A rather strange battle is going on in a New York bankruptcy court. It involves a legal dispute over the enforceability of a vehicle defect settlement between a General Motors (GM) bankruptcy trust and car purchasers and accident victims. The deciding factor appears to be whether the absence of signatures overpowers what appears to be the parties’ stated agreement to the terms of a settlement.
At the end of a two-day trial on Dec. 19, U.S. Bankruptcy Judge Martin Glenn said that he’s never seen a case like the one before him, putting millions of car purchasers and accident victims squarely against “New GM,” the “operating incarnation” of the automaker, and a trust set up to distribute recovered funds to creditors of the defunct “Old GM.” The parties are arguing over the enforceability of an unsigned settlement agreement.
The claimants say they reached a binding agreement with the bankruptcy trust, but things went south at the last minute when New GM pressured the trust to back out of the agreement in August and instead accept funding to fight the economic-loss and personal-injury claims. To say this turn of events is rather weird may be a gross understatement.
The abandoned settlement would have caused the carmaker to issue approximately $1 billion worth of new stock. It’s a “disputed issue of fact” whether the parties unambiguously agreed to be bound to the terms of the agreement, Judge Glenn said after the trial. It is now the judge’s job to decide if the general unsecured creditors’ trust had the freedom to back out simply because nothing had been signed by the parties.
Judge Glenn said he had “never seen a case like this,” and he indicated that he was undecided on how to rule, but found it “incredible” that the trust backed out of the settlement altogether after meeting with New GM a day after finalizing material terms.
The claimholders at issue asked the bankruptcy court in December to allow late class claims against the GM trust, saying the company failed to tell vehicle owners about an ignition switch problem and other defects in time for them to file claims in the company’s bankruptcy. Under the terms of the proposed settlement, the late claims would have been settled in exchange for a $15 million payment and support for an order that would have obligated New GM to issue 30 million shares of common stock to creditors, pursuant to provisions of the 2009 bankruptcy sale of the company that call for New GM to put in additional consideration if claims allowed against the estate surpass certain thresholds. The share value of the proposed new equity would be approximately $1 billion.
While the Plaintiffs say the settlement agreement should become binding under New York law, the trust believes it should instead be allowed to enter into a forbearance agreement with GM and accept funding to fight the creditors’ claims. The basis for that position is that discussions “culminated in the preparation, but not the execution, of draft settlement documents.”
The sides fought over whether language in the draft agreement – the final product of more than 20 back-and-forth revisions – indicating that the settlement had to be fully executed to “become effective and binding” was just a boilerplate contract provision or meant that signatures were absolute and binding. Judge Glenn said he is mindful of the injury claims at stake in the dispute and is taking the matter “very, very seriously.”
The cases are In re: Motors Liquidation Co., et al., (case number 1:09-bk-50026), in the U.S. Bankruptcy Court for the Southern District of New York, and In re: General Motors LLC Ignition Switch Litigation, (case number 1:14-md-02543), in the U.S. District Court for the Southern District of New York.
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