* Judge says would prefer settlement to litigation; parties hesitant
* GM is seeking ruling it cannot be sued over alleged loss of car value stemming from recall
* Plaintiffs say GM concealed ignition switch defect that led to recall
By Nick Brown
NEW YORK, May 2 (Reuters) - A U.S. bankruptcy judge on Friday urged settlement talks in a dispute between General Motors Co and plaintiffs seeking compensation for the lost value of their cars stemming from a massive recall over a faulty ignition switch.
Judge Robert Gerber, of the U.S. Bankruptcy Court in Manhattan, said he would welcome the prospect of a resolution that avoided a "monstrous battle."
"Frankly, it would be great if whatever money is available for injured people could go to them, and not to litigation costs and attorneys' fees," Gerber said at a court conference with GM and the plaintiffs.
Gerber is the same judge who in 2009 oversaw GM's whirlwind Chapter 11 bankruptcy case. Now facing dozens of lawsuits over a faulty ignition switch that has led to the recall of some 2.6 million vehicles, GM is asking Gerber to enforce the so-called bankruptcy shield, in a pre-emptive move aimed at staving off dozens of lawsuits from customers who say they took a financial hit from the recall.
Under the plan approved by Gerber, GM channeled its burdensome liabilities into a shell known as "Old GM," while selling its profitable assets to "New GM," a separate corporate entity that took GM out of bankruptcy and now operates as General Motors Co.
Accident victims are not involved in the dispute before Gerber, which involves only claims for loss of car value.
The new entity agreed to take on certain of Old GM's legal liabilities, including those for accidents that occurred after the bankruptcy but which involved cars made before the bankruptcy.
But New GM says it did not agree to take on liability for so-called economic loss claims like the ones it now faces, in which plaintiffs allege that their cars lost value due to the recall. The company wants Gerber to endorse that position and declare that such lawsuits can only be brought against the Old GM shell.
Plaintiffs allege that they could not have known about the defect because GM purposely concealed it from the bankruptcy court. That allegation could lead down several legal paths. Intentional concealment could constitute fraud on the bankruptcy court, and GM wants Gerber to rule no fraud was committed.
A CONSTITUTIONAL ISSUE?
The plaintiffs would rather frame the issue as a constitutional one: they believe any concealment constitutes a violation of due process rights, because the liability shield, they argue, would bind people who could not have known they had claims against GM at the time the shield was imposed. They say they should therefore be able to circumvent the shield and sue New GM.
Arthur Steinberg, a lawyer for GM, said he agreed that settlement talks could be productive eventually, but wanted to wait for recommendations from attorney Kenneth Feinberg, hired by GM to explore legal options for compensating victims of accidents stemming from the switch defect.
"We'd like to see what Mr. Feinberg will or won't do," Steinberg said. "Let's see where the legal issues lie."
Feinberg, the architect of high-profile compensation funds like the Sept. 11 Victim Compensation Fund, is considering among other things whether GM should fund a trust for accident victims, but he could also address - and reach conclusions - on other legal matters.
GM has come under heavy criticism for not catching sooner the defective ignition switch, which had been studied by engineers in the company as early as 2001 but was not recalled until the initial action in February this year. The defective switch has been linked to 13 deaths.
Assuming the case does not settle quickly, Gerber indicated on Friday that he may be inclined to address questions of due process violations before those relating to potential fraud on the bankruptcy court, which would require plaintiffs to probe GM's records.
"I want to accomplish as much as we can before we get bogged down in discovery," Gerber said.
Ed Weisfelner, representing some of the plaintiffs, was hesitant to embrace settlement talks right away, citing disruption to Feinberg's study as well as the ongoing investigations into the switch defect by regulators and federal officials. "While we would rather mediate than litigate, I'm not sure the environment is such today that we're being presented with that choice," Weisfelner said.
(Editing by Howard Goller and Matthew Lewis)