The GM switch arguments raise important issues about the claimed powers of bankruptcy judges. Set out below are some background facts and initial comments, with more to follow. The goal is to provide some hopefully useful thoughts and comments about public policy, the nature of long-tail tort claims, and (spoiler alert as to my view), the folly of allowing bankruptcy courts to willy-nilly discharge contingent tort claims.

To start, the key papers. GM’s papers seeking to block the switch claims are here (motion to enforce prior plan terms). For the GM switch plaintiffs, their complaint is here, and here is their objection to GM’s motion.

Next, note that some of the would-be GM plaintiffs have now hired Sander Esserman, a bankruptcy lawyer who was involved in the original GM bankruptcy case as counsel for asbestos plaintiffs. This is good for plaintiffs – the opening objection of plaintiffs revealed basically zero knowledge of the prior proceedings. Mr. Esserman’s retention and GM background are described in his April 23 letter to Judge Gerber.

On the merits, GM’s lead arguments is that the terms of the original GM deal included the Justice Department supposedly demanding that “New GM” not take on most old legacy liabilities, including avoiding most obligations for tort claims arising from past conduct.  See GM’s motion at 2 (“New GM’s assumption of just these limited categories of liabilities was based on the independent judgment of U.S. Treasury officials as to which liabilities, if paid, would best position New GM for a successful business turnaround. It was an absolute condition of NewGM’s purchase offer that New GM not take on all of Old GM’s liabilities. That was the bargain struck by New GM and Old GM, and approved by the Court as being in the best interests of OldGM’s bankruptcy estate and the public interest.”)  The supposedly “absolute condition” of course needs review knowing that that the deal was a put up job engineered by the US government and other economically interested parties, including unions.

Even more to the point – so what if there was a deal term? Parties make deals all the time, but courts do not always blindly enforce them. Suppose, for example, the DOJ absolutely conditioned the bankruptcy plan on a term requiring  “New GM” to emblazon a picture of Eric Holder on every post-bankruptcy car produced by “New GM.”  Presumably any sensible bankruptcy judge would not enforce such an absurd term, even if demanded by Justice Department lawyers. And, it’s plain that such an absurd term is not required to earn a judicial veto;  in recent history, we’ve seen Judge Rakoff and other respected federal judges catching “Rakoff fever,” and  refusing  to blindly enforce deals simply because they were cut by the government.

Perhaps more importantly, a famous movie illustrates why it’s good policy to reject enforcement of self-serving deal terms. The relevant movie? Blazing Saddles, the 1974 classic by Mel Brooks. The relevant scene? When the Sheriff held a gun to his own head. In fact, the Blazing Saddles scene is so apt it’s already been cited by a federal judge when he refused  to enforce a deal term simply because it was deal term. Really. As I’ve described before, it happened in the Federal-Mogul asbestos bankruptcy. There, as in GM, various parties claimed that an injunction was needed because it was called for by a deal term.  Judge Lyons, however, rejected the injunction motion of the interested parties, aptly calling the condition a self created problem.  Judge Lyons explained:

“Let me focus first of all upon irreparable harm. And one of the opponents here has characterized this as a self created irreparable harm. And this really reminds me of the scene from the movie Blazing Saddles where the sheriff played by Clevon Little is being hassled by a crowd and he’s being threatened with physical violence. And he pulls out a gun and he holds it to his head. And he says, stand back or I’ll shoot the sheriff. The debtor in this case has agreed to a deal in which they’ve undertaken to get a preliminary injunction and the other party to the deal has said, if I don’t get this preliminary injunction I’m going to withdraw from the deal. This to me is a totally self created scenario for irreparable harm.” See January 20, 2006 Hearing Tr. at 130-31

What more needs to be said – Judge Lyons obviously got it right in refusing to enforce a deal term simply because it was created by self-interested parties.