By on October 9, 2012

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



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17 Comments on “Will Creditors’ Lawsuit Undo GM Bailout? Bankruptcy Judge ‘Shocked’ By Undisclosed GM Canada Deal...”

  • avatar

    Interesting…good research Ron. We in Canada were alawys told “GM did NOT go bankrupt”

    As GM Canada retiree, I got a dog in this fight.

    Hmmmm? I wonder how this will turn out?

  • avatar

    Very interesting, could have wide ranging implications. Good work Ronnie.

    • 0 avatar

      Did the judge essentially say his decision was based on damn the law,I’ve got a company to save?
      With that mindset,no way he allows a do-over on bankruptcy,no matter how “shocked” he may be.

      • 0 avatar

        The judge is supposed to be following the (bankruptcy) law….not “merely saving GM, the supply chain, and about a million jobs”.

      • 0 avatar

        You are taking what he wrote out of context. What he said was, when he approved the deal, this is what he thought he was doing. He didn’t say he approved the deal because it was saving jobs etc.

  • avatar

    It is a nice dream, but I don’t foresee a return to the rule of law under this regime.

    • 0 avatar

      “Return” to the rule of law? How many regimes do you plan to go back?

      More than one, I assume, unless you’re forgotten about a certain cache of nonexistent weapons for which a few thousand of us died.

  • avatar

    I admit I don’t know that much about corporate bankruptcy, but doesn’t the idea of “borrowing” $450 million from old GM, a company that was about to cease to exist, to prop up new GM, a company only the leadership knew existed at the time, seem a bit suspicious?

    • 0 avatar

      It wasn’t really to prop up new GM, but to keep GM Canada out of bankruptcy court. Bankruptcy court in Canada apparently takes a lot longer and they were trying to avoid that.

    • 0 avatar

      In the case of a “fraudulent conveyance”, the court can look back up to one year prior to the bankruptcy filing.

      I’ve dealt with bankruptcy professionally but not as an attorney. With those caveats, I would say that the unsecured creditors may have a good argument that the money borrowed by GM Canada was, in effect, their money and that they’re entitled to get it back.

      The creditors wouldn’t have to prove intent to defraud in order to support a “fraud” claim. (It is possible to perpetrate a fraud without having done so intentionally.) They would just have to show that they got less from the bankruptcy settlement than they would have otherwise.

      If true, then the court would then have the right to reach back to the party that got the money (in this case, that would appear to be GM Canada) or parties that benefited from the money (the hedge funds), and have that money given back to (what I presume would be) Motors Liquidation (the old GM) for distribution to the affected creditors. But since a US court doesn’t have jurisdiction in Canada, I’m not sure how that would work here. I suppose that the creditors could take that judgment to a Canadian court, and try to get the Canadians to enforce it.

      For the sake of perspective, it should be noted that GM’s unsecured liabilities around the time of the bankruptcy filing were about $120 billion. Even if they got $450 million back, that would amount to about 1/3rd of a cent per every dollar of unsecured debt.

      • 0 avatar

        Do you know if you would have to proof that the move shouldn’t have been done?

        GM was in so much debt that the only way out was probably deals like this or bankruptcy. Also, would it matter that the debt they were trying to paid was this or suppliers. I know that GM gave some suppliers advances on payments before bankruptcy because it wasn’t sure how long it would be before they could pay them again.

        Also, say the deal isn’t made. Do we know that the $450 million that was loaned would have been with old GM or would have gone to new GM’s balance sheet?

        I am not a lawyer and don’t try to pretend to be one on the internet. I am just curious to see if anyone knows the answers to this.

      • 0 avatar

        “GM was in so much debt that the only way out was probably deals like this or bankruptcy.”

        I suppose that it could be a gray area, in that a bankruptcy of GM Canada would have surely impacted the owners of the old GM, since old GM owned the GM Canada entity at the time. It may have been cheaper to pay off these guys and avoid the Canadian bankruptcy than to have the Canadian bankruptcy and whatever claims that may have been made against the US parent company.

        Also, I’m assuming that the new GM acquired GM Canada out of the bankruptcy. If so, then it presumably acquired it with this liability on its balance sheet, which could have effectively lowered its value. In other words, perhaps the new GM would have theoretically paid more for the Canada unit if the loan hadn’t been made, and the whole thing is something of a wash. (I haven’t seen the numbers, so I have no idea how much of that may or may not be true.)

        “I know that GM gave some suppliers advances on payments before bankruptcy because it wasn’t sure how long it would be before they could pay them again.”

        There are fraud exceptions for vendors such as suppliers, since they keep the revenue coming in the door.

        “Also, say the deal isn’t made. Do we know that the $450 million that was loaned would have been with old GM or would have gone to new GM’s balance sheet?”

        The money would have been on the old GM’s balance sheet, since it was their money in the first place. The new GM is a separate entity, and would have acquired its assets from the old GM by paying for them.

        When a company files bankruptcy, then its assets are no longer under its control. It’s up to the company to file a plan with the court, and a trustee operates the business until the matter is disposed.

        Part of the trustee’s job is to make sure that the money goes where it supposed to go. If the old GM’s loan looks like an effort to end run the court and the trustee’s authority, then that could be a problem.

      • 0 avatar

        I should clarify that I haven’t read the case, so I don’t know exactly what is alleged or the arguments that are being used to support the claim against Motors Liquidation. I don’t know if the investors are arguing for fraud or what they may be claiming.

        My intention above was to address the more general question of whether there is some ability for a bankruptcy court to “look back” prior to the date of the bankruptcy filing to see whether a transaction may have been improper. The answer to that question is “yes.”

  • avatar
    Robert Schwartz

    I know Gerber. He is a pompous @$$ and a jerk.

  • avatar

    Hey Ronnie, that judge’s last name is Gerber, not Garber.

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