Bankruptcy Judge Rules Against Settlement Triggering GM Payout -- Update

General Motors Co. avoided a potential $1 billion-plus stock payout to address claims stemming from the auto giant's ignition-switch crisis after a judge found a settlement between plaintiffs and a trust for the company's bankruptcy estate unenforceable.

U.S. Bankruptcy Judge Martin Glenn on Thursday ruled that an August deal reached between ignition-switch plaintiffs and a trust tasked with compensating creditors of so-called Old GM couldn't go forward because the settlement lacked necessary signatures. Old GM is the term often used to describe the assets GM left behind in 2009 as part of its $50 billion government rescue and bankruptcy restructuring.

The ruling effectively allowed GM to avoid the consequences of the deal, which had contemplated forcing the auto maker to pay the Old GM trust roughly $1 billion in stock to address claims from car-accident victims and customers seeking recompense for declining vehicle values arising from faulty ignition switches.

GM in 2014 recalled roughly 2.6 million older cars with the switches, which can slip from the run position and lead to stalled engines and disabled air bags in crashes. GM suffered criminal charges for mishandling the defect, now linked to 124 deaths. The Detroit auto maker has paid legal settlements totaling more than $2 billion after conceding it failed for more than a decade to recall vehicles with the part despite internal evidence of a safety problem.

In the current legal skirmish, the Old GM trust backed out of a settlement with plaintiffs and reached a separate deal with what's often called New GM, the auto maker currently operating after emerging from bankruptcy proceedings in 2009. Under terms of the latter deal, GM would avoid paying the $1 billion in stock and instead pay the trust's legal expenses for addressing ignition-switch claims.

The plaintiffs argued that the trust had finalized a settlement with them, preventing it from negotiating the separate agreement with GM. The trust's lawyers said they hadn't signed the first deal, freeing them to negotiate another with GM.

Judge Glenn sided with the trust, finding the settlement couldn't be enforced through oral agreements and lacked necessary signatures. But he chided the trust's lawyers for "last-minute infidelity" and "pulling the rug out from" plaintiffs' lawyers even after negotiating 21 drafts of the settlement and all parties having essentially agreed to terms.

The trust's "dishonesty -- or bad faith -- is not lost on this court," the judge wrote. "Regrettably, the court is unaware of any contract principle that would nevertheless enable the court to enforce an unsigned written agreement absent a finding that the parties intended to be bound orally."

A lawyer for the trust didn't immediately respond to a request for comment. GM declined to comment.

"We are of course disappointed in the result but are thankful that the court reviewed the issue so carefully and is committed to quickly resolving late claims motions," said Steve Berman, a partner at Hagens Berman Sobol Shapiro LLP representing plaintiffs.

Under terms of the now-scuttled settlement, the trust would have accepted claims from plaintiffs exceeding an estimated $10 billion, triggering a requirement for GM to pay the trust in shares valued at roughly $1 billion.

The trigger stems from a complex feature in a bankruptcy sale that sent assets to a government-owned company to create the current, revitalized New GM. Its less-desirable parts were discarded in bankruptcy court.

The additional ignition-switch claims arose from other legal battles spanning multiple federal courts. When the ignition-switch crisis emerged in early 2014, GM asserted a legal shield that blocked consumers from pursuing claims that predated the company's July 2009 court-approved bankruptcy sale.

A federal appeals court later undid that legal shield, opening the door for additional claims. GM had waived the shield for ignition-switch victims seeking money from a compensation fund the auto maker established that eventually paid out about $600 million. But other claimants remain who didn't seek money from that fund.

Judge Glenn hinted that his ruling might spark yet further litigation, noting that whether plaintiffs "have any other remedies" against the trust or GM wasn't currently before him to determine.

Write to Mike Spector at

Corrections & Amplifications

This item was corrected at 5:17 p.m. ET. The original misstated the name of Hagens Berman Sobol Shapiro LLP as Hagens Berman Sobol Shapiro LPP.

"Bankruptcy Judge Rules Against Settlement Triggering GM Payout -- Update," at 3:43 p.m. ET, incorrectly stated the name of Hagens Berman Sobol Shapiro LLP in the 10th paragraph. (January 18)

(END) Dow Jones Newswires

January 18, 2018 17:31 ET (22:31 GMT)