Auto Industry Bankruptcy: How Will It Affect Products Liability Litigation?

By on November 19, 2008 - 1 comment

This week top executives of the ‘Big Three’ automakers are on Capitol Hill asking Congress for $25 billion in government bailout money. Even before the recent economic crisis things were not going well for American automotive giants. Sales had been sliding along with their market share, and the downturn of the last few months has only made matters worse. Ford Motor Company’s share price has dropped 74% this year. General Motors revenue was down 45% in October alone, and its stock price has dropped down to where it was half a century ago. Now industry analysts, as well as the unions, are saying that without a bailout GM may be driven into bankruptcy, and others speculate that Ford and Chrysler could eventually follow.

If one or more of these automakers files for bankruptcy, how will this affect claims brought by individuals alleging injuries caused by automotive design or manufacturing defects? It is reasonable to assume that at any given moment there are hundreds of automotive crashworthiness lawsuits being actively litigated across the country, involving everything from SUV rollovers, to fuel system fires, to seatbelt and occupant restraint system defects, to roof crush and door latch failures. While the long term impact on the ability of the manufacturers to pay a judgment against them or to settle a claim is difficult to predict, there may be an immediate impact by the filing of bankrupty proceedings. All pending civil actions could be stayed pursuant to an automatic stay under Section 362 of the Bankruptcy Code, which provides in relevant part:

“[A] petition filed … under this title … operates as a stay, applicable to all entities, of-
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title …. ”
[11 U.S.C. § 362(a)(1) (1993)]”

The scope of the automatic stay is broad. Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1203 (3d Cir.1991)(citing Assoc. of St. Croix Condo., Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir.1982)). “All proceedings are stayed, including judicial proceedings. Proceeding in this sense encompasses civil actions ….” Id

If a stay is put into effect it could not only cause all pending litigation to gring to a halt, but also prevent new cases from being filed until the bankruptcy court determines the stay should be lifted. A court may grant relief from such a stay to allow a party to proceed in an action in another forum under certain limited circumstances. In determining whether to lift the stay courts take into account a number of factors:

1) whether relief would result in a partial or complete resolution of the issues; 2) lack of any connection with or interference with the bankruptcy case; 3) whether the other proceeding involves the debtor as a fiduciary; 4) whether a specialized tribunal with the necessary expertise has been established to hear the cause of action; 5) whether the debtor’s insurer has assumed ful responsibility for defending it; 6) whether the action primarily involves third parties; 7) whether litigation in another forum would prejudice the interests of other creditors; 8) whether the judgment claim arising from the other action is subject to equitable subordination; 9) whether the moving party’s success in the other proceeding would result in a judicial lien avoidable by the debtor; 10) the interests of judicial economy and the expeditious and economical resolution of litigation; 11) whether the parties are ready for trial in the other proceeding; and 12) impact of the stay on the parties and the balance of the harms. In re Mid-Atlantic Handling Sys., LL C, 304 B.R. at 130 (citing In re Ice Cream Liquidation, Inc., 281 B .R. 154, 165 (Bankr.D.Conn.2002)). See also In re Curtis, 40 B.R. 795, 799-800 (Bankr.D.Utah 1984) (utilizing same factors). All twelve factors are not necessarily present in a particular case, and a court need not rely on any plurality of factors in deciding whether to lift the automatic stay. In re Mid-Atlantic Handling Sys., LLC, 304 B.R. at 130 (citing In re Ice Cream Liquidation, Inc., 281 B.R. at 165).

Should one of the Big Three file for bankruptcy, products liability litigants may be forced to petition the bankruptcy court in order to obtain permission to initiate new actions against a bankrupt automaker, or to allow them to continue proceedings already in progress in another court.

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