As Chrysler, GM and the Obama admin and the courts work out the terms of the bankruptcies, there are lots of issues to resolve. One of the matters that has generated the ire of state attorneys general is the assertion that if a consumer owns a Chrysler or GM-manufactured car built prior to the bankruptcy, you would be S-O-L if the car is a lemon or dangerous based on a manufacturing defect. GM partially capitulated once people cried foul; Chrysler slipped under the radar.

Under GM’s original bankruptcy plan, the auto maker planned to leave such liabilities behind after selling its “good” assets to a new GM owned by the government. That meant future car-accident victims who believe that faulty manufacturing by the old GM caused their injuries would be unable to sue the new GM. Instead, they would have been treated as unsecured creditors, fighting over the remains of GM’s old bankruptcy estate.

…GM maintained in court papers that it wasn’t legally required to take on the claims, saying federal pre-emption meant the bankruptcy code overrode state laws governing the rights of car-accident victims to sue the new GM. It also noted that Chrysler Group LLC, which recently emerged from bankruptcy in a deal with Fiat SpA, wouldn’t be responsible for such claims, after a bankruptcy judge dismissed objections to its plan.

GM said it ultimately agreed to take on future product-liability claims “to alleviate certain concerns that have been raised on behalf of consumers.”

Car-accident victims with pending lawsuits, those who won damages against GM before it filed for bankruptcy and those who get in accidents while the auto maker is under bankruptcy protection will still be unable to bring claims against the new GM. They would remain with other unsecured creditors making claims against the old GM. Those victims are likely to recover little or nothing.

Attorneys general were expected to “keep pressing” for the new GM to take on those liabilities ahead of Tuesday’s court hearing, a person involved in the discussions said. But the person said GM and the government were unlikely to capitulate further.

Why is the consumer always the entity that institutionally gets the shaft? A car is the second most expensive purchase a consumer makes in their lifetime; that they select a company to do business with in good faith that the products it sells should work properly and be safe is not an incidental matter. What does all of this mean? Mike Spector at the WSJ:

Q: If the new GM is operating a similar business to the old GM, does the law require the new GM to remain liable for tort claims?

A: GM’s legal team anticipated this point of law. In its asset-sale proposal, GM said that “neither [the new GM] nor any of its affiliates or stockholders shall be deemed to…be a mere continuation or substantial continuation of Sellers or the enterprise(s) of Sellers….” Translation: New GM is a fresh company, not a mere continuation of the old GM.

Of course, from practical standpoint, the new GM is just that: a slimmed down version of the auto maker that the Obama administration believes will be more viable. The attorneys general said certain case law requires buyers who operate similarly to the old bankrupt company to remain liable for defects in vehicles from “the same product line.”

Q: Does freeing the new GM of product-liability claims for vehicles sold before its bankruptcy exit violate constitutional due process rights of people who haven’t yet been in car accidents?

A: This is the question that vexed the government, and led GM to take on future claims. Many bankruptcy experts point out that so-called 363 sales are designed to be made “free and clear” of many liabilities, in part to attract buyers. If a buyer had to take on product liability, for instance, the price would be lower and not maximize recovery for creditors.

Judge Richard Posner, of the Seventh U.S. Circuit Court of Appeals, rejected that argument in a 1994 case called Zernand-Bernal Group v. Cox, arguing that “free and clear” sales harmed the rights of future claimants.

So with Chrysler’s slate wiped clean will anyone out there drop $$$ on that company for a new ride?