By Erik Larson, Bloomberg News

A federal appeals court upended General Motors Co.’s plan to shed hundreds of lawsuits over a deadly ignition switch defect found in millions of cars, ruling that such cases aren’t automatically barred by the company’s 2009 bankruptcy sale to a new corporate entity.

The decision Wednesday by the U.S. Court of Appeals in Manhattan is a major setback for GM after the biggest U.S. automaker won two straight victories in test trials over the switch defect, which has caused at least 124 deaths and led to 2.59 million vehicle recalls. The court said the economic losses alone were estimated at as much as $10 billion.

The bankruptcy sale that turned “Old GM” into “New GM” to save the storied company from financial ruin didn’t trump personal-injury suits over accidents that happened before the transaction or claims by people whose vehicles lost value as a result of the flaw, the court said. Those customers didn’t get to challenge the sale before its approval seven years ago, according to the ruling.

“While the desire to move through bankruptcy as expeditiously as possible was laudable, Old GMʹs precarious situation and the need for speed did not obviate basic constitutional principles,” the court said. “Due process applies even in a company’s moment of crisis.”

Claims Revived

Wednesday’s ruling also revives claims by people who purchased used GM vehicles after the sale of the company was approved and say they wouldn’t have bought the cars if they’d known about the switch flaw. The ruling may also revive cases over other types of defects, as long as the vehicles were manufactured before the bankruptcy sale.

“Even if some claims are ultimately allowed to proceed, the plaintiffs must still prove their cases,” Jim Cain, a spokesman for GM, said in a statement. “Many of the claims we face have been brought on behalf of car owners who want to be compensated even though they have not suffered any loss.”

The revived lawsuits include claims over some of the carmaker’s most egregious behavior, said Robert Hilliard, a lawyer representing hundreds of GM customers including at least 300 whose cases are affected by the ruling. “Finally they’ll have a chance at justice,” he said in a phone interview.

Steve Berman, another lawyer for GM plaintiffs and co-lead counsel in the ignition switch cases, said the ruling will affect millions of owners of GM-branded vehicles. His firm accused GM of fraudulently using the bankruptcy sale process to hide the extent of the ignition switch problem and stop hundreds of legitimate lawsuits in their tracks.

‘Calculated Move’

“The appeals court’s ruling today solidifies something that we have known from the very beginning of this suit -- GM’s bankruptcy filing was a calculated move in its effort to conceal and cover-up its actions,” Berman said in a statement.

The appeals court also assailed GM’s handling of the ignition switch defect from the moment it was first discovered, giving a detailed outline of the company’s failure to fix the problem and attempts to keep it from the public.

“New GM essentially asks that we reward debtors who conceal claims against potential creditors. We decline to do so,” the court said.

“At minimum, Old GM knew about moving stalls and airbag non‐deployments in certain models, and should have revealed those facts in bankruptcy,” it said.

GM argued in court that a ruling against the company would throw into question the law governing the sale process. Companies won’t have peace of mind that their asset purchases are truly “free and clear” of all legal problems if GM can’t avoid the presale cases, the company said.

$2 Billion

The carmaker has already paid more than $2 billion to resolve legal claims stemming from the scandal, including $900 million to end a criminal probe by the U.S. government, $575 million to settle a shareholder suit and more than 1,380 civil cases by victims, and at least $595 million through a victims’ compensation fund outside of court.

In addition to GM’s two trial victories, ignition switch plaintiffs voluntarily dropped or settled several other test cases before they reached a jury, including one that would have included emotional testimony about the death of a father of five.

The plaintiffs argue that GM endangered them by delaying the recall of defective vehicles in which jostled keys could trigger a shut-off and disable steering, brakes and airbags. While GM has said top executives didn’t know the switch was a persistent problem, the company admitted in a Justice Department settlement that it knew about the defect by 2005 and concealed it from regulators from 2012 to 2014.

The case is In re Motors Liquidation Co., 15-2844, U.S. Court of Appeals for the Second Circuit (Manhattan).

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