Government Guarantee Of Warranties – A Lemon Law Perspective

With General Motors and Chrysler on the verge of bankruptcy, the Obama Administration applied some tough love today and declined to bail them out – for the time being.

GM was provided with 60 days of government financing for operating costs and Chrysler was offered up to $6 billion in financing if it comes to terms with Fiat, within 30 days, on a possible merger or sale.

Addressing the reasonable concern that these two companies might end up in bankruptcy court, which GM’s new CEO seems to acknowledge, the Administration announced that it would guarantee all warranties on new cars sold by GM and Chrysler during a restructuring period. The length of the restructuring period has not been clarified, so for all intents and purposes, it will last until the government says so.

Importantly, this guarantee of warranties does not apply to vehicles sold before March 30, 2009. I previously discussed what might happen in the event of a large manufacturer bankruptcy. Theoretically, if the manufacturer of your vehicle were to file for bankruptcy, your warranty could be voided. Realistically, it would be politically lethal for the Obama Administration to let that happen – and it won’t. My strong gut feeling is that even in a liquidation bankruptcy (restructuring is more likely), either a trust fund would be created by the bankruptcy court from remaining assets to cover warranty costs, or alternatively, Congress would draft legislation to cover consumer warranties of affected manufacturers.

From a Lemon Law perspective, it is unclear at this time whether the government guarantee on new sales extends to legal claims against the manufacturers for breach of warranty pursuant to state lemon laws and the Magnusson-Moss Warranty Act. It’s certainly possible that warranty repairs are ultimately covered, but breach of warranty claimants may stand on line with the rest of the manufacturers unsecured creditors in bankruptcy court. It’s even possible that warranty claims from before March 30, 2009 are stuck in bankruptcy court, and those after March 30, 2009 are covered, but if you have to litigate them you need to bring the case in the United States Court of Claims.