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Creditor Lawsuit Could Undo Elements of 2009 GM Bailout

09/27/2012 | 09:15am US/Eastern
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   By Joseph Checkler 
 

General Motors Co. (>> General Motors Company) is worried that a little-noticed lawsuit could reopen the books on its massive 2009 federal bailout, a deal touted by President Barack Obama during this year's election season as one of his chief first-term achievements.

The lawsuit, filed by a trust representing "old" GM's unsecured creditors, attacks a "lockup agreement" that sent hundreds of millions of dollars to a group of hedge funds to get them to drop their claims against GM's Nova Scotia unit. The deal helped keep the unit's parent, GM Canada, out of bankruptcy, but the unsecured creditors trust says it was unfair, and, more importantly, not disclosed properly to a bankruptcy judge.

The trust, which is recovering money for old GM's unsecured creditors, says the deal was completed after GM's bankruptcy filing, meaning it should have been reviewed by Judge Robert E. Gerber of the U.S. Bankruptcy Court in Manhattan. If the suit is successful, the deal could be undone, putting "new" GM on the hook for at least $1.3 billion in claims.

The proceedings are continuing this week, with GM Chief Financial Officer Daniel Ammann set to take the witness stand Thursday. While working at Morgan Stanley, Mr. Ammann advised GM during its restructuring.

The hedge funds, creditors of the Nova Scotia-based GM subsidiary, agreed in June 2009 to waive $1.3 billion in claims in exchange for a $367 million payment. The payment came from GM Canada, which borrowed $450 million from old GM to make that payment. GM, which is vigorously fighting the suit, has said it will prove during the trial that the loan was made before it sought bankruptcy protection and not "backdated" after the fact, as the trust claims.

Judge Gerber has already made it known that the deal at least should have been run by him and that he is worried the entire sale might have to be reopened. Even if the trial doesn't come down to a redo of the entire 2009 restructuring deal, GM could be forced to come up with $1 billion or more to compensate the unsecured creditors at a time when its stock price is languishing and it is lobbying to get the U.S. government to sell its remaining stake in the auto maker.

"The litigation encompasses issues which, if decided adversely to GM, could impair the 2009 resolution of certain indebtedness by GM Canada," said GM spokesman James Cain. "We are defending those interests in the Bankruptcy Court and believe we should ultimately prevail." In a recent regulatory filing, GM said that while it is impossible to estimate how much it could lose if it doesn't win the case, a "reasonable" maximum loss estimate could be about $918 million. That doesn't appear to take into account creditor lawsuits that could spring up as a result of a loss.

Last Thursday, a former employee from one of the hedge funds involved in the original transaction, Fortress Investment Group LLC (>> Fortress Investment Group LLC), testified at the trial. A lawyer for the trust tried to show that the hedge funds had great incentive to keep the details of the deal from the court: 35 cents on the dollar in "cash money," as the witness, Bao Truong, put it in a May 2009 email read to the court. Many other creditors stood---and stand---to get much less.

Mr. Truong, who now works as a managing director at Centerbridge Partners, listened as the lawyer read June 2009 emails between Mr. Truong and his colleagues preparing to get beers to "celebrate" how great a deal the hedge funds got.

Paulson & Co., which bought its bonds later and isn't on the hook to pay back any money, said in court papers that the hedge funds gave up a lot when they signed the deal, including the right to go after the full $1.3 billion in claims.

The deal was beneficial to GM, too. Wiping out the hedge funds' claims helped keep GM Canada out of bankruptcy, a key goal during GM's restructuring because of Canada's complicated and lengthy insolvency process. The unsecured creditors trust has said that the money didn't go to the hedge funds until late June, a few weeks after GM filed for Chapter 11 protection backed by tens of billions in aid from the U.S. government.

If the deal with the hedge funds was completed after GM sought Chapter 11 protection on June 1, 2009, it could be classified as a "post-petition" transaction that would have required approval from Judge Gerber.

"When I heard about that, it wasn't just a surprise, it was a shock," Judge Gerber said in July.

He added, "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 judge has been careful to say that he doesn't know if he would have rejected the sale altogether if he knew about the deal, which was disclosed in a U.S. Securities and Exchange Commission filing the same day GM sought Chapter 11 protection. But he said he might have added a provision that made it clear he wasn't approving the transaction with the hedge funds.

The $367 million payment was divvied among several well-known hedge fund managers, including Fortress, David Tepper's Appaloosa Management LP and Paul Singer's Elliott Management. Appaloosa has since sold its bonds and is no longer involved.

The GM bailout has been touted by the Obama campaign as one of the triumphs of his first term. At the Democratic National Convention in Charlotte, N.C., earlier this month, many attendees sported buttons and stickers with the slogan, "Bin Laden is dead! GM is alive!"

Those following the trial, including several people who wouldn't speak on the record for this article, think it is unlikely Judge Gerber would rule on the matter before the November election.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)

Write to Joseph Checkler at joseph.checkler@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

Stocks mentioned in the article : General Motors Company, Fortress Investment Group LLC
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