May 29 (Bloomberg) -- When General Motors Corp. files for bankruptcy protection next week, a Dickensian tale of two legal processes will unfold.

In one, a judge will be told that a new entity will emerge within three months with prized assets and a plan to revisit the best of times when GM was the world’s largest carmaker. In the other, Bleak House comes to bankruptcy court as creditors shut out of the new entity will be told to argue for perhaps years about who gets company properties the new GM doesn’t want.

In the rosy scenario, the new company, armed with vehicles from GM’s Cadillac, Chevrolet, Buick and GMC divisions, plans to begin making money again within 60 to 90 days, while a bankruptcy court sells or liquidates unprofitable brands such as Saturn and Hummer. Saab already is in bankruptcy.

Chrysler LLC, GM’s smaller rival, is on schedule to create a similar new company even faster, stripped of billions in debt and stocked with viable vehicle models, with the approval of a bankruptcy judge in charge of its reorganization.

“They are clearly trying to clear a path for a very quick Chrysler-style case,” said Stephen Lubben, a bankruptcy-law professor at Seton Hall University School of Law in Newark, New Jersey. “They will use the bankruptcy code to separate ‘good GM’ from ‘bad GM.’”

Stock Below $1

GM today fell below $1, the minimum price normally needed to trade on the New York Stock Exchange, and closed at the lowest level in 76 years. The stock dropped 37 cents, or 33 percent, to 75 cents, at 4:02 p.m. in NYSE composite trading.

In creating the good company, the U.S. plans to speed GM’s progress by turning more than $50 billion of loans into a 72.5 percent equity stake for the government, slashing company debt to about $17 billion, excluding financing obligations to suppliers and warranty programs, according to a regulatory filing yesterday.

With unions accepting pay cuts, GM also will compete better in world markets with Japan’s Toyota Motor Corp., which overtook it as the world’s largest automaker last year, ending GM’s 77- year reign.

The new agreement with the United Auto Workers union, ratified by U.S. employees today with 74 percent voting in favor, may save the automaker $1.3 billion annually and includes plans to retool an idled plant to build small cars in the U.S. GM didn’t identify the plant, which will be capable of building 160,000 cars annually, or say when it would begin production. Without the labor pact, the plant would have closed.

The new GM will take some liabilities with it such as an auto supplier financing program and warranty obligations. Detroit-based GM had global liabilities of $176.4 billion as of Dec. 31, 2008.

Hummer, Saturn Units

Pontiac models will be scrapped, along with 14 factories, some of which may involve massive cleanup costs. GM must also try to find buyers for its Hummer and Saturn units after not finding any takers so far.

GM and Magna International Inc. have reached a framework agreement on a rescue proposal for the Opel unit in Germany, according to two people familiar with the discussions. The preliminary pact would provide the basis for Germany’s government to release 1.5 billion euros ($2.12 billion) in short-term financing for Opel, said the people, who asked not to be identified because the talks are confidential.

Given the planned stakes, the new GM will be controlled by the U.S. government, with the Canadian government possibly owning a small share. A union health-care trust will own 17.5 percent and 10 percent will be given to the old GM to hand to creditors to resolve claims, according to GM’s filing.

Bondholder Allocation

The Treasury plans to allocate that 10 percent stake to bondholders, plus offer warrants to buy an additional 15 percent of equity, provided a “satisfactory” number of holders agree to go along with GM’s restructuring program, according to the filing. Bondholders may get nothing if they don’t satisfy the Treasury by 5 p.m. New York time tomorrow, GM said.

The sweetened offer and support of the bondholder committee “increase substantially the chances that the transaction will be approved expeditiously by the bankruptcy court,” said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm not involved in GM negotiations.

GM’s current stockholders would get no recovery from the new-entity asset sale, according to the filing, a change from an earlier plan to give them 1 percent of the new company.

None of the new holders will be allowed to sell their shares at the outset, an Obama administration official said yesterday, asking not to be identified because the plan is confidential. The reborn entity would be a private company for six to 18 months, the official said.

Biggest Losers

The UAW union represents the “big winners” in the bankruptcy, while U.S. taxpayers are the biggest losers, said Edward Altman, a professor at New York University’s Stern School of Business.

“The bill is now up to $50 billion or more,” Altman said today on Bloomberg Television. “The government will now have stock in the company, more than 72 percent. It is a big uncertainty if the company will do well.”

The company needs to overhaul its board and management after the firing of Chief Executive Officer Rick Wagoner, Jerome York, a former director for the automaker, told Bloomberg Television in a subsequent interview.

“When you analyze the capabilities and skill sets of the various directors who have sat on the board, there was no automotive experience,” York said. “There was to my knowledge not one director with substantial expertise in labor relations.”

Chrysler is the template for the maneuvers and bickering GM is likely to go through. Out of court, Obama’s team successfully pressured secured creditors to accept Chrysler’s plan for a streamlined, best-assets company run by Italy’s Fiat SpA.

Chrysler Dissidents

In court, a bankruptcy judge this week was dealing with Chrysler dissidents such as Indiana pension funds. They argued the company and the Obama administration were taking their property unconstitutionally, ignoring bankruptcy priority rules and violating the TARP law by giving money to automakers, which aren’t the financial institutions the law was designed to help.

The law firm that represented dissident Chrysler lenders is now seeking to advise some GM dissidents. Thomas Lauria, a lawyer with the New York-based White & Case firm said GM’s plan to reward the union trust goes far beyond the priority the bankruptcy code mandates, of $10,000 per employee.

Pension Claims

“Anything after that is not priority,” he said, adding that pension claims of union members shouldn’t get priority. The term priority refers to where creditors stand in the line to get paid, with secured creditors usually getting paid ahead of unsecured ones and junior creditors getting treated equally.

If the transfer of Chrysler’s assets is approved, a judge in the GM case may be more likely to green-light the same process for GM, bankruptcy lawyers said. The automaker’s plan is to file in New York, though Michigan has competed for the business, a person familiar with the matter said.

“If the New York court approves Chrysler’s sale, it signals that the New York court is highly likely to approve GM’s sale as well,” said Lynn LoPucki, a law professor at the University of California, Los Angeles, who specializes in business reorganizations.

GM so far has 35 percent of bondholders on its side, said a person familiar with that matter. If not enough sign up, they will all be thrown back to square one and will have to queue up in bankruptcy court to fight over the rubble left behind.

Discarded Assets

Stuck in court, they and other unsecured creditors such as dealers and suppliers may argue for months or years over who gets the proceeds from GM’s discarded assets and what share of the 10 percent stake in the new company is due them.

Before GM’s unsecured creditors get anything, secured lenders will be paid in full, the administration official said. Banks such as JPMorgan Chase & Co. secured GM’s revolving loan of about $4.5 billion with inventory, receivables and factories, also providing a $1.5 billion term loan.

For the GM story to have a happy ending, of course, the new company will have to come up with vehicles that customers, now mired in a recession, will want to buy in numbers that keep the carmaker out of bankruptcy court down the road.

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net; Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net.

Last Updated: May 29, 2009 16:30 EDT