The FBI and federal prosecutors based in New York City are reportedly investigating General Motors’ bankruptcy to see whether GM committed bankruptcy fraud by knowing of an auto defect that could result in significant liability and failing to adequately disclose the problem to authorities and consumers when the company filed for bankruptcy relief in 2009.
GM reportedly knew of the defect in more than 1.6 million small cars, including Chevrolet Cobalts manufactured in 2005 – 2007. The defect, a flawed ignition switch that sometimes turned off power to engines and air bags when thumped by drivers or burdened by heavy key rings, allegedly resulted in 31 accidents and 12 deaths. GM finally recalled at least some defective cars in February 2014.
In 2009, General Motors famously filed for restructuring under federal bankruptcy laws. Under an approved agreement, GM was divided into 2 companies: the “old” company, which would absorb losses such as failed plants and lawsuits for incidents occurring prior to bankruptcy filing; the “new” company, which was better able to get back on its financial feet. Through bankruptcy protections, the company reportedly settled pending claims for relatively small amounts while protected from future liability for other incidents occurring prior to the bankruptcy filing.
If federal authorities find that GM committed bankruptcy fraud, the bankruptcy could be reopened, the bankruptcy agreement could be set aside, GM could be exposed to a slew of new suits related to the recalled cars, and GM will face criminal and civil penalties related to the federal probe.
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