Chrysler Bankruptcy and Product Liability

May 20, 2009, 12:50 pm
By CHRISTOPHER JENSEN

There are thousands of creditors lined up hoping to get their money from Chrysler as it goes through Chapter 11 bankruptcy. One of them, Jeremy K. Warriner, had his legs amputated after an accident in a Jeep Wrangler.
In 2005, Mr. Warriner, 34, of Indianapolis, was in a crash and fire in a Jeep Wrangler. It meant his legs had to be amputated. In 2007 he sued Chrysler in the Superior Court of Marion County, Ind. He claimed that a design defect in the Wrangler’s body allowed his entrapment and made it easier for a fire in the engine compartment to reach him. Chrysler denied those assertions.
But like other consumers who have filed product-liability or lemon-law suits against Chrysler, Mr. Warriner’s chances of getting a lot of money are poor. Under bankruptcy proceedings, such suits are temporarily frozen and placed among the unsecured creditors.
It is not clear how the bankruptcy court will determine the validity of the suits. One possibility is that they could be returned to their original courts for a decision. Then the litigants with winning or settled cases would return to the bankruptcy court to get their money from whatever is left in the unsecured creditors funds.
Unsecured creditors are way down on the payback scale. At the top are the secured creditors who have collateral and are given preferential treatment when it comes to being paid. Unsecured creditors are owed money — or believe they are owed money — and they typically divide up whatever is left after other debts are paid. Mr. Warriner and other litigants are in the same group with corporations.
“The most likely result is they are going to get chewed up and get little if anything,” said Richard A. Zitrin, who teaches legal ethics at the Hastings College of the Law of the University of California in San Francisco. “They’re being put in a bucket with much more powerful forces, so they are going to be the low people in the pecking order.”
Chrysler owners may not be alone in this. Far more consumers could face similar issues if General Motors — a larger automaker — files for bankruptcy.
Michael Palese, a Chrysler spokesman, said the automaker wants “to maintain good will with our customers, and we’re doing everything within the constructs of the bankruptcy laws to do that.”
But Theodore Eisenberg, a professor of law at Cornell University, said Chrysler could have tried to make it easier on those with pending suits. Chrysler could have asked the court to give those cases a priority among the unsecured creditors, citing the need to maintain good customer relations, he said. That might give the plaintiffs a better chance of recovering funds. Of course, other creditors might object, and the court would have to decide if that was fair, he said.
In addition to consumers who claim they were injured as a result of defects, other consumers who have filed lemon-law suits also have their cases frozen and included among the unsecured creditors.
“Those people are stuck,” said Sergei Lemberg, a Stamford, Conn., lawyer who often handles lemon-law cases.
Mr. Palese said the automaker is working with consumers to resolve lemon-law claims in which suits have not been filed.
How the bankruptcy affects lemon-law cases is a major concern of the International Association of Lemon Law Administrators. Its members run the lemon-law programs in all 50 states. Earlier this month the association sent a letter to the automotive task force, asking if President Obama’s promise that the government would back new-vehicle warranties extends to lemon-law awards. Philip R. Nowicki, the president of the association, said the task force had not replied.
One way to protect all consumers would be for the bankruptcy court to require the new Chrysler to either set aside money to cover claims or require a special insurance policy, said Norman I. Silber, a law professor at Hofstra University, who specializes in consumer law.
Otherwise, there won’t be much money left, according to plaintiffs’ lawyers and consumer advocates.
Larry E. Coben is a lawyer in Scottsdale, Ariz., who represents Mr. Warriner and serves on the court-appointed committee for unsecured creditors in the Chrysler bankruptcy. “We’re talking pennies on the dollar,” he said.
Mr. Warriner said such an award would be a disaster for him. He said he needs the money for future medical bills and to modify his home to make it easier for him to move around. “I just don’t see how it can be right,” he said.
Late Tuesday a motion asking the court to help consumers like Mr. Warriner was filed by consumers groups including the Center for Auto Safety, Consumer Action, Consumers for Auto Reliability and Safety, National Association of Consumer Advocates and Public Citizen.
The groups accused Chrysler of trying to abandon customers with defective vehicles. They asked the judge to have those cases returned to their original courts and to require Chrysler to put aside money or agree to cover any future awards.
“If Chrysler is willing to abandon customers with defective or lemon vehicles, including customers who have been physically injured, one would question why anyone in the market for a new vehicle would buy a car from Chrysler’s successor company, which now aims to leave its prior customers holding the empty bag,” they said.