A Costly Omission during 2009 GM Reorganization
Six years ago as the nation struggled under the heavy weight of recession, GM turned to the federal government for a bailout loan (actually, GM execs flew their private luxury corporate jet to D.C.), the only palatable alternative to bankruptcy and closing its doors. Congress vigorously debated the pros and cons, but eventually the Senate voted against a bailout.
Soon thereafter, President Bush and then-Treasury Secretary Henry Paulson did an end run around Congress, diverting $17.4 billion from the Troubled Asset Relief Program (TARP), a component of the government’s stopgap measures in 2008 to deal with the subprime mortgage crisis. It was President Bush’s swan song, a move designed to pull GM, Ford and Chrysler back from the brink, saving “three million jobs within a year” (if you swallowed the PR blitz of the automakers at the time) and bolstering a sagging economy. The only caveat to this so-called “bridge loan” was that GM, Ford and Chrysler execs were to come up with a revised business plan for resurrecting their companies.
Chapter 11 Bankruptcy Proceedings Outcome: the “New” and “Old” GM
Lest short-term memory fails you, GM had been bleeding red for years, the result of swollen labor contracts coupled with a relatively impotent bargaining position, substantially lower sales to support the number of plants and dealerships, an over-abundance of white collar jobs fattened with top salaries—and above all—an atrociously bad management team supported by a rubber stamp board of directors who denied that the King had no clothes even as the corporate giant went under for the third time. President Obama, got credit for the bailout (but in retrospect perhaps was not as culpable as President Bush for getting the wheels rolling). When $13.4 billion was made available to GM in January 2009 (and another $6 billion for GMAC), GM promised it would accelerate research and development of energy-efficient vehicles and consolidate its operations in appreciative return.
Bankruptcy proceedings for GM were structured as Chapter 11 reorganization. Chapter 11 in essence protects a corporation from shutting its doors by providing access to financing and favorable loans, thus allowing the company to maintain its usual operations while restructuring. And my, oh my, did GM get favorable financing, with an additional influx of $6 billion provided by the government as a working capital loan between February and June 2009. On June 1, GM filed for bankruptcy with a plan to re-emerge as a streamlined and less debt-burdened organization. Two days later, the government injected another $30 billion into the corporation in the form of a debtor-in-possession loan.
On July 10, 2009, GM rose from the ashes to emerge as two companies. The “new” GM—eventually to be known as General Motors Company—was financed with $50 billion in U.S. Treasury loans, giving the government (i.e., taxpayers) the largest stake in the company amounting to 60.8%. The General Motors Company was formed from the purchase of the desirable assets of the “old” GM, now known as Motors Liquidation Company. The “old” GM kept all the liabilities while the new GM kept the assets. The “old” GM continued in bankruptcy proceedings to settle with bondholders and other liabilities. The “new” GM was no longer part of these bankruptcy proceedings.
To make the distinction very clear, the “old” GM” got the debt; the “new” GM got the assets and has gone on to be so successful that the U.S. government sold its last share just three months ago…at a loss to taxpayers of $10 billion. The “old” GM, eventually dissolved into four separate trusts, was handed $275 billion in claims pending against it in 2011, most of which were product liability claims.
So why is this history important from a personal injury perspective?
First and foremost, the new GM—funded by taxpayers—never divulged its knowledge of the faulty ignition switches during the 2009 reorganization and the implications that this defect could have on future litigation and liability. By 2009 when GM was restructured, the “new” company was well aware of the problem. You may recall from my earlier blog chronicling the history of the faulty ignition switch that GM’s knowledge of a problem stretched back to 2001, and certainly executives understood the gravity of the situation by 2004-2005. CEO Mary Barra recently said that GM employees became aware of most of the accidents involving the ignition switch within two weeks of their occurrence. By 2005-2006, GM had fielded so many complaints that it was prompted to issue a special bulletin to dealers warning of the potential for airbag non-deployment in the 2007 Pontiac G5 and 2005-2007 Chevrolet Cobalt. Moreover, CEO Barra has conceded that the company had been has been involved in claims and lawsuits regarding the Ion and HHR vehicles where non-deployment of airbags may have been caused by the ignition switches throughout the past decade (although she was careful not to cite any specific dates. From my perspective, it is doubtful that all of these lawsuits occurred after the restructuring.) To date only two ignition switch cases have been publicly settled, and neither side is allowed to discuss the outcome under terms of the settlement.
All of this begs the question of just how credible the Chapter 11 reorganization was when GM execs failed to mention the lethal defect in 2009, and what this “oversight” (that’s a generous term) could potentially cost the “new” taxpayer-financed company in terms of future liabilities. As I write this, I feel confident that somewhere in a backroom boardroom, GM executive and their lawyers are orchestrating a defense contending that—despite their knowledge of the flaw—they had absolutely no idea that it could possibly mushroom into the focus of dozens—if not hundreds—of lawsuits worth millions or possibly billions of dollars. (Good Golly! What a surprise!)
This time, if GM approaches the federal government for help in recovering from the debt of liability–hat in hand with tin cup extended–I will be among the first taxpayers to stand up and yell: NEVER AGAIN! Once burned, forever cautious.