GM In Trouble On Court Ruling, May Face Billions In Claims

General Motors Company (NYSE:GM) is again in troubled waters as a federal appeals court ruled that the automaker cannot use the 2009 bankruptcy as an excuse to defend itself against lawsuits over defective ignition switches. This ruling has exposed the company to several additional liabilities.

General Motors has long been facing the heat for delaying the recall of 2.6 million vehicles with defective ignition switches, which can lead to shutting down of the engine and prevent deployment of front airbags in the event of a crash. The defect has been linked to 124 deaths and 275 injuries. The company issued a recall in Feb 2014, although the problem was identified back in 2001. Lawfully, automakers are supposed to alert the National Highway Traffic Safety Administration (“NHTSA”) about any safety issue in vehicles within five business days of recognizing the problem.

The 2nd U.S. Circuit Court of Appeals in Manhattan said that General Motors was aware of the defective switches when it went bankrupt but had concealed the fact. The new company which emerged after bankruptcy was free of the claims against the pre-bankruptcy company, or Old General Motors. Thus, the automaker had stopped crash victims from claiming compensation, depriving them of their rights. With the new rule being effective, hundreds of pre-bankruptcy claims can go ahead, including some lawsuits claiming that the value of the automaker’s vehicles has declined as a result of its actions.

Around 1,000 death and injury lawsuits were awaiting the appeals court’s verdict. In addition, the ruling may affect 399 injury and death cases which were settled by the automaker through compensation expert Kenneth Feinberg for $594.5 million in total. General Motors has already coughed up $2 billion as settlements for the defective ignition switches with the U.S. Justice Department, shareholders and consumers.

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The company currently carries a Zacks Rank #3 (Hold).

Some better-ranked automobile stocks include O'Reilly Automotive Inc. (NASDAQ:ORLY) , Spartan Motors Inc. (NASDAQ:SPAR) and U.S. Auto Parts Network, Inc. (NASDAQ:PRTS) , all carrying a Zacks Rank #2 (Buy).