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In potentially risky move, GM returns to court

An unusual meeting took place this week at a law office high in a Times Square skyscraper. Lawyers from about 100 law firms participated, either in person or by phone. The agenda: solidifying a strategy for taking on General Motors in bankruptcy court.

Bankruptcy court was supposed to be a fading memory for the giant automaker. But on Friday, less than five months after declaring the era of “Government Motors” over and done with, the new GM, which just completed its 17th consecutive profitable quarter, will be back before Judge Robert E. Gerber in the US Bankruptcy Court of the Southern District of New York, girding for a new fight.

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On the surface, GM is merely asking the judge to enforce a provision of its July 10, 2009, bankruptcy reorganization that insulated the “new” company from lawsuits stemming from accidents that occurred before that date. But the reason for the request is far from routine. The company is trying to shut down a rising tide of class actions stemming from its recall of 2.6 million cars because of a dangerously defective ignition switch that it now links to 13 deaths.

Asking a judge to enforce part of a restructuring happens in many bankruptcy cases. But in this situation, some bankruptcy specialists say, it may be a risky move. Objections have poured into the court from plaintiffs in cases around the country alleging that the company committed fraud during the bankruptcy proceedings five years ago by not disclosing the potential liabilities from the faulty switch, a problem it now admits was known in parts of the company for more than a decade before the recall.

“I think it’s a gamble from GM’s perspective,” said David A. Skeel, a bankruptcy specialist at the University of Pennsylvania School of Law and the author of “Debt’s Dominion: A History of Bankruptcy Law in America.” “If I were the judge, I would not give them a carte blanche and say this litigation has got to stop. I suspect the response will be more nuanced than that.”

In fact, he and others say, the otherwise routine motion could potentially end up leading to a minitrial of sorts, on whether or not fraud was committed. If that happens, Skeel said: “In a way, it’s we’re redoing the bankruptcy. It’s quite possible this trial could be a larger event than the real bankruptcy.”

If alleged fraud becomes a focus, the proceedings could go a long way toward answering a question that two congressional investigations, countless news reports, and other inquiries have not been able to ascertain so far — how high up in the company did the knowledge of the switch defect go. GM has largely declined to make employees available for questioning and has continually cited its own internal ongoing investigation.

The two lead lawyers representing GM in its motion to enforce the bankruptcy order did not return phone calls. But outside lawyers say the company may still have the upper hand. There is a generally accepted feeling that judges do not like to tamper with sales or restructuring plans and that the greater economic good of this one — which has been credited not only with saving the company, but also preventing the US economy from sinking deeper into recession — may be paramount.

Whatever the outcome for GM and the plaintiffs who have filed lawsuits against it, the result could have wider implications for American business.

“This may be an important case for teaching us how bankruptcy sales can relieve a company of its past mistakes,” said Richard Levin, head of the restructuring practice at Cravath, Swaine and Moore.

The bankruptcy court proceeding on Friday is a procedural conference — “No substantive matters will be decided at the conference, nor will evidence be taken,” wrote Gerber in an order — but it sets the starting point of a process that could be lengthy and fraught.

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