By Joseph Checkler
General Motors Co. (GM) 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
(FIG), 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
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