GM could face $918 million hit from bankruptcy-related lawsuit

Thu Jan 3, 2013 4:42pm EST
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By Tom Hals

(Reuters) - A U.S. bankruptcy judge could soon rule on whether the 2009 government-led restructuring of General Motors Co improperly favored hedge funds, and an adverse ruling could cost the automaker nearly $1 billion.

Judge Robert Gerber must decide whether a "lock-up agreement" in the restructuring sent $367 million to a group of hedge fund noteholders at the expense of other creditors.

A trust representing unsecured creditors has sued to undo the lock-up agreement, arguing that it was a last-minute deal secretly folded into GM's bankruptcy to ensure the hedge funds' support.

After the automaker, or "Old GM," filed for bankruptcy in 2009, its best assets were sold to the new General Motors Co (GM.N: Quote). The remainder of the company was liquidated for the benefit of creditors.

While the hedge funds, which hold notes with about $1 billion in face value, received the $367 million under the lock-up agreement, unsecured creditors received just pennies on the dollar. The hedge funds and other investors in the notes also received a claim against "Old GM" for $2.67 billion.

In its lawsuit, which was filed in U.S. Bankruptcy Court in Manhattan, the creditors' trust alleged that the lock-up agreement was unfair to "Old GM" creditors. The trust said the deal took place after the bankruptcy filing and therefore required Gerber's approval, and it called on Gerber to unwind the deal.

GM and the hedge funds have argued the lock-up agreement was sealed before the bankruptcy and was not subject to Gerber's approval. They have also argued the agreement was not secret because it was disclosed in securities filings.

They also argued that the lock-up agreement cannot be unwound without undoing the entire restructuring.   Continued...

The General Motors logo is seen outside its headquarters at the Renaissance Center in Detroit, Michigan August 25, 2009. REUTERS/Jeff Kowalsky