The nation's top court on Monday rejected a request from General Motors Co. to limit the fallout from its ignition-switch defect.
The U.S. Supreme Court denied the Detroit auto maker's request to review a lower-court ruling that gave some victims' families the power to sue over defective ignition switches, exposing the company to billions of dollars in potential new claims.
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GM had tried to overturn a July ruling from the Second U.S. Circuit Court of Appeals that said the auto maker should have disclosed the ignition-switch defect when its operations were sold during its 2009 bankruptcy. Under bankruptcy law, a company's operations can be sold "free and clear" of past liabilities, blocking future lawsuits over claims that arose before the sale.
The decision could expose GM to hundreds of additional wrongful death and personal injury cases.
The potential legal claims could total more than $10 billion, according to figures cited by several judges in court records, though the ultimate financial fallout could be far less if plaintiffs don't prevail in court or reach settlements. GM has already reached ignition-switch settlements with consumers, shareholders and federal prosecutors totaling more than $2 billion.
Those settlements included roughly $600 million from a compensation fund that GM set up for ignition-switch victims, which allowed some people with pre-bankruptcy claims to receive money. Still, the bankruptcy shield remained intact in other cases, blocking others from moving forward with lawsuits.
GM recalled 2.6 million older cars in 2014 with the defective switches, which can slip from the run position, cause vehicles to stall and disable safety features including air bags. The company acknowledged that employees knew of problems for more than a decade. The defect has been linked to 124 deaths and led GM to settle a federal criminal case.
In its request for Supreme Court review, GM lawyers said the lower-court ruling "threatens to undermine one of the largest bankruptcies in history."
The appeals court found that GM should have known of the ignition-switch defect -- or strongly suspected it -- at the time of its bankruptcy case and therefore should have disclosed it. Failing to do so violated consumer rights that are built into the chapter 11 bankruptcy process, the court said. GM "essentially asks that we reward [bankrupt companies] who conceal claims," the court said.
Without the Supreme Court's intervention, the lower court's ruling stands.
Gary Peller, a lawyer for the plaintiffs, said he was pleased with the Supreme Court decision, which he said "makes it clear that it's time for GM to take responsibility for wrongdoing."
GM spokesman Jim Cain said the Supreme Court's move "was not a decision on the merits" of the case and said plaintiffs will still have to win their individual lawsuits over the defect.
GM's bankruptcy was the fourth-largest case in U.S. history at the time and came a little more than a month after Chrysler filed for chapter 11 protection.
During the bankruptcy, the U.S. Treasury bought GM's financially strongest operations. The Obama administration later sold its shares, returning the company to private hands.
In court papers, GM lawyers called the ability to sell assets in bankruptcy "free and clear" of liability a "cornerstone provision...because purchasers would not buy the assets if doing so could expose them to the liabilities that put the seller into bankruptcy."
As a consumer protection, though, the law calls for the bankrupt company to reach out to people and businesses who may lose out on claims because of the sale. GM notified creditors of the sale, and the case was also publicized in more than 1,250 news stories, according to court papers.
GM officials promised to honor some warranties after the sale. Consumer advocates and state attorneys general protested the deal's "free and clear" provision, urging the buyer to take on all of its liabilities -- both known and unknown. A bankruptcy judge dismissed their objections.
Several bankruptcy experts said the Supreme Court's rejection is troubling for the uncertainty it casts over the bankruptcy sale process -- a popular tool used by major companies such as Eastman Kodak and TWA Airlines. Justices missed a chance to clarify the rules and ease the concerns of purchasers who take over bankrupt companies, they said.
"It's going to put a heavier burden on purchasers," said Debra Dandeneau, a Baker & McKenzie bankruptcy lawyer who isn't involved in the GM litigation.
Some business groups, including the National Association of Manufacturers, joined the auto maker in urging the Supreme Court to overturn the ruling, arguing that it is unfair to punish a buyer when the noticing process is the seller's responsibility.
The U.S. Chamber of Commerce, in a brief, said the lower-court ruling revived "the very type of abusive, lawyer-driven class actions of dubious merit that cause enormous harm to the business community."
Brent Kendall contributed to this article.
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(END) Dow Jones Newswires
April 24, 2017 14:56 ET (18:56 GMT)