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GM and Chrysler Bankruptcies: Consumers' Claims At Risk?

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By Brian Kumnick on July 14, 2009 11:07 AM

General Motors emerged from bankruptcy protection last week, a month after Chrysler emerged from its own bankruptcy as a new subsidiary of Italian automaker Fiat. Both companies used the bankruptcy process more or less as expected, seeking to shed liabilities and reinvent themselves as, they hope, more successful enterprises. But in the key area of product liability, the two companies took very different paths, with potentially very different outcomes for their customers.

Car makers are no strangers to lawsuits alleging that faulty design or manufacture of their cars led to an accident. Product liability lawsuits are often filed against auto manufacturers in the wake of accidents, and settlements or judgments for injured consumers are not uncommon. Under bankruptcy law, however, a consumer's product-liability claim against a manufacturer may be treated as an "unsecured" claim, a type of claim that is among the last to be paid.

Chrysler took advantage of its bankruptcy proceeding to effectively discharge all product-liability claims for cars it manufactured pre-bankruptcy. This means that any future product-liability claims, even for Chrysler vehicles purchased before the bankruptcy, would be in effect unsecured debts, leaving consumers making such claims with a limited likelihood of recovering any damages.

In the GM bankruptcy, the original plan was to do the same, but in this case, objections lodged by consumer groups and state attorneys general were heard. GM eventually changed its mind and agreed to allow the "new" GM to be subject to product-liability claims for GM vehicles manufactured before the bankruptcy.

The upshot for car owners is that consumers who bought Chryslers before June 10, and who in the future want to allege that their car suffers from faulty design or manufacture, will have almost no chance of recovering for their injuries. On the other hand, GM owners who purchased before the GM bankruptcy will find that they can still bring a suit and win a judgment -- assuming of course that their claim has merit.

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