Non litigation alternatives are indeed being pursued in GM to try to settle pending and future product liability claims, as is evidenced by a Friday’s June 26 Wall Street Journal article my Mike Spector and Jeffrey McCracken regarding state attorney generals trying to negotiate with the Obama administration over the treatment of product liability claims in GM. The article does not provide any specifics on where the money would come from, but my bet is still on the concept of asking the government to turn over some of its ownership rights in “new GM” to a product liability trust created to pay claims.

The article does not mention multiple key issues that would have to be addressed if a trust is created. One would be: how will someone decide whether or when future product liability payments would be made. Would the claims be made be made through a trust with money set aside to pay claims? Would claims be processed administratively without a trial ? Would the bankruptcy court delegate to state courts the job of trying cases to resolve claims through actual trials ?

Beyond those direct issues, consider also the important rights and interests of the myriad other entities who are routinely sucked into product liability cases with GM when cars are in crashes. Let’s assume a trust is set up to pay future product liability claims from a financial base comprised of some cash and stock, as is typically done in asbestos bankruptcy trusts. If a trust is created, then multiple issues arise.

One issue when and how the trust coordinates with state court tort system claims and the rights of other tort system defendants. Suppose, for example, that a car crash victim driving a GM car claims that he is a quadriplegic because a seat malfunctioned. Assume also that the claimant cannot sue GM due to the bankruptcy court having issued an injunction purporting to prohibit future product liability claims against New GM, and old GM has no money. Suppose the quadriplegic does not sue either Old or New GM and instead files a state court lawsuit that names as defendants the entity that manufactured and sold the car seat system to GM, the manufacturer of a component of the seat, and the car dealer that sold the GM car.

In that state court lawsuit, can those defendants do what they would normally do in the state court tort system, which is to bring a contribution or indemnity claim against GM (or the trust) if GM designed and specified the car seat system and/or the characteristics of the component? What are the rights of the car dealer who argues that she should not have to pay any money because all she did is sell the car? Can her company obtain indemnity from that trust or GM ? Can the plaintiff file a claim against the trust and keep it a secret from the parties to the state court litigation on the grounds that processing a trust claim is “a settlement?” Can the plaintiff take the state court case to trial, win money and then later obtain additional money from the trust?

All of these issues are very real, and exemplify problems that have been dealt with badly in asbestos bankruptcy cases where the rights of co defendants have been given at best nominal treatment, and trusts have frequently failed to honor the rights of co defendants. The problems are exacerbated by the reality that many but not all members of the plaintiff”s bar have been gaming the overall compensation system by bringing a state court claims for asbestos injuries, but trying terribly hard to keep the state court defendants from learning anything about claims submitted to any of the many asbestos trusts that collectively hold something in the vicinity of $30 billion. The problems also are made worse by terms in many of the asbestos bankruptcy trusts that purport to allow the plaintiff’s lawyers and their clients to resolve the state court claim in full and to then later bring claims against the trusts, thereby obtaining compensation twice in some but not all cases.

Why have these lousy situations emerged in asbestos bankruptcies ? There are a variety of answers and factors, including the plaintiff’s bar and debtors trying to keep co defendants and insurers from being allowed to exert any rights in bankruptcy. Another problem is that the bankruptcy court lawyers and judges in general have little or no understanding of the intricacies of product liability claims. Yet another problem is that the bankruptcy code was not designed in terms of its intersection with product liability claims, in part because product liability as we know it today did not really take off and become a major issue until the 1970s. And, when an asbestos bankruptcy code section was added in 1994, the section was very poorly done and bears much of the blame for the asbestos bankruptcies. Yet another problem is that insurance that might be used to pay such claims is often compromised through “an insurance policy buyout” in which an insurance company agrees to pay a fixed amount of money in return for the insured company releasing all of its rights under the product liability insurance. To the dismay of product liability claimants, the money generated by such buyouts typically is not put into a trust and instead of the money may be used for any other purpose, including trying to stave off bankruptcy by paying fees to lawyers and/or investment bankers, or may be be used to pay off secured creditors, leaving no source of funds for product liability victims. And, cynics have said that bankruptcy courts are out of control and so pro-debtor that they will do anything to get a debtor out of chapter 11, including trampling the due process rights of co defendants and tort victims.

One hopes that a much better solution will be created for the GM and Chrysler bankruptcies. One hopes that a better solutions will then be implemented for past and future asbestos bankruptcy trusts. Some but not all of the existing asbestos trusts have failed to respect the rights of tort system of co defendants, and have left the remaining manufacturers to beat he financial burdens created by the bankruptcies of other defendants. This would be a great time to start fixing some of the myriad problems created by the intersection of “long tail liability” claims and chapter 11 cases.

Here are a key excerpts from the Wall Street Journal article:

“The case law is unclear and ambiguous on the issue of future product-liability claims. So when the case law is all over the map, a lot of times it makes sense for both sides to settle,” said one administration official.”

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Last year, GM set aside $921 million for product-liability litigation, and in 2007 it had $1.1 billion available.

“Everyone agrees there has to be some access to the courts,” said Maryland Attorney General Douglas Gansler, a Democrat who co-chaired Mr. Obama’s presidential campaign in the state.
The auto task force has been caught off guard by the recent outcry from attorneys general and consumer groups. The task force modeled GM’s bankruptcy plan after Chrysler’s, without giving much weight to the potential fallout from leaving product-liability claims behind, said people familiar with the matter.”

“In opposing GM’s product-liability plan, state attorneys general are raising a number of complex legal issues, ranging from the power of federal bankruptcy courts to supercede state law to constitutional due-process rights of Americans to sue GM if they’re injured by the auto maker’s vehicles in the months and years ahead.”