Takata’s bankruptcy creating legal history

Takata’s bankruptcy proceedings on novel ground given the number of parties involved and the quantum of the recall.

With last week’s global recall of Takata Corp’s defective air bags being widened, the bigger worry, as per legal experts, is the fallout on car companies who are caught in the bankruptcy court proceedings in the Delaware courtroom.

Earlier this month, people who were injured by Takata’s air bags, were appointed to their own official committee in the Japanese company’s U.S. bankruptcy, thus giving them a powerful voice in the proceedings.

This committee will now be pitted against auto giants such as Toyota Motor Corp, Honda Motor Co, and other automakers.

As per Kevin Dean, Motley Rice attorney who represents injured drivers on the committee, automakers have been trying to use the bankruptcy proceeding to limit their liability for the installation of the faulty air bags.

With the committee now gaining official status, Takata will now have to provide it funds which it can tap to investigate the liability of automakers. Without a committee, plaintiffs would have to pay for their lawyer’s fees by 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, on the appointment of the special committee.

When asked to respond to requests for comments, Takata, Toyota, Honda, and General Motors Co declined to comment.

In a typical bankruptcy proceedings, there is only one official committee – that of creditors. In this case, there is going to be a committee of injured drivers, another of suppliers and yet another of vendors.

According to bankruptcy attorneys who aren’t involved in the case, vendors are naturally expected to be more interested in the future prospects of the business rather than dispense compensation.

The committees were appointed by the U.S. Trustee’s Office, the arm of the U.S. Department of Justice that acts as a bankruptcy watchdog.

Only last week, the National Highway Traffic Safety Administration widened a global recall of Takata airbags, which regulators expect to ultimately cover 69 million cars and 125 million inflators, with most defective air bags yet to be replaced.

Earlier in January, Takata had entered a settlement with the U.S. Department of Justice and has set aside $125 million to compensate consumers and $850 million in restitution for automakers.

In its bankruptcy filing, the company stated it will create a fund to compensate future injuries stemming from the air bags.

Significantly, companies that wind up bankrupt court due to faulty products typically set up such funds. The funds collected from insurers and other potentially liable parties help the victims, in return the company is shielded from ongoing litigation.

It is likely that automakers are likely to demand that their contribution to such a fund would provide them legal protection.

The committee is likely to hire experts who will challenge the automakers proposals, said bankruptcy experts.

“If I were an injured person, I wouldn’t want Takata or the carmakers to decide on the size of the fund,” said Steven Todd Brown, a professor at the University at Buffalo School of Law who specializes in compensation funds.

A few experts have stated that the concerned parties may want to avoid protracted legal battles, such as those that have marred other product liability bankruptcies like those involving asbestos.

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