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GM Judge Says Concealing Switch Defect Would Have Been Fraud

DETROIT -- General Motors Co. customers who sued the automaker over fallen car prices might have a stronger case if they could prove company executives defrauded the court about a faulty ignition switch when testifying during its 2009 bankruptcy, a judge said.

If then-Chief Executive Officer Fritz Henderson “knew about the switch problem and intended to keep it from me, that might constitute fraud on the court,” U.S. Bankruptcy Judge Robert Gerber said at a hearing today in Manhattan.

Such deception would be a worse offense than the one customers’ lawyers propose to fight on, which is that GM didn’t give the car owners a say in court during the company’s restructuring, the judge said.

The stakes are high for how the case proceeds. Customers injured in car accidents tied to the initial 2.59 million vehicles recalled for switch repairs might be paid about $3 billion, a Barclays analyst estimated in March. By contrast, one lawyer with a car-price suit has demanded as much as $10 billion for car owners who weren’t injured except for having almost unsaleable Cobalts and Ions.

In the same court where the U.S. financed the automaker’s turnaround in 2009, Gerber today met with lawyers bringing about 90 lawsuits on behalf of GM customers. Gerber’s task is to decide whether to allow them to proceed with cases that he’s halted until at least Sept. 1, or to bar the largest claims.

GM Timetable

Customers might have to wait longer than anticipated for the judge’s answer. Under a timetable proposed by GM, Gerber wouldn’t hold another hearing until Sept. 15 or later. The judge also is demanding much more work from lawyers than they expected, including the filing of papers on what constitutes an effort to deceive a judge and sway his rulings, he told them.

“I need the ability to do my job and I want to look at the issues,” Gerber said.

Proving so called fraud on the court by GM may be the only way for customers to persuade the judge that the carmaker should be forced to pay billions of dollars in damages because of lower car prices since the recall, according to Chip Bowles, a bankruptcy attorney at Bingham Greenebaum Doll LLP who isn’t involved in the case.

Gerber’s Hypothesis

Gerber didn’t accuse anyone at GM of deliberately deceiving him about defective switches that spurred the initial recall. He said he was offering a “hypothesis” to illustrate how customers might win the right to demand damages from GM for economic losses on their recalled cars, even though he freed the company from such liability five years ago.

Lawyers for the car owners say Gerber’s 2009 ruling that bars their lawsuits doesn’t apply to them because GM knew about the defect and didn’t tell customers at the time of the bankruptcy.

Greg Martin, a spokesman for Detroit-based automaker, said an internal probe by outside lawyer Anton Valukas found that none of the most-senior executives knew about the faulty switch.

In the 2009 reorganization, Gerber freed GM from most liabilities tied to its bankrupt predecessor’s cars, leaving intact only some warranty obligations and responsibility for post-2009 accidents. Property damages on old GM cars, and any punitive damages related to them, were disavowed by new GM with Gerber’s approval.

GM, which has recalled 25.7 million cars in the U.S. this year, has said that the Treasury’s price for saving the company was that it leave behind as many liabilities as possible.

Lawsuit Halted

Halting one lawsuit today by customers who didn’t want to stop suing, Gerber affirmed previous rulings that allowed the sale of new GM stock to the U.S.

“The sale order may turn out to self-destruct but for now it’s in place for your clients,” he told the customers’ lawyer.

The lawyer argued that the customers own a car made after GM came out of bankruptcy, so their suit isn’t affected by Gerber’s past rulings.

There are no new cars with defective ignition switches among the 2.59 million vehicles called in, because GM hasn’t made any of the defective parts since the bankruptcy, a lawyer for GM countered.

The lawyer, Arthur Steinberg, cited GM’s recall of 2010 Chevy Cobalts, saying the automaker called in the cars because some had been repaired with the old, defective switches. Under Gerber’s ruling, the customers would have to ask old GM for money.

Expanded Recalls

Since the first switch-related recalls, GM has called back millions of other cars, saying their ignitions could also slip out of the “run” position.

After Gerber’s last court session on GM in May, GM moved about 90 car-price lawsuits to Chicago, where judges bundled them and sent them to another federal court in Manhattan. The judge in that court has chosen three lawyers who handled car- value suits against Toyota Motor Corp. to represent GM customers, although Gerber hasn’t said yet if they can mount a group lawsuit against the company.

He said today he wants to keep the “train moving” so the judge doesn’t have to wait too long.

The bankruptcy is In re Motors Liquidation Co., 09- bk-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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