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Should GM Lose Its Bankruptcy Shield, Its Auto Defect Liability Will Balloon

It looks like GM could face the loss of its bankruptcy shield, based on a Bloomberg News report, which as of now protects the automaker from liability tied to vehicles made prior to its bankruptcy in 2009. According to Bloomberg News, whether GM loses its bankruptcy shield depends on whether the judge buys its argument that company executives were not aware of defective switches present in many of their vehicles.

The defective switches are responsible for a number of deaths, for which (among other injury and defect claims) GM has apparently allocated $600M.

If the executives did know about the defective switches, yet did not make their knowledge available to creditors at the time of GM's bankruptcy, it could be enough to make the shield fall, and open the floodgates wide to liability.

On this, Bloomberg reporters quote a bankruptcy lawyer: "[Y]ou have to disclose your assets and liabilities. Those are basic requirements - and GM didn't do it. It would be very easy for [the bankruptcy judge] to say, 'Guess what? If you know someone is a creditor you have to give them notice. If you fail to do so, they aren't constitutionally bound by my orders.'"

Even though GM has allocated $600M for deaths and injuries associated with its auto defects, potential liability could bloom much higher if the bankruptcy judge allows the shield to fall - many car owners claim that the value of their vehicles plummeted because of the defects.

Bloomberg characterizes this as a potential "$2 billion tab."

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