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Judge dismisses class action by GM Canada dealers, upholds claim against law firm

A General Motors logo is seen at a dealership in Montreal, May 31, 2009.

Christinne Muschi/Reuters

A class-action lawsuit by former General Motors of Canada Ltd. dealers against the company has been dismissed but their claim against a Toronto law firm has been upheld.

The dealers, who were terminated as the auto maker successfully staved off bankruptcy protection under the Companies' Creditors Arrangement Act in 2009, have been awarded $45-million in damages against Cassels Brock & Blackwell LLP. That is considerably less than the $375-million to $425-million claim they urged Judge Thomas McEwen to levy on the law firm.

The retailers sued GM Canada and the law firm after their dealerships were wound up in 2009. They argued in part that the six days the company gave them to assess wind-down agreements they signed in return for compensation was insufficient and that the law firm was in conflict of interest because it represented both dealers and the federal government, which was being asked to help bail out the company.

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The suit is one of several launched by individual dealers or groups of GM Canada dealers in the wake of the 2008-2009 recession, which led to the elimination of 240 dealerships in Canada, the termination of the Pontiac, Saturn and Hummer brands and the chapter 11 bankruptcy filing by General Motors Co.

The Ontario Superior Court judgment provides a glimpse of the crisis facing GM Canada and its parent company in the depths of the recession as auto sales plunged, bondholders launched a lawsuit and the company and its parent racked up billions of dollars in losses.

The Canadian unit lost $2.7-billion in 2007 – the year before the recession hit – and another $4.3-billion in 2008. GM Canada (GMCL) does not release annual profit and loss statements publicly so the evidence introduced in the trial provides the first public indication of how deep the pool of red ink grew.

"GM, GMCL and the dealers were all surprised by the extraordinary pace and painful depth of the financial crisis," Judge McEwen wrote.

GM Canada terminated about one-third of its outlets in the country and 181 of those dealers signed on to the class-action suit. They will each be awarded about $249,000 if the ruling stands.

Judge McEwen agreed with GM Canada's arguments that it gave the dealers sufficient notice to make a decision about whether to accept a wind-down agreement and compensation and that the cuts in its dealer network were necessary in order to secure financial assistance from federal and Ontario taxpayers.

"GMCL did not mislead dealers by stating that the governments mandated the cuts," he wrote.

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But he was sharply critical of Cassels Brock, which was advising Industry Canada in negotiations with GM Canada and its parent company and then signed on to represent a group of dealers.

"Cassels acted irresponsibly and unprofessionally by failing to have an effective conflicts checking system in place – that is one which actually leads to lawyers discussing and resolving potential conflicts," he wrote. "Cassels is liable for its failure to heed the alarm bells that were audible, despite the deficiencies of its conflicts checking system." While GM Canada stayed out of bankruptcy protection, Canadian and Ontario taxpayers contributed $10.8-billion to the bailout of its parent, which used some of that money to reduce a massive pension deficit in plans set up for salaried and hourly employees.

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