A major issue related to GM’s bankruptcy is being settled in a New York Court, and it could have a major impact on what the company is liable for in faulty ignition switch lawsuits.

A mountain of lawsuits were filed over a defect in the ignition switches of many GM vehicles that could cause the vehicles to switch from “drive” into an auxiliary or standby mode while driving.

Such a change would shut down the engine and disable the airbags. In several cases, it has been alleged that this has happened while driving, causing fatal car wrecks.

Internal GM investigators have indicated that a “culture of incompetence” within GM prevented the company from taking action, even though key individuals at General Motors were aware of the problem for nearly a decade before the recall was issued. In addition to the lawsuits, GM is facing several investigations.

However, one issue that has come up in the GM lawsuits is that in 2009 GM filed for bankruptcy and was restructured. In many ways, the “new GM” is legally distinct from GM prior to the bankruptcy.

There were concerns raised that “new GM” would not be held accountable for the actions of General Motors prior to 2009. However, a New York Court has held hearings on the matter, starting this month.

A trust representing the creditors of General Motor’s bankruptcy estates have said that “New GM” is still accountable for the alleged defect. A trustee from the estate argued in a New York State bankruptcy court that claims regarding the GM ignition switch defects should be applied to the New GM, as the New GM was aware of the issue.

Trustees have also argued that because the defect was concealed, or at least not known during the bankruptcy proceedings, it greatly influenced the outcome of bankruptcy proceedings, leaving New GM just as liable as its predecessor, as opposed to the bankruptcy trust.

A district court in New York is currently hearing arguments to determine if the bankruptcy estate or General Motors will be responsible for any liability lawsuits pertaining to the GM ignition switch defect.

The GM Bankruptcy Case is In re: Motors Liquidation Co., et al., Case No. 1:09-bk-50026, in the U.S. Bankruptcy Court for the Southern District of New York.