More on the Challenge to the Canadian Lock-Up Agreement in GM Case

Last week I linked to a news story about a new challenge to the GM bankruptcy that dealt with a “lock up” agreement that directed a large amount of money to creditors of GM’s Canadian subsidiary in order to keep them from driving that subsidiary into bankruptcy.  The problem, as I understand it from news stories, is that money from main GM was used to do that, money that GM’s unsecured creditors says is theirs.  The other problem is that it appears that the lock-up was secret and not disclosed to GM’s bankruptcy judge.  Oops.

Today the Washington Free Beacon adds a bit more information to the story and provides some sense of the political context around the decision:

 A backroom deal hatched by General Motors during the auto bailout to fulfill the Obama administration’s demand for a quick bankruptcy could be reversed, draining the automaker of nearly all of its cash on hand and leaving it in worse shape than it was when it collapsed in 2009.

As GM teetered on the edge of bankruptcy in June 2009, it cut a $367 million “lock-up agreement” with several major creditors in order to prevent its Canadian subsidiary from going under. The move spared the subsidiary from fulfilling the $1 billion debt it owed the creditors—major hedge funds—ensuring that GM would not have to face bankruptcy courts in two nations, which could have delayed the company’s recovery.

The trustee for (old GM) creditors shortchanged by the government-driven bankruptcy are now suing the hedge funds in a move that could undo the bailout.

“Many U.S. creditors waived their rights to object because the government wanted to push through the bailout for political reasons,” risk analyst Chris Whalen said. “If they had continued through normal channels, they could have easily been in bankruptcy for five years. So they made sure these issues were not adequately briefed before the court.”

Judge Gerber says:

“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,” Gerber said in July.

Some of those involved claim that the motivation was political:

President Obama pledged that the bailout would pull the company through bankruptcy in record time. The cash injection from Treasury accomplished that goal, but the corners GM cut to ensure a smooth transition left many parties unhappy.

“They didn’t care about the company long-term,” risk analyst Whalen said. “The process was politically driven to be done as fast as possible, focused on securing short term support from the [United Auto Workers union].”

***

“The government did a sloppy job with the bailout,” the bankruptcy expert said. “We have a fully functioning bankruptcy process based on centuries of common law, standard ways of doing things.”

“The federal government didn’t want pension plans to bear any costs associated with traditional bankruptcies … and now you’re faced with this.”

According to the article, if the creditors win the dispute that could lead to reopening the entire GM bankruptcy case.  But is that right?  I don’t understand why it would lead to completely reopening the bankruptcy case.  The article quotes a lot of flamboyantly-expressed generalities, but if the plaintiffs win I don’t see why that would lead to reopening the whole bailout.  Isn’t the theory here basically a fraudulent transfer theory?  And if so, wouldn’t the remedy be for the hedge funds that received the transfers to simply give it back to the estate.  In which case the Court reopen the case for the narrow purpose of distributing the proceeds to unsecured creditors, but does anyone know why this potentially could lead to reopening the whole bailout and bankruptcy case?

Bloomberg’s story has some different details about the case.