Jan 3 A U.S. bankruptcy judge could soon rule on
whether the 2009 government-led restructuring of General Motors
Co improperly favored hedge funds, and an adverse ruling could
cost the automaker nearly $1 billion.
Judge Robert Gerber must decide whether a "lock-up
agreement" in the restructuring sent $367 million to a group of
hedge fund noteholders at the expense of other creditors.
A trust representing unsecured creditors has sued to undo
the lock-up agreement, arguing that it was a last-minute deal
secretly folded into GM's bankruptcy to ensure the hedge funds'
After the automaker, or "Old GM," filed for bankruptcy in
2009, its best assets were sold to the new General Motors Co
. The remainder of the company was liquidated for the
benefit of creditors.
While the hedge funds, which hold notes with about $1
billion in face value, received the $367 million under the
lock-up agreement, unsecured creditors received just pennies on
the dollar. The hedge funds and other investors in the notes
also received a claim against "Old GM" for $2.67 billion.
In its lawsuit, which was filed in U.S. Bankruptcy Court in
Manhattan, the creditors' trust alleged that the lock-up
agreement was unfair to "Old GM" creditors. The trust said the
deal took place after the bankruptcy filing and therefore
required Gerber's approval, and it called on Gerber to unwind
GM and the hedge funds have argued the lock-up agreement was
sealed before the bankruptcy and was not subject to Gerber's
approval. They have also argued the agreement was not secret
because it was disclosed in securities filings.
They also argued that the lock-up agreement cannot be
unwound without undoing the entire restructuring.
At a court hearing in July, Gerber said he was "shocked" to
learn about the hedge fund deal. "The bottom line is, is that
this matter is huge," Gerber said. "There was a lack of
disclosure to the court on the matter with the potential to
injure 'Old GM' creditors to the extent of hundreds of millions,
if not billions of dollars."
Gerber held several days of trial between August and
October. The hedge funds and GM have asked Gerber to extend the
trial for one more day to call a rebuttal witness, a request to
which the judge has not responded publicly.
Although the judge has not said when he will rule on the
lock-up agreement, experts say a ruling could come as early as
A GM spokesman and Bruce Zirinsky, a Greenberg Traurig
lawyer who represents the main hedge fund defendants, both said
they expect to prevail but declined to comment further. A lawyer
for the creditor trust, Eric Fisher of Dickstein Shapiro, did
not respond to requests for comment.
The defendants are the hedge funds that signed the lock-up
agreement, as well as others that invested in the notes along
with the hedge funds. While GM is not a defendant, the automaker
said in an earnings statement in August that the lawsuit could
lead to a possible loss of as much as $918 million.
This is because GM could find itself on the hook for a loan
of around $1 billion that was owed by GM Canada to a financing
unit based in Nova Scotia that had issued notes to the hedge
According to court papers, the lock-up agreement was
negotiated with the involvement of Canada and the United States,
which were funding the bankruptcy.
The two governments wanted to keep GM Canada out of that
country's potentially complicated insolvency proceedings and
agreed to pay the $367 million to the hedge funds to resolve GM
Canada's debt to the Nova Scotia entity.
In addition to the payment, "Old GM" agreed not to contest
claims against it by the noteholders with a face value of $2.67
Regardless of the outcome, Gerber said in July he expected
his ruling to be appealed.
The case is Motors Liquidation Company GUC Trust v The
Liverpool Limited Partnership et al, U.S. Bankruptcy Court,
Southern District of New York, No. 12-09802.