General Motors will have to face the people of the state of California in state court in Orange County, thanks to a decision last week by U.S. District Judge Jesse Furman of Manhattan, who is presiding over consolidated federal-court claims involving GM's faulty ignition switches. Furman ruled that a consumer protection and trade practices suit by the Orange County district attorney is fundamentally a law enforcement action that can be litigated despite federal bankruptcy protection for GM's predecessor. And because California's suit otherwise involves only state-law claims, Furman said, the case belongs in state court.Furman's decision has potentially enormous consequences for GM. You probably recall that the court order approving GM's restructuring broadly barred claims against the new company based on cars manufactured before 2009. When the ignition switch scandal broke, New GM filed a motion to enforce the 2009 restructuring order, arguing in federal bankruptcy court in Manhattan that under the terms of the court-approved deal creating the new company, it is not liable for claims that the ignition switch defect either caused accidents or diminished the value of pre-2009 cars. U.S. Bankruptcy Judge Robert Gerber is scheduled to hold a hearing on New GM's protection on Jan. 26. In the meantime, he has required plaintiffs suing New GM over ignition switch defects to stay their cases or file papers in his court explaining why their cases shouldn't be stayed.
California, however, now won't face the prospect that Judge Gerber will erase its case. Its suit which has already served as a model for Arizona's state-court complaint against GM could lead the way for other state attorneys general, more than 40 of whom have reportedly banded together to investigate GM, to do likewise. Even if federal courts ultimately conclude that New GM isn't liable for ignition-switch defects in pre-2009 cars, state AGs may be able to win big money from GM for alleged post-bankruptcy violations of state consumer protection and trade practices laws.
The Orange County DA's office, working with plaintiffs' lawyers from Hagens Berman Sobol Shapiro and Robinson Calcagnie Robinson Shapiro Davis, structured its suit specifically to avoid federal court jurisdiction. The statute of limitations for claims under California's consumer protection laws is four years, so, according to Orange County's brief, its claims don't even implicate Old GM. Judge Gerber in Manhattan bankruptcy court has refused to cede jurisdiction over several private suits that similarly tried to restrict claims, but Orange County said that its case is different because the Bankruptcy Code carves out an exception for enforcement actions by government entities acting in the public interest.
Orange County's lawyers said their case falls under the exception. It "has been brought to protect public safety, to enforce a police and regulatory power and with the primary aim of trying to effectuate public policy and safety," the brief said. Orange County admitted that California law permits monetary penalties for statutory violations $2,500 per violation under one of the laws it accuses GM of breaking and $5,000 under the other but insisted that the goal of the case is to enjoin GM from "continuing and future unfair, deceptive, fraudulent and unlawful practices in California."
GM, represented by Kirkland & Ellis, argued that Orange County doesn't qualify for the "police power" exception because it is using injunctive relief merely as a front for monetary penalties. GM's brief contended that the Orange County suit is a "carbon copy" of a parallel class action filed by Hagens Berman and the Robinson firm on behalf of all owners of GM cars affected by the ignition switch recall. GM has already done everything Orange County wants to assure public safety, the brief argues. So the only real motive for Orange County's complaint is to obtain cash penalties against GM.
The test for whether a government case is exempt from federal bankruptcy court jurisdiction turns on the "pecuniary purpose" of the government entity, GM said. Here, the carmaker said, bankruptcy court should be in charge because Orange County's purpose is pecuniary.
GM said that Orange County, Hagens Berman and the Robinson firm played exactly the same game in recently concluded litigation over Toyota's alleged sudden acceleration defect. Orange County was represented by the same plaintiffs' lawyers in that case, and asserted similar claims for injunctive relief in the name of public safety. But when Toyota settled with the county, the agreement "was only about money," GM said; the 2013 consent order didn't address injunctive relief but called for Toyota to pay a total of $8 million to county programs and another $4 million to plaintiffs' lawyers. (In reply, Orange County pointed out that a 2012 class action settlement with Toyota had already taken care of the injunctive relief Orange County had asked for.)
"It simply cannot be that Congress intended for a local governmental authority like the Orange County plaintiff here to be able to hire a plaintiffs' firm to do no more than refile a private civil suit in the name of the state and thereby deprive a defendant of its right to a federal forum," GM argued.
The remand issue took a circuitous route to Judge Furman in federal district court in Manhattan. Orange County filed the case in Orange County Superior Court. GM removed it to federal district court in Los Angeles. U.S. District Judge James Selna of Los Angeles refused to hear Orange County's motion to send the case back to state court and instead granted GM's motion to stay. But the Judicial Panel on Multidistrict Litigation transferred the case to Judge Furman in New York, who asked for new briefing on whether to remand it to state court.
Furman concluded that, "viewed objectively," Orange County's suit is fundamentally a law enforcement action and therefore qualifies for the exception to federal bankruptcy court jurisdiction. Since the U.S. Supreme Court's 1991 ruling in Board of Governors of Federal Reserve System v. MCorp Fin Inc, the judge said, most courts have looked at the purpose of the law that the state government entity is trying to enforce rather than at the state's intention. In this case, Orange County is acting to enforce consumer protection and trade practice laws, and the judge said that the monetary penalties it wants "are thus means of reaching the ultimate goal of such actions deterring fraud and unfair trade practices by California corporations not the ultimate goal itself."
If GM believes the exception is overly broad, Furman said, it should blame Congress, not him. "This court's task is not to decide whether the police-power exception is good policy. It is to apply the statutory language as written," he said.
Orange County lawyer Steve Berman of Hagens Berman told me by email that he expects Furman's analysis to extend to the Arizona AG's case, which is also being handled by his firm. He said that so far, the other AGs are not working with outside counsel.