GM Worried About Class-Action Suits But Not Cash: Recalled-Car Incentives Boost Sales

May 2, 2014

General Motors' ongoing "Switchgate" saga continues today, as the company returns to bankruptcy court. According to the New York Times, the automaker isn't planning to restructure again, it just wants the court to reiterate that "new" GM isn't liable for any of the products made on "old" GM's watch.


Theoretically, such protections are built into the bankruptcy process. After a company emerges from restructuring, it is, legally speaking, a new entity, completely separate from the company it was before. As such, its liability for anything that the previous company did is pretty limited.

In the case of the ignition switch recall, that means that today's GM -- General Motors Company -- can't be sued for any accidents or injuries caused by flawed vehicles manufactured by pre-2009 GM -- General Motors Corporation. GM has agreed to repair the vehicles, but that's as far as it goes.

However, the Justice department has been investigating whether old GM hid information about ignition switch problems during its 2009 restructuring. The company knew about those problems as far back as 2001, so the question is: how forthcoming was GM about those issues when it filed its bankruptcy paperwork?

That's a very important question, because a series of lawsuits seeking class-action status are working their way through the legal system. If GM is found to have fibbed or committed sins of omission during the restructuring, those suits have a much better chance of success. Given the size of the recall and the mounting evidence that GM took more than a decade to address the ignition switch problem, GM could be facing some very expensive settlements.

And that's why GM's in court: to confirm that the company isn't liable for vehicles built by its predecessor. In Spaghetti Western terms, they're trying to cut off plaintiffs at the pass.

It's a risky move. If GM wins, then great, the company can breathe a small sigh of relief (though the judgment would likely still be challenged in each of the class-action cases). If GM loses, however -- if the judge says "Not so fast..." -- not only do the pending cases become greater threats to GM, but the finding could encourage even more plaintiffs to come forward, making the automaker's problems exponentially bigger.


Outside courtrooms, however, GM is having much better luck. As we reported last week, public opinion of the automaker is rebounding, and sales have been going strong. In fact, sales for the company's four brands -- Buick, Cadillac, Chevrolet, and GMC -- were up seven percent for April.

Perhaps more surprisingly, according to Auto News, many of those sales were made to customers who traded in recalled vehicles. (Thus raising the question: who cares more about the recall, customers or attorneys?) As we reported, GM has been offering those customers a special $500 purchase credit, and more recently, it began offering them employee pricing on new vehicles, too.

That's helping GM's bottom line. Morgan Stanley analyst Adam Jonas says that if GM can convert just two percent of owners with recalled vehicles into new-car buyers, it would add more than one percentage point to GM's U.S. market share. (So far in 2014, GM holds 17.6 percent of the U.S. market -- down from 18.1 percent at this point last year, but still well ahead of its closest competitor Ford, which rings in at 15.4 percent.)

That growth in share would be good news any year, but it's especially enticing now, because if the company fares poorly in the courts, it'll need plenty of extra cash for payouts.


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