By Jessica Dye and Nick Brown
NEW YORK, March 14 (Reuters) - General Motors Co is facing increasing pressure to compensate victims for an ignition defect that prompted the recall of 1.6 million vehicles, even if some would-be plaintiffs are barred from suing the auto maker under the terms of its emergence from bankruptcy in 2009.
GM is a different legal entity than the one that filed the 2009 bankruptcy that shook the U.S. economy. The so-called "new" GM is not responsible under the terms of its bankruptcy exit for any legal claims relating to incidents that took place before July 2009.
But with a massive recall on its hands and accusations the company knew of the defect for a decade, GM is facing pressure from consumer groups that say the arrangement would unfairly bar victims from getting the compensation they deserve.
On Wednesday, two prominent consumer advocacy groups called on GM Chief Executive Officer Mary Barra to create a $1 billion trust fund to pay victims.
"Don't you think in your heart of hearts that it is cruel and unfair to use those defenses to escape liability for a defect GM concealed and failed to remedy for 10 years?" Clarence Ditlow, executive director of the Center for Auto Safety, and Joan Claybrook, president emeritus of Public Citizen, stated in a letter they released to the public.
In a statement, GM did not rule out the possibility of setting up such a fund to compensate victims.
"We appreciate the concern expressed in the letter," the company said. "It is true that new GM did not assume liability for claims arising from incidents or accidents occurring prior to July 2009. Our principle throughout this process has been to put the customer first, and that will continue to guide us."
GM says the ignition switch has been connected to at least 34 crashes and 12 deaths. A study released Thursday night linking 303 deaths to the recalled cars was quickly criticized by GM.
Federal prosecutors, Congress, regulators and GM itself are all investigating why it took GM so long to recall affected cars, in light of documents that indicate the company may have received reports of a potential defect at least a decade ago.
Plaintiffs' lawyers expressed confidence that solid lawsuits will emerge stemming from incidents that occurred after GM's bankruptcy. Lawsuits from older incidents, however, must be brought against a shell entity that retained the liabilities of pre-bankruptcy GM, and which has little in the way of money to pay plaintiffs.
If GM were to set up a fund to compensate victims, the move would have some recent precedent. Notably, BP Plc agreed to set up a $20 billion trust fund under pressure to speed up payments to victims of a massive 2010 oil spill in the Gulf of Mexico.
Creating trusts to finance legal liability is not uncommon in bankruptcy, though it can take various forms. Paint materials maker Tronox Inc emerged from bankruptcy in 2011 by assigning a spate of environmental claims to a new trust, which then sued other parties to try to raise money to pay the claimants.
A more common type of trust relates to companies in bankruptcy due to asbestos-related claims. Under a bankruptcy statute applying only to such cases, companies can use bankruptcy to shed legal claims by setting aside money in a separate trust. Chemical manufacturer W.R. Grace & Co set up a $4 billion trust when it went bankrupt in 2001. Since then it has been wildly successful, and its stock has more than tripling since 2010.
GM is already out of bankruptcy, and most experts say it has no legal obligation to create such a trust, even if authorities eventually conclude that there was wrongdoing.
Nevertheless, some experts said that as lawsuits start to fly and the various investigations keep the issue in the headlines, GM could see advantages in a relatively quick resolution in the form of trust.
"The illogic of having this in the newspaper every day, about how they lied and killed people, that's not what the marketing people will think is servicing their interest," said Bill Brandt, head of corporate restructuring consultant Development Specialists Inc.
The size of the $1 billion trust proposed by the Center for Auto Safety and Public Citizen would generally be in line with the $1 billion to $1.5 billion in legal judgments and settlements that Guggenheim Securities analyst Matthew Stover estimated GM would ultimately face from the recall.
One influential lawmaker, Senator Jay Rockefeller, on Thursday voiced interest in the trust proposal.
"I can't answer that out of the blind, but generally speaking, I'm all for establishing funds to take care of people," said the West Virginia Democrat, who chairs the Senate Commerce Committee.
Rockefeller's committee is expected to hold hearings next month on the GM recall.