GM says lawsuit could undo the sale that created ‘New GM’

GM says lawsuit could undo the sale that created ‘New GM’
Tiffany Kary
Automotive News | August 7, 2012 – 7:19 am EST

NEW YORK (Bloomberg) — The new General Motors Co. could be undone by a lawsuit that pits general creditors against a group of hedge funds, GM said in a lawsuit that goes to trial today.
The litigation pits general creditors against hedge funds including Appaloosa Management LP, Elliott Management Corp. and Fortress Investment Group LLC over $3 billion.
A trust for creditors of the old, bankrupt part of the automaker now known as Motors Liquidation Co. sued the hedge funds in Manhattan bankruptcy court in March, alleging that while GM was preparing its bankruptcy filing on June 1, 2009, the funds, which held notes in a Canadian unit of GM, “saw an eleventh-hour opportunity for profit and pounced.”
The trust seeks to have a $2.67 billion claim and a $367 million payment negotiated for holders of notes in GM’s Nova Scotia unit disallowed or reduced, saying the hedge funds seek more than three times what GM actually owed them.
The amounts, agreed to as part of a settlement known as the “Lock-Up Agreement” resolved a dispute the hedge funds had brought over an intercompany claim GM’s Nova Scotia Finance unit had against GM Canada.
GM, which split off from the bankrupt unit through a purchase of its assets July 10, said the trust’s objections “threaten to disturb” the sale that saved the automaker, allowing it to prosper.
Preserve order
“New GM intends to participate in the trial of the claims objection to the extent required to protect and preserve the sale order,” lawyers for the company wrote.
The trial before U.S. Bankruptcy Judge Robert Gerber in Manhattan will revolve around whether the lock-up agreement was finalized before GM’s 7:57 a.m. petition. The notes at issue, 8.375 percent notes due 2015 and 8.875 percent notes due 2023, both recently traded at 43.8 cents on the dollar, according to Trace, the bond price reporting system of the Financial Regulatory Authority.
The trust says the hedge funds, pushing for maximum advantage as they negotiated through dawn in the offices of Weil Gotshal & Manges LLP, an adviser to GM’s Canadian subsidiaries, didn’t finish the agreement until 9:21 a.m. on June 1. Furthermore, a precondition of the agreement — the consent of two-thirds of the note-holders — wasn’t obtained until June 25, more than three weeks later, the trust said it will show at trial.
Court approval
Since the agreement wasn’t completed until after General Motors actually filed for bankruptcy protection, it requires bankruptcy court approval, which was never obtained, the trust said, adding that the hedge funds misrepresented the agreement as ending before the bankruptcy in order to evade court scrutiny.
In a pretrial brief, the noteholders said the allegations “have always been a pure fabrication” and that they negotiated at General Motors’ request for the benefit of all holders of notes in the Nova Scotia unit to satisfy an intercompany loan that would have also bankrupted its Canadian unit.
The agreement satisfied the loan “at a substantial discount” and the settlement was approved by the U.S. and Canadian governments in the early morning of June 1, the hedge funds said.
GM said the agreement was important for it because it resolved the dispute over intercompany loans and allowed the U.S. and Canadian governments to buy GM Canada without creating a separate bankruptcy for it. Without the ability to do that, the company would have immediately liquidating, giving creditors of the old GM nothing, lawyers for the automaker said in court papers.
Forgiven claim
Paulson & Co. funds, also investors in the two tranches of Nova Scotia notes, said in court papers that as part of the settlement, the noteholders “gave up a lot in return” including the intercompany claim, worth $1.334 billion, which was forgiven under the agreement.
Before the lock-up agreement, the face amount of the claims held by the notes was less than $1 billion, the trust has said in court papers. Gerber’s wind-down order in 2011 sealed the government- backed separation of the automaker’s liabilities from its most profitable operations, which took place in 2009.
Motors Liquidation Co.’s plan repays general unsecured creditors through a trust. The trust is set up to pay general unsecured creditors through receive stock and two series of warrants, one with an exercise price of $10 a share that expires in July 2016, and another with an exercise price of $18.33 a share that expires July 2019, according to court papers.

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