Chrysler and GM together face nearly 3,500 lawsuits a year for death and injuries allegedly resulting from product defects. Post-bankruptcy, they'll be able to walk away from those claims previously filed.

Just mention the term, “plaintiff attorneys” in automotive circles and watch how everyone flinches.  Big Three executives have, over the years, often claimed that liability and other lawsuits can add hundreds, even thousands, of dollars to the cost of a new vehicle.  While hard data aren’t easy to come by, there’s no question that the industry is often hit by multi-million dollar verdicts when juries find fault with vehicle designs or manufacturing defects alleged to have caused injuries or death to motorists and passengers.

While the auto industry has been less successful than the medical professions in getting liability limits enacted into law, the newly-reformed Chrysler appears to have found an alternative, if temporary reprieve likely to save it many millions of dollars.

When the automaker recently emerged from bankruptcy protection, and its remaining assets were put under the control of Italy’s Fiat, this new Chrysler was exempted from liability not only to existing lawsuits but to legal action that might arise in the future involving vehicles built before June 10th, the day of the sale.

In an extensive report in The Detroit Free Press, journalist Greg Gardner outlines the human side of what was just one of many ways the federal courts gave Chrysler a new, and largely debt-free opportunity to start over.

“Our family and others who have gone through this are going to fight this tooth-and-nail,” the paper quotes Christina Catalano, whose mother, Linda, died last August when a Chrysler minivan she had parked slipped from Park to Reverse.

Whether the courts will reconsider such claims is uncertainty, albeit unlikely.  During the roughly two-month Chrysler bankruptcy, Judge Arthur Gonzalez showed little sympathy towards the thousands of dealers, employees, lenders, suppliers and others who tried to block the automaker’s plan to march through the Chapter 11 process and emerge a smaller, leaner manufacturer. Among other moves, that meant the firing of 789 dealers around the country.  Despite ordering a brief delay, the U.S. Supreme Court added its own imprimatur when, on June 9, it declined to consider Chrysler’s plan to emerge from bankruptcy.

Some liability trials involving Chrysler are currently underway, in courts across the U.S.  How the bankruptcy decision will impact them is uncertain, but lawyers for the new Chrysler could move to halt such proceedings, since they would claim they are no longer responsible for the old, bankrupt maker’s liabilities.  In the event of a favorable judgment, a plaintiff might be forced to try to seek payment from the discarded assets of Chrysler LLC, which are considered to have little, if any, value.

Exactly how much Chrysler will save specifically as a result of being freed from such legal liabilities is unclear.  During the bankruptcy hearings, from Chrysler LLC Chairman Robert Nardelli testified that Chrysler spends about $240 million annually on various liability-related lawsuits.  That figure includes not just matters of negligent liability but also lemon law and other claims.  Chrysler is expected to honor at least some lemon law claims, such disputes being handled in state courts.

The Chrysler bankruptcy case has been closely watched in legal circles, and that includes the lawyers who are helping steer General Motors through its own Chapter 11 journey.  And it appears likely GM will receive the same liability protection when it goes through a similar, so-called “363 Sale,” in which only the desired assets of the old company will be sold to a new enterprise that, in this case, will have the federal government as its largest shareholder.

How many potential claims might be impacted is uncertain, as there could yet be lawsuits filed involving the products for which the post-bankruptcy Chrysler and GM will no longer be responsible. A study by Safety Research & Strategies, a plaintiff attorney support firm, claims that between the third quarter of 2003 and the fourth quarter of 2008, the smaller maker fielded 3,497 death and injury claims, while GM was tagged with 15,284 – a collective annual total of 3,415.

“There is every reason to conclude that the injury and death rates will continue. But the claims will disappear and that will impact the rate of GM and Chrysler recalls and public safety in the future,” asserted Sean Kane, the firm’s president and CEO.  Kane argued that there’s a broader public good to such lawsuits, as they help foster recalls of defective vehicles and encourage manufacturers to design safer vehicles.  Without lawsuits, he complained, “what incentives do they have…?”

Manufacturers counter that lawsuits are a costly distraction and are as likely as not to reflect abuse of the legal system.  But the bankruptcy actions will offer only temporary protection, as products produced post-Chapter 11 will not be exempt.

And while the freedom to walk away from past legal liabilities might save the two makers countless millions, there is the possibility it could carry costs and risks of its own.  Recent studies have shown that a sizable number of American motorists are unwilling to buy from a bankrupt automaker, while others are refusing to deal with companies that relied on federal aid to stay in business.  News that the manufacturers are slipping out of legal liabilities to those injured or killed by their products may cause the sort of publicity that GM and Chrysler can’t afford.