by Marian Wang. ProPublica, May 27, 2011, 11:33 a.m.May 26, 2011May 27, 2011

As part of their government-brokered bankruptcies, American auto giants Chrysler and General Motors were released of some legal liability for product defects, the Wall Street Journal reported today. As a result, the automakers do not have to pay out damages to car accident victims who had lawsuits pending or had already won damages before the companies filed for bankruptcy.

Chrysler and GM went on government life support during the financial crisis and were bailed out with more than $60 billion in taxpayer dollars. While the cash infusion may have saved jobs and averted the collapse of the American auto industry, the restructuring process left thousands of accident claimants with little to no legal recourse.

A University of Pennsylvania law professor and bankruptcy expert told the Journal that it’s an unusual case of the government picking winners and losers. With mixed legal precedents on the issue, federal bankruptcy judges prioritized certain lenders—the U.S. Treasury, for one, received huge ownership stakes in the two companies—and left car accident victims in the lurch. The Journal explains what happened behind the scenes:

Leaving behind product-liability claims didn’t initially raise red flags for the president’s auto task force, said people familiar with the negotiations. In part, that was because such methods had been used in other bankruptcy sales. But also, setting aside more money for accident victims, these people said, could have prompted complaints from others who felt shortchanged by the restructurings, at a time when government bailouts were unpopular.

Unable to recover damages from the car companies, some victims and victims’ families have tried to sue other parties. (Bloomberg noted this phenomenon in 2009.)

“They will sue the GM dealer that sold the car because they sold a defective product, or they will sue the owner of the roadway, claiming that the pavement was the problem,” auto-safety expert Daniel Melcher told me. Melcher said the companies’ protection from liability has had a significant effect within his industry.

“The party that we all know is responsible can’t be sued, so people play lawyer games of who else we can sue. They have to go somewhere else to get compensation for the accident.”

Chrysler and GM told the Journal they sympathize with claimants but emphasized that many stakeholders also sacrificed as the companies fought off collapse—jobs were lost, dealerships closed, and lenders weren’t fully repaid.

Chrysler announced this week that it repaid the government loans it took out two years ago, and GM made a similar announcement last year. But as Politifact notes, those claims were a bit misleading.

The U.S. Treasury still holds a stake in Chrysler that it intends to sell, and an Obama administration official has said that the government doesn’t expect to fully recover about $1.9 billion in remaining investments. And while GM has paid back the $6.7 billion in bailout loans, it did so using other taxypayer money. Meanwhile, the government still owns a huge percentage of the company and may never be made whole on that investment.

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