* Bondholder group asks Judge to call government's bluff
* GM seeks court approval for sale
* Bondholders: GM would be first Chap. 11 nationalization
By Emily Chasan and Phil Wahba
NEW YORK, July 2 (Reuters) - A group of dissenting bondholders told a U.S. bankruptcy judge on Thursday that General Motors Corp's GMGMQ.PK proposed asset sale to the government should be blocked because it is not "a genuine sale."
Calling GM's sale the first attempt at a "Chapter 11 nationalization," Michael Richman, a Patton Boggs bankruptcy attorney representing the group of dissenting GM bondholders, said the U.S. government had been "overbearing" in its rescue of the automaker and was circumventing the law.
GM was in U.S. bankruptcy court in Manhattan on Thursday to seek approval from Judge Robert Gerber for a proposed sale of its best assets to a "New GM" funded by the U.S. government.
Over the course of the three-day hearing, the company's lawyers, CEO Fritz Henderson, and a senior member of the Obama administration's autos task force have argued that the sale is GM's only option for survival.
If the deal is approved, New GM plans to be a company that would have the best parts of the old company, a less-expensive workforce and much less debt.
The "old GM," which would include unpopular brands and unneeded factories, would be liquidated in bankruptcy court.
But Richman, representing a group that calls itself the "Unofficial Committee of Family and Dissident GM Bondholders," argued that the sale had not been negotiated as a legitimate sale to an independent party.
Instead, he said the government determined what would be needed to make a "settlement offer" to "favored parties" and then it decided on the price of the sale on the back end of the negotiations.
Richman said "it's not credible" that the U.S. government would turn on GM after providing the company with billions of dollars in support. He asked the judge to "call the bluff" that the government would walk away from the automaker if a deal is not closed by July 10.
"The government came to GM with a financial rescue, not to buy assets," Richman said.
The bondholder group has proposed GM pursue a fast-track traditional Chapter 11 reorganization plan, in which creditors would be entitled to vote, rather than the proposed asset sale.
GM is asking Judge Gerber to approve the sale just one month after filing for Chapter 11 bankruptcy, as no other bidders have come forward to offer an alternative.
Under the terms of the deal, the U.S. Treasury would provide $60 billion in financing to the new company, including a proposed $50 billion that would give the U.S. Treasury a 60 percent stake in the company.
The United Auto Workers union would gain a 17.5 percent stake; the Canadian government would own about 12 percent, and GM bondholders are expected to obtain about 10 percent of the new company.
A successful sale of GM's main assets would be the second big victory for the Obama administration's auto task force. It helped broker the sale of Chrysler LLC to a group led by Italy's Fiat SpA FIA.MI last month.
The case is In re: General Motors Corp, U.S. Bankruptcy Court, Southern District of New York, No. 09-50026. (Reporting by Emily Chasan and Phil Wahba, editing by Matthew Lewis)