Chrysler’s Newfound Immunity

The WSJ reports on an easter egg contained in Chrysler’s bankruptcy restructuring.

Chrysler is immune from new punitive-damage claims from any alleged manufacturing defects in vehicles sold before the auto maker’s 2009 government-brokered restructuring.

Chrysler’s legal exemption, approved by a bankruptcy judge, is the product of rules embedded in the federal bankruptcy law. These rules allow sick companies at times to abandon product liability or other risks, overruling state laws that give consumers the right to seek damages.

Specifically, the company’s immunity—which no other car maker has—stems from a clause Chrysler crafted in its 2009 bankruptcy sale to Italy’s Fiat SpA. The exemption applies to more than 28 million cars and trucks.

The legal protection afforded Chrysler, now profitable for the first time in six years, allows the Auburn Hills, Mich., company to “essentially get a free pass on some of their most egregious past mistakes,” said Douglas Laycock, a University of Virginia law professor and punitive-damages expert.

The story includes links to the relevant documents.  I’d be curious whether any readers believe there’s any way to challenge these provisions in court.

UPDATE: The VC’s own Todd Zywicki comments:

That WSJ article was weird–it is black-letter bankruptcy law that you can discharge products liability and other tort claims in bankruptcy.  The only limitation really is due process, which is if potential claimaints have notice that their claims will be discharged.  And what is typical is to basically create a trust out of some of the assets in the case and set those aside for the claimants.  And so if you actually own a Chrysler car or buy one used after the date of the bankruptcy then due process is satisfied.

The real anomaly here is actually GM.  There for purely political reasons the government allowed claims against GM to pass through bankruptcy.  I suspect it is because of the trial lawyers.

Punitive damages are especially disfavored in bankruptcy.  They are subordinated to actual damages.  So where creditors do not receive their compensatory damages in full–because the debtor is insolvent–it makes no sense to pay punitives before other creditors are paid in full for compensatory damages.

The oddity in these cases is the rigged bidding process.  Typically this matters because discharging the claims increases the value of the reorganized company (or the amount that a buyer will pay in a 363 sale).  So the real benefit would not go to Chrysler, but rather to Chrysler’s estate, which would thus have more money that it could pay out to creditors as a whole.