A couple of weeks ago the Wall Street Journal published an article about a “little-noticed” lawsuit in U.S. Bankruptcy Court filed by a trust representing “old” GM’s unsecured creditors. Those creditors are challenging a 2009 deal between GM Canada and a group of hedge funds that helped keep GM’s Canadian subsidiary out of its own bankrupcy. It’s a bit surprising to me that the WSJ article itself got very little notice in the automotive world because, if successful, the lawsuit could undo at least part of GM’s restructuring or result in a $1.3 billion price tag for the automaker. In regulatory filings GM has said its possible exposure will be less than that, $918 million, though in theory the bankruptcy court could reopen the entire bankruptcy, which would be much more disruptive to GM than just paying out a billion dollars.
The plaintiffs in the suit claim that the deal not only treated them unfairly compared to other creditors , but that it was also not properly disclosed to Judge Robert E. Garber, who presided over General Motors’ bankruptcy and restructuring in the U.S. Bankruptcy Court for the Southern District of New York. Perhaps ominously for GM, Judge Garber has already expressed “shock” over the fact that he was not informed of the deal, which the claimants allege was consummated after the Detroit based automaker filed for bankruptcy in his court. Had GM Canada been forced to file its own bankruptcy over that debt it would have likely substantially stretched out GM’s bankruptcy process from weeks to possibly years.
Earlier this year, Judge Garber said,
“When I heard about that, it wasn’t just a surprise, it was a shock. When I approved the sale agreement and entered the sale approval order I mistakenly thought that I was merely saving GM, the supply chain, and about a million jobs. It never once occurred to me, and nobody bothered to disclose, that amongst all of the assigned contracts was this lock-up agreement, if indeed it was assigned at all.”
The case centers on $1.3 billion in GM Canada debt to a group of hedge funds that was waived in 2009 after GM Canada agreed to make a lump sum cash payment of $367 million (USD) to those hedge funds. To make that cash payment, GM Canada in turn borrowed $450 million from old GM. New GM says that it can prove that loan was made before it filed for bankruptcy before Judge Gerber. The trust representing the creditors says that the deal was backdated to hide it from the judge. Those creditors are unhappy because while 35 cents on the dollar doesn’t sound like a great deal, that’s better than what they got.
Ronnie Schreiber edits Cars In Depth, a realistic perspective on cars & car culture and the original 3D car site. If you found this post worthwhile, you can dig deeper at Cars In Depth. If the 3D thing freaks you out, don’t worry, all the photo and video players in use at the site have mono options. Thanks for reading – RJS