A $10 Billion Loophole: Will General Motors Really Ignore the Same Taxpayers That Saved It From Ruin?


General Motors headquarters in Detroit. Source: General Motors

General Motors (NYSE: GM  ) has just been slapped with a staggering lawsuit that could cost the automaker more than $10 billion. The lawsuit claims that General Motors is liable for a loss of resale value on as many as 15 million vehicles, some of which aren't even involved in the ignition switch recall debacle, due to damaged brand image. With all the negative publicity about General Motors and its ever-growing pile of recalled vehicles -- 17.7 million vehicles in the U.S. and counting -- how will the company respond to this suit? Will it fork over the cash to its customers? 

Don't count on it. It appears that America's largest automaker could use a loophole that formed when it emerged from its bankruptcy in 2009.

Here's where it gets tricky
Make no mistake, this massive recall saga has ballooned into a very complex situation. It has been made especially tricky because the bankruptcy General Motors emerged from in late 2009 enables "New" GM to avoid responsibility for accidents that originated during the "Old" GM era, in its pre-bankruptcy days. 

GM CEO Mary Barra during an update on ignition switch recalls. Source: General Motors

Apparently, when you're America's largest automaker, this defense works perfectly. That's the kicker in this tragic case -- because many of these ignition switch accidents took place almost a decade ago, "New" GM can, in theory, avoid responsibility. 

Toyota, while avoiding bankruptcy through its entire recall saga in 2009 and 2010, unfortunately did not have that same defense available and ended up settling a very similar lost-value lawsuit under terms valued between $1 billion and $1.4 billion. 

To be very clear, General Motors has said that it will absolutely take "Old" GM's responsibility, and rightfully so, for those people directly affected by the ignition switch defects through crashes, injuries, or tragic deaths. Currently, it appears "New" GM's assumption of "Old" GM's responsibility will end with the 300 individuals identified as having been directly affected.

In reality, this lost-value lawsuit is but one piece of the entire situation surrounding General Motors. Here are a few more things to consider, and a mystifying lack of a response from the taxpayers that were left on the hook paying to save the once troubled Detroit automaker.

Does anybody care?
General Motors has recalled over 17.7 million vehicles in the U.S. this year. That amount is more than the entire automotive industry is expected to sell in the U.S. this year, an estimated 16.1 million vehicles. Furthermore, General Motors is currently on pace this year to top the entire auto industry's record of 30.8 million vehicles recalled, set in 2004, single-handedly.

After the American taxpayer helped fuel General Motors' unique bankruptcy and bailout process roughly five years ago, our thank-you note was an $11.2 billion tab. After all of that, is General Motors really going to try to shrug off a $10 billion lawsuit that alleges that as many as 15 million American car buyers lost value on their vehicles?

Surely the American consumer would respond to either the massive recall debacle or this new lawsuit?

If Americans responded, it certainly wasn't in terms of purchasing competing vehicles, rather than General Motors' -- the company's sales are up 13% through the first five months of the year, and May was the company's best monthly sales performance since August 2008.

"It's remarkable how disconnected the buying public is from this story," said Jack Nerad, executive market analyst at Kelley Blue Book, according to Bloomberg. "It doesn't seem to have affected sales at all."

Bottom line
Despite ballooning recalls, massive incompetence, and tragic deaths linked to ignition switch defects, it's possible that General Motors could emerge from this entire recall debacle relatively unscathed. We know that General Motors will take a $2 billion charge on its financial reports through the first two quarters, and that it plans to set up a massive fund to compensate victims' claims. But is that enough?

If General Motors emerges, after all is said and done, paying roughly the same amount Toyota did for its massive recall a few years ago, roughly $3 billion, wouldn't that seem like a slap on the wrist? Wouldn't that be insignificant compared to the tab GM left taxpayers on the hook for, to the tune of $11.2 billion? Before you answer, consider that General Motors ended the first quarter with $27 billion in automotive cash and marketable securities. Maybe it's time consumers and investors spoke up.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 21, 2014, at 3:23 PM, lem2004 wrote:

    GM doesn't owe the tax payers anything for the bail out.GM didn't tell the Gov. to sell the stock at a loss,if you want to complain ,complain to the Gov.GM wanted the Gov. to loan them the money but the Gov. wanted the stock,if they had loaned them the money GM would be paying it back as I write.Know the facts before you write an article.As for the lost value of the cars,they are mostly older used cars,and sites that track resale values say the cars have lost very little if any value.First of all they are going to fix them for free and will get you a loaner if you don' want to drive them.As for the deaths and injuries they said they are going to compensate people for that as they should.It was tragic that people were killed or injured,and hopefully GM will see to it that it never happens again.

  • Report this Comment On June 21, 2014, at 3:30 PM, AdamGalas wrote:

    I've never been a GM fan but was considering some of their models such as the Cruze TDI or the Volt.

    Now? Well, I can't risk such a large expenditure on a company who's track record is of shoddy quality and lies.

  • Report this Comment On June 21, 2014, at 4:30 PM, yuckfu wrote:

    im driving two gm vehicles now and when I trade ill buy a new chevy cruise and a new Silverado,despite the recalls,nobody builds them better.

  • Report this Comment On June 21, 2014, at 4:30 PM, TheeMadCatte wrote:

    GM's business practice was built upon lies and deceit. These are the same CEO who only cares about the almighty dollar and not about people's lives.

    It is not the government's job to bailout a failing company. Not only that, but the money that was used to "pay off" GM's debt was from another form of loan.

    With all the recent recalls they've been having, it makes you wonder what other lies they've been hiding? Well either way, only the real blind/brainwashed "patriotic" fools will stand by GM for the rest of their lives.

  • Report this Comment On June 21, 2014, at 6:45 PM, TheLightBearer wrote:

    In 2004 I leased a Cadillac CTS and drove

    it for four years and other than routine maintenance my only repair was to replace

    the battery. Likewise with the 2008 CTS,

    but no battery. The belief that GM does

    not build quality cars is false. I won't even

    go into the 1964 Impala I put 120,000 miles

    on.

  • Report this Comment On June 22, 2014, at 10:12 AM, dick62m wrote:

    I have a 2006 hhr that I have been trying to sell for months.

    I took it to two gm dealers to have it appraised. they confirmed that the retail value (nada) was approximately $8100.

    I posted it on the internet and got one ridiculous offer.

    I then consigned it to a dealer and the highest offer so far is $5500.

    I think the "loss of value" is obvious.

    It boggles my mind to think people still support/defend gm AFTER it has been proven that they lied and tried to cover their quality problems at the same time the problem was causing deaths.

    gm's 1Q2014 automotive cash on hand was over $27B. (blood money)

    wake up people.

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