As a former bankruptcy lawyer who now represents consumers in warranty and lemon law cases, I have a pretty unique view on what a possible bankruptcy of General Motors, Ford or Chrysler would mean for the owners of those companies’ vehicles. So I thought I would share it with my readers.
IS YOUR WARRANTY GOING TO BE INTACT IN BANKRUPTCY?
The answer depends on whether a particular automaker will reorganize or liquidate in bankruptcy. Warranty agreements are called ‘executory contracts’ in bankruptcy – simply put, they are contracts where one or the other party has not finished fulfilling its obligations. In the context of a warranty, the manufacturer has yet to perform on the unexpired portion of the contract, so the contract qualifies as ‘executory.’ The Bankruptcy Code allows the debtor to keep these contracts (if they are favorable) or ‘reject’ them (if the debtor feels that the contract isn’t favorable to it).
So, technically, a bankrupt automaker could either keep its warranty obligations or cancel them, and it has the power to choose. From the practical standpoint, it is hard to see how an automaker that intends to reorganize or be purchased, and to remain in business, would choose to cancel its obligation to service the vehicles of its own customers. No one would have any trust in buying its cars going forward. Long story short, if GM, Ford, or Chrysler files with the intent to reorganize or be acquired, your warranty will most likely be intact.
However, if an automaker decides to liquidate and go out of business under Chapter 7 of the Bankruptcy Code, its warranty obligations may go to the grave with it. It’s possible that a trust could be established to pay warranty claims over time.
WHAT IF MY VEHICLE IS A LEMON? CAN I STILL SUE THE CARMAKER?
First and foremost, a bankruptcy filing has the effect of stopping all suits or other efforts to collect against the debtor. This nifty device is known as the ‘automatic stay.’ That means, literally, all suits, including lemon law actions, creditors’ efforts to collect, or any other means to grab what the bankrupt has, must stop. The automatic stay applies with equal force to arbitrations run by Attorneys General in many states to adjudicate lemon law suits. The stay isn’t permanent – it lasts only as long as the bankruptcy does – but from a creditor’s or a consumer’s perspective it makes no difference. That is because all claims against the debtor would be administered through the bankruptcy process.
One possible source of hope for lemon owners lies in Section 362(b)(4) of the Bankruptcy Code, which provides an exception for so-called ‘police powers’ actions against the debtor. This normally means that the Bankruptcy Court has no power to stop state or local governments from enforcing regulatory, administrative or even criminal violations by the debtor – these cases go forward regardless of the debtor’s bankruptcy.
Could lemon law cases fall under this exception? Possibly. There is a good argument to be made that the lemon law legislation is intended to police wrongful or unfair conduct by the automakers. However, the police powers exception normally applies to government, not private actions by individuals.
WHAT CAN I DO IF MY WARRANTY IS VOIDED OR LEMON LAW CLAIM STOPPED?
Get in line. The bankruptcy process provides for orderly liquidation of claims. All creditors who lose money as a result of a debtor’s bankruptcy filing may file a claim with the court. If the court allows the claim, each creditor will get its proportional share of recovery of the debtor’s remaining assets, depending on where the creditor stacks up on the food chain of claims.
IS THERE SOMEONE ELSE I COULD SUE?
Yes, the bank that financed the car. The bank may be liable, but likely only up to the amount of money you have already paid on the loan, not the entire finance agreement.
PLEASE UNDERSTAND THAT NOTHING IN THIS BLOG IS MEANT IN ANY WAY TO CONVEY LEGAL ADVISE TO ANY READER OF THIS BLOG IN ANY STATE.