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Takata's bankruptcy to pit automakers against air bag victims

Monday, July 17, 2017 - 14:59

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The global recall of Takata Corp's defective air bags widened last week and the number of confirmed deaths rose, but legal experts said the bigger worry for car companies caught in the fallout is playing out in a Delaware bankruptcy courtroom.

[NEW YORK] The global recall of Takata Corp's defective air bags widened last week and the number of confirmed deaths rose, but legal experts said the bigger worry for car companies caught in the fallout is playing out in a Delaware bankruptcy courtroom.

Earlier this month, people injured by the air bags, which degrade over time and can inflate with excessive force, were appointed to their own official committee in the Japanese company's US bankruptcy, giving them a powerful voice in the proceedings.

This unusual committee, which includes people whose cars lost value due to the recall, will be pitted against Honda Motor Co, Toyota Motor Corp, and other automakers.

The car companies have been trying to use the bankruptcy to limit their liability for installing the faulty air bags, said Kevin Dean, a Motley Rice attorney who represents injured drivers on the committee.

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Because the committee has official status, Takata must provide it with funds which can be used to investigate the automakers' liability or to challenge financial assumptions.

Without a committee, plaintiffs' lawyers would typically have to pay for that themselves.

"If I were a plaintiffs' lawyer, this would be a golden goose for me," said John Pottow, a professor at the University of Michigan Law School, of the appointment of the special committee.

Takata, Honda, Toyota and General Motors Co declined to comment. Other carmakers did not return requests for comment.

Bankruptcies typically only have one official creditors committee. In the Takata case, the committee of injured drivers will sit alongside another made up of suppliers and vendors, who are likely more interested in the future of the business than compensation disputes, according to bankruptcy attorneys who are not involved in the case.

Both committees were appointed by the US Trustee's Office, the arm of the US Department of Justice that acts as a bankruptcy watchdog.

Seventeen fatalities, including one confirmed last week, and at least 180 injuries have been tied to Takata's air bags since at least 2009.

Last week, the National Highway Traffic Safety Administration widened a global recall of the airbags, which regulators expect to ultimately cover 69 million cars and 125 million inflators. Most defective air bags have not been replaced.

In January, Takata entered a settlement with the US Department of Justice, setting aside US$125 million to compensate consumers and US$850 million in restitution for automakers.

Facing up to US$50 billion in liability, Takata filed for bankruptcy in June in Japan and the United States with a plan to sell its non-air bag operations for US$1.6 billion to Key Safety Systems, which is owned by China's Ningbo Joyson Electronic Corp . Its air bag business would continue to make replacements for the 125 million recalled inflators.

Takata said in its Chapter 11 filings that it will create a fund to compensate future injuries stemming from the air bags.

Companies that wind up bankrupt due to faulty products often set up such funds, and gather contributions from insurers and other potentially liable parties, who in return get shielded from ongoing litigation.

REUTERS

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