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From Products Liability Law Daily, September 22, 2014

Post-bankruptcy GM not liable for Saturn transmission class action settlement

By John W. Scanlan, J.D.

General Motors LLC could not be held liable for a settlement in a class action suit regarding allegedly defective transmissions in some 2002-2005 Saturn Vues and 2003-2004 Saturn Ions because the new post-bankruptcy GM had not assumed liabilities under the settlement from the old GM, the U.S. Court of Appeals for the Second Circuit said in a summary order affirming a district court decision (In the Matter of: Motors Liquidation Company (Castillo v. General Motors LLC)), September 19, 2014).

Background. In 2007, Kelly Castillo and other plaintiffs brought a class action lawsuit against GM in the U.S. District Court for the Eastern District of California on behalf of certain owners of Saturn Vues and Saturn Ions alleging that their vehicles contained defective Saturn Vti transmissions. The vehicles originally came with a 3 year/36,000-mile warranty that the company later extended to 5 years/75,000 miles. The transmissions of the Castillo plaintiffs failed after the expiration of the warranty. GM settled with the plaintiffs in 2008; in exchange for a release of claims, GM agreed to reimburse class members for certain costs if their transmissions failed within 125,000 miles. GM did not admit liability. The district court approved the settlement on April 14, 2009, and entered a judgment that was to become effective June 2, 2009.

However, on June 1, 2009, GM filed for Chapter 11 bankruptcy. As part of pre-sale negotiations between GM and the U.S. Treasury’s Auto Task Force, the majority of GM’s assets were sold to a new entity: General Motors LLC (New GM). What was not sold became part of Motors Liquidation Co. (Old GM). During the negotiations, Old GM and the Auto Task Force agreed that New GM should assume only those liabilities necessary for it to operate, with all other liabilities remaining with Old GM. Old GM did not list the Castillo settlement among the executory contracts to be assigned to New GM, instead identifying it as a contract it should later move to reject during the bankruptcy proceeding.

The sale agreement provided that New GM would assume “all Liabilities arising under express written warranties of Sellers that are specifically identified as warranties and delivered in connection with the sale of new, certified used or pre-owned vehicles or new or remanufactured motor vehicle parts and equipment . . . manufactured or sold by Sellers or Purchaser prior to or after the Closing.” It also stated that Old GM would retain “all Liabilities arising out of, related to or in connection with any (A) implied warranty or other implied obligation arising under statutory or common law without the necessity of an express warranty or (B) allegation, statement or writing by or attributable to Sellers.”

On July 5, 2009, the bankruptcy court approved the sale agreement with the language limiting New GM’s assumption of warranty-related liabilities to those stated in express warranties. New GM came into existence when the sale officially closed on July 10, 2009. By September 2, New GM informed dealers that it would not assume liabilities under the Castillo settlement and that it would repair or replace Vti transmissions within 5 years/75,000 miles. The company later implemented a policy giving owners of certain Saturn vehicles within 8 years/100,000 miles the choice of a 50 percent reimbursement for covered transmission repairs or a $5,000 credit toward the purchase of a new GM vehicle.

On August 29, 2009, the Castillo plaintiffs brought the present action in the Delaware Court of Chancery, seeking a declaration that New GM had assumed Old GM’s liabilities under the Castillo settlement. The case ended up in the U.S. Bankruptcy Court for the Southern District of New York, which was administering the GM bankruptcy. The bankruptcy court found that there was sufficient ambiguity in the documentation of the settlement agreement to require extrinsic analysis, but eventually ruled against the Castillo plaintiffs. They appealed, and although the district court found ambiguity in the sale agreement that differed from the ambiguity found by the bankruptcy court, it nonetheless affirmed the bankruptcy court because it did not find clear error by the lower court. There was some evidence that New GM understood that it had assumed liability for the Castillo settlement, but substantial evidence that it had not, and all of the evidence from the sale agreement showed that the parties intended that liability for the settlement remain with Old GM, the district court decided. The plaintiffs again appealed.

Contractual interpretation. The Castillo settlement was not assumed by New GM, according to the Second Circuit. The sale agreement provided that New GM would assume liabilities “arising under” express warranties of sellers that are specifically identified as express warranties. The plain and ordinary meaning of “arising under” made it clear to the Second Circuit that Old GM’s obligations under the Castillo settlement did not arise from an express warranty; therefore, they were not assumed by New GM. Furthermore, the Second Circuit found that extrinsic evidence showed that the settlement was not intended to be assumed by New GM under the sale agreement: lawyers for Old GM and the Auto Task Force agreed that New GM should assume only those liabilities necessary for the new company to operate, and specifically identified the settlement as an example of a liability that would not be assumed; New GM told state attorneys general that it would assume liabilities under state lemon laws but no additional liabilities; the sale order was strong evidence that New GM was assuming obligations of Old GM subject to limitations contained in express written warranties delivered in connection with the sale of vehicles and vehicle components, but the settlement obligations were not undertaken pursuant to such warranties; and the sale order did not list the settlement as an assumable executory contract.

The case number is 13-4223-bk.

Attorneys: Robert W. Schmieder, II (SL Chapman LLC) for Kelly Castillo. Arthur Jay Steinberg (King & Spalding LLP), and Gregory R. Oxford (Issacs Clouse Crose & Oxford LLP) for General Motors LLC.

Companies: General Motors LLC

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