In recent news, both GM and Chrysler have recently suspended operations at several manufacturing plants as a result of problems with their part suppliers. 

 We’ll start with GM.  American Axle Corp. was spun off from GM in 1994.  Its former parent is still its biggest client, representing 80% of its business.  It supplies truck and SUV parts to GM.  Or at least it did until recently.  In order to compete with its rivals, it released plans to cut hourly labor costs from its current $70 per employee down to between $20 and $30.   Not surprisingly, the United Auto Workers Union went on strike.  

 On to Chrysler.  Most recently, it shut down a minivan plant in Windsor, Ontario.  The Canadian Auto Workers Union at TRW Automotive walked off the job on February 28 after failing to reach a contract with their employer.  This problem for Chrysler is in addition to other recent difficulties.  Last month, a company called Plastech filed for Bankruptcy protection.  This caused Chrysler to temporarily shutter five plants, with a potential shut down of all 14 Chrysler facilities as a result of not having access to the over 500 parts sold to it by Plastech. A temporary agreement kept the parts coming, but its set to expire on March 3.  In the mean time, Chrysler lost a motion before the Bankruptcy Court to compel Plastech to turn over tooling used to make those 500 parts.  So Chrysler had better hope that further deals can be reached to keep those parts coming.

From a Lemon Law perspective, this could get interesting.  Imagine you were the CEO of American Axle Corp.  GM represents 80% of your business.  If GM said they were going to pay you 75% of what they used to pay you for the same parts, what can you do?  If you want to stay in business, your going to give GM what it wants.  After that, you will try to cut expenses enough to stay in business.  The predictable results:  strikes and bankruptcies for suppliers, plant shutdowns for automobile manufacturers.  And possible lemon law cases as vehicles are unable to be repaired due to a shortage of replacement parts.

Truth be told, GM and Chrysler can use a little down time.  They have enormous inventories built up to weather this storm.  I am sure that this factored in to their decision to squeeze their suppliers.  However, these types of things have a way of getting out of hand. 

General Motors recently disclosed that it lost a staggering 38.7 BILLION dollars in the past year. To put that in perspective, if you multiplied the amount of GM shares that exist by the current share price ($26.60), the result would be a market capitalization of only slightly more than 15 billion dollars. In other words, GM lost more than double what the market says its worth… in ONE YEAR.

So here I am, representing consumers who are either suing GM, about to sue GM, or trying to get a settlement from GM, and from the looks of it, my good friend GM has a pretty decent shot of filing for BANKRUPTCY at some point.

This is, to be perfectly blunt… literally… a Lemon Nightmare. (Cue the sour scary music).

Lets go off on a tangent for a minute. Many of you will remember a company called Daewoo that manufactured low end vehicles in the late 1990’s. When they filed for bankruptcy, the court established a trust fund to pay for warranty repairs. As far as I can tell, there were never any issues with the funding of the trust fund. However, Daewoo vehicles still lost half their value. Why? Well first off, it became very difficult to find Daewoo parts. Then, Daewoo owners found that they could not obtain collision insurance because the difficulty in obtaining such parts made it impractical for insurers to pay for repairs. And in the period before creation of the trust fund, unsold Daewoo vehicles rusted on the dealership lots, as it was illegal to sell them in some states without a warranty.

SO, in the event of a GM bankruptcy, even if provisions were made by the court for payment of warranty claims, which isn’t a given considering the cost of this liabilty, the value of the vehicles are likely to decline significantly. This would broadly effect a large segment of the US population. Essentially, a good many of us would be forced to ‘write down’ the value of our second biggest asset.

But, you ask, this is a lemon law blog, right? How would a GM bankruptcy effect my lemon law case?

Now one thing I never wanted to be was a bankruptcy lawyer. I can’t honestly say that I always dreamed of being a lemon lawyer, but one day it started to make sense, and I actually quite enjoy it. Bankruptcy, on the other hand, is the subject that I tended to snooze through in law school. HOWEVER, if there is one thing that even a daft lemon lawyer knows about bankruptcy, its the concept of the “automatic stay”. The rule is pretty black and white. If a person or corporation files for bankruptcy, any lawsuits pending against the debtor is stayed pending a resolution of the underlying bankruptcy issues. So in the (hopefully) unlikely situation that GM or another automobile manufacturer were to file for bankruptcy, any pending lemon law cases would be delayed indefinitely. Any cases that we were hoping to settle would likely be delayed as well.

Meanwhile, as these cases languish, the bankruptcy court would proceed to restructure the liabilities of the company or perhaps order its liquidation. Warranty rights of consumers could theoretically be discharged, but its more likely that the the court would create a Daewoo-like trust from the remaining assets of the corporation to cover warranty repairs going forward.

Whether or not such a trust would be sufficiently funded is a key question. Keep in mind, GM has been increasing the term of its warranty, perhaps in a desperation move to take in more revenue now at the expense of future costs. It would take a whole lot of money to cover warranty repairs on GM vehicles for upwards of the next 7 years. But lets assume that there are sufficient funds. That’s the best case scenario. My GM cases are delayed for a few months to a year or so, but ultimately I can pursue them against a solvent trust, unless, of course, the bankruptcy court discharges any past warranty liabilities.

A worst case scenario is, indeed, a situation where those past warranty liabilities are discharged by the court, OR, where the trust is not sufficiently funded. This is where it gets tricky.

If you have ever financed a vehicle, take a look at the back of your finance agreement. In bold letters, you will find a paragraph that states:

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

This language is required to be in your retail installment contract, pursuant to a little known rule promulgated by the Federal Trade Commission (16 C.F.R. 433) called the “FTC Rule on Preservation of Consumers’ Claims and Defenses”, otherwise known as the “Holder Rule“. The rule puts lenders into the shoes of a seller of consumer goods in situations where consumers cannot sue the seller. Like, for instance, in this case where a mobile home was damaged due to defective plumbing, the seller of a mobile home went out of business, and the lender had to pay damages to the consumer.

In the unlikely scenario that my GM clients could not enforce their claims against a warranty trust, it would be the lenders who would take the hit. One has to wonder whether lenders take this risk into account when writing loans on GM vehicles. With all the talk lately of a ‘credit crunch’, this is one potential fly in the ointment that is routinely overlooked.