One of the things that bankruptcy lets you out of is legal judgements; if you've had a case go against you, and you declare bankruptcy, then the person who sued you has to get in line with the other creditors.


In the case of people with product liability suits against GM, this meant that they got nothing, as an article in the Wall Street Journal explores today:

Plaintiffs have been bargaining with Motors Liquidation lawyers in conference rooms across the U.S. to get whatever they can, often 30 cents on the dollar in the form of shares and warrants from an unsecured creditors' trust that received 10% of new GM stock. 
 Some have settled. Others have refused to accept terms offered in mediation. Callan Campbell, who was rendered a quadriplegic in 2004 when a GMC Jimmy sport-utility vehicle she was riding in flipped and the roof caved in, says she rejected an offer from lawyers with Motors Liquidation, and hopes to go to trial to recoup more. 
GM has argued in similar cases that such injuries are caused by drivers falling into the roof rather than the roof collapsing. 
Chrysler has no money set aside for unsecured creditors, so no detailed tally has been made of claims against it, and accident victims who weren't compensated before the bankruptcy are unlikely to get much. In Hiawassee, Ga., Ms. Denton's family isn't optimistic about getting any of the damages they're owed by Chrysler. The money would "help us take care of things," including unpaid hospital bills, says her sister-in-law, Leslie Denton, who with her husband cares for Vicki's surviving son Brett, now 13 years old.

This is not some dire machination of the Obama administration; people who win lawsuits are creditors of the corporation, just like bondholders and suppliers, and they have to stand in line for what's left over when the corporation declares bankruptcy.  But David Skeel, my favorite bankruptcy professor, makes an interesting point:  


"This was not a normal case. The government was deciding who was going to be taken care of and who was not," said David Skeel, a University of Pennsylvania law school professor and bankruptcy expert who has testified before Congress on the auto bailouts. Even if the auto makers had legal rights to leave behind product-liability claims, "there is a deep unfairness," he said. "It would have been easy enough to set something aside for them."
Why screw these plaintiffs, and keep the union pension funds whole? Were they really so much less deserving?

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