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What Happens If GM Goes Bankrupt?

Published February 13, 2008

UPDATE 5/24/13 - I was updating some old blog articles (fixing broken links, etc.) and noticed that this article sorely needed to be made current.  As most people are aware, GM filed for bankruptcy in the summer of 2009.  This article was actually originally published in February of 2008, so it was a bit ahead of its time.  As a matter of context, when this article was written, the idea of a GM bankruptcy was almost unthinkable.  I remember the key words "GM Bankruptcy" on Google would have this blog post on the first page for quite some time.  There just wasn't much speculation about this possibility, until it became an inevitability.

I'm actually quite proud of my predictions, as it basically played out how I expected.  All the cases were held up for a couple of months, a few checks bounced, but as I anticipated was possible, the courts imposed warranty liability on the new GM and Chrysler entities that were created to hold the 'good' assets.  So we did end up getting people Lemon Law relief notwithstanding the bankruptcy.  

Anyway, without further ado, the original article is below.

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General Motors recently disclosed that it lost a staggering 38.7 BILLION dollars in the past year. To put that in perspective, if you multiplied the amount of GM shares that exist by the current share price ($26.60), the result would be a market capitalization of only slightly more than 15 billion dollars. In other words, GM lost more than double what the market says its worth in ONE YEAR.

So here I am, representing consumers who are either suing GM, about to sue GM, or trying to get a settlement from GM, and from the looks of it, my good friend GM has a pretty decent shot of filing for BANKRUPTCY at some point.

This could be a Lemon Nightmare! (Cue the sour scary music).

Lets go off on a tangent for a minute. Many of you will remember a company called Daewoo that manufactured low end vehicles in the late 1990s. When they filed for bankruptcy, the court established a trust fund to pay for warranty repairs. As far as I can tell, there were never any issues with the funding of the trust fund. However, Daewoo vehicles still lost half their value. Why? Well first off, it became very difficult to find Daewoo parts. Then, Daewoo owners found that they could not obtain collision insurance because the difficulty in obtaining such parts made it impractical for insurers to pay for repairs. And in the period before creation of the trust fund, unsold Daewoo vehicles rusted on the dealership lots, as it was illegal to sell them in some states without a warranty.

SO, in the event of a GM bankruptcy, even if provisions were made by the court for payment of warranty claims, which isn't a given considering the cost of this liability, the value of the vehicles are likely to decline significantly. This would broadly effect a large segment of the US population. Essentially, a good many of us would be forced to write down the value of our second biggest asset.

But, you ask, this is a lemon law blog, right? How would a GM bankruptcy effect my lemon law case?

Now one thing I never wanted to be was a bankruptcy lawyer. I can't honestly say that I always dreamed of being a lemon lawyer, but one day it started to make sense... and I actually quite enjoy it. Bankruptcy, on the other hand, is the subject that I tended to snooze through in law school. HOWEVER, if there is one thing that even a daft lemon lawyer knows about bankruptcy, it's the concept of the automatic stay. The rule is pretty black and white. If a person or corporation files for bankruptcy, any lawsuits pending against the debtor is stayed pending a resolution of the underlying bankruptcy issues. So in the (hopefully) unlikely event that GM or another automobile manufacturer were to file for bankruptcy, any pending lemon law cases would be delayed indefinitely. Any cases that we were hoping to settle would likely be delayed as well.

Meanwhile, as these cases languish, the bankruptcy court would proceed to restructure the liabilities of the company or perhaps order its liquidation. Warranty rights of consumers could theoretically be discharged, but its more likely that the the court would create a Daewoo-like trust from the remaining assets of the corporation to cover warranty repairs going forward.

Whether or not such a trust would be sufficiently funded is a key question. Keep in mind, GM has been increasing the term of its warranty, perhaps in a desperation move to take in more revenue now at the expense of future costs. It would take a whole lot of money to cover warranty repairs on GM vehicles for upwards of the next 7 years. But let's assume that there are sufficient funds. That's the best case scenario. My GM cases are delayed for a few months to a year or so, but ultimately I can pursue them against a solvent trust, unless, of course, the bankruptcy court discharges any past warranty liabilities.

A worst case scenario is, indeed, a situation where those past warranty liabilities are discharged by the court, OR, where the trust is not sufficiently funded. This is where it gets tricky.

If you have ever financed a vehicle, take a look at the back of your finance agreement. In bold letters, you will find a paragraph that states:

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

This language is required to be in your retail installment contract, pursuant to a little known rule promulgated by the Federal Trade Commission (16 C.F.R. 433) called the FTC Rule on Preservation of Consumers Claims and Defenses, otherwise known as the Holder Rule. The rule puts lenders into the shoes of a seller of consumer goods in situations where consumers cannot sue the seller. 

In the unlikely scenario that my GM clients could not enforce their claims against a warranty trust, it would be the lenders who would take the hit. One has to wonder whether lenders take this risk into account when writing loans on GM vehicles. With all the talk lately of a credit crunch, this is one potential fly in the ointment that is routinely overlooked.


Eugene Krukas, Esq.

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Bellmore, NY 11710

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