New Creditor Challenge to the GM Bankruptcy

I hadn’t heard of this until a reader sent me the link:

General Motors GM -1.86% 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.

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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.