Federal authorities are taking a closer look into whether General Motors committed bankruptcy fraud by not disclosing defects. The question is whether G.M. was aware of a defect that was found in their cars – a faulty ignition switch – when the company filed for bankruptcy in 2009 and failed to disclose this awareness to the public and to authorities that when they realized it could lead to a wave of liability claims.

General Motors Failed to Fix Faulty Switch

G.M. told federal authorities that it had been notified of the faulty switches as early as 2001. And while it explored fixes to the switch in 2004 and 2005 it failed to solve the problem. The switch, if bumped or weighed down by a heavy key ring, can shut down the engine and disable the air bags. G.M. has linked the issue to 31 crashes and 12 deaths.

2009 Filing Agreement

During the 2009 restructuring deal G.M was split into “old” and “new” corporate entities.  Bad assets such as closed assembly plants and liability from accidents that occurred prior to the bankruptcy were assigned to the “old” company. Crashes that happened “pre-bankruptcy” were shielded from future liability. Claims pending during the bankruptcy were settled and paid from a limited pool of money.

Recent Claims Could Re-Open 2009 Bankruptcy

Claims have been brought against the company by a shareholder who is arguing stockholders were defrauded by G.M.’s delay in disclosing information regarding the faulty switches. “The news of the company’s recalls through a series of disclosures, and later reports of government criminal and civil investigations into the company, began a sharp decline in the company’s share price, wiping out billions in shareholder value,” the class-action lawsuit said. Though such lawsuits are hard to prove, if successful it could reopen the 2009 bankruptcy as well as expose G.M to a new round of lawsuits regarding the recalled cars.

For information and guidance on bankruptcy, you need the experts at RHM LAW LLP.