from re-litigating whether Old GM knew or should have known of the ignition switch defect by May 2009.

Collateral estoppel. Initially, the court determined that the bellwether plaintiff’s request to apply collateral estoppel arguably was not ripe because New GM’s petition for a panel rehearing of the Second Circuit’s en banc decision was still pending. However, even if the issue were ripe, collateral estoppel was not warranted in this case because the Second Circuit merely found no clear error in the bankruptcy court’s finding that Old GM knew or should have known about the defect. The deferential review afforded by the appellate court to the bankruptcy court’s finding, standing alone, provided no basis for relieving the MDL plaintiffs from proving by a preponderance of the evidence that Old GM knew or should have known of the defect in May 2009, prior to its bankruptcy filing.

The court also found no reason to give preclusive effect to the bankruptcy court’s factual findings on this issue because those findings were limited to its resolution of four threshold issues and specifically were given no force or applicability in any other legal proceedings. In addition, in order to expedite the bankruptcy court’s decision, the parties had agreed on stipulated facts that were pulled together very quickly and were subject to each party’s right to contest those facts. The absence of facts obtained through full scale discovery and evidence of the clear intention by the parties that the litigation of the factual issues would not be foreclosed in future litigation mitigated against a finding of preclusion.

The cases are Nos. 14-MD-2543 (JMF) and 14-MC-2543 (JMF).

Attorneys: Robert Hilliard (Hilliard Munoz Gonzales LLP) for Joseph Fleck and Stephanie Cockram. Adam Laird Anthony (Hartline Dacus Barger Dreyer) and Andrew Baker Bloomer (Kirkland & Ellis LLP) for General Motors, LLC.

Companies: General Motors, LLC

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