GM faces bondholder lawsuit in Canada

Mon Apr 13, 2009 2:09pm EDT
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By Pav Jordan and John McCrank

TORONTO (Reuters) - General Motors Corp is facing a lawsuit in Canada from unsecured bondholders after the auto giant paid dividends from a small Canadian unit even as it teetered near insolvency.

According to GM filings and sources close to the legal proceedings, the lawsuit was filed in Nova Scotia courts last month.

Sources with direct knowledge of the suit told Reuters on Monday that the dividend payouts meant there was a risk that holders of debt issued by the unit, General Motors Nova Scotia Finance Co, would not be paid.

"This is a violation of Canadian and U.S. laws," said one source close to the lawsuit who asked not to be identified. "Creditors have been left with nothing."

GM is trying to keep itself in business and is eyeing a plan for a bankruptcy filing that could split it into a "good" company comprised of its most successful units and an "bad" company of unprofitable units.

Bondholders are worried that a bankruptcy filing would force them to accept hefty losses on their investments.

The Canadian complaint was led by investment funds including Aurelius Capital Partners LP, a New York-based firm, according to a form 10-K filed with the U.S. Securities and Exchange Commission by General Motors Corp on March 5.

The Wall Street Journal said investment funds Drawbridge DSO Securities LLC and Appaloosa Investment Ltd were also listed on the complaint.   Continued...

<p>The entrance of the General Motors of Canada head office is seen in Oshawa March 31, 2009. REUTERS/Mike Cassese</p>