Elliott International LP and a unit of Fortress Investment Group LLC are among hedge funds that failed to reach an agreement with the trust liquidating General Motors’ old assets over $3 billion in claims related to the automaker’s 2009 bankruptcy filing, according to court papers.
The dispute stems from a settlement made between the hedge funds and a Canadian unit of GM the day of the bankruptcy filing. The trust liquidating the old assets, called Motors Liquidation Company GUC Trust, seeks to reduce or eliminate the claims that the hedge funds negotiated.
General Motors Co.’s Chief Financial Officer, Daniel Ammann, testified in past hearings that a negative outcome in the dispute over the Canadian notes could cost the automaker, now out of bankruptcy, as much as $918 million, or 50 cents a share.
That damage estimate is the upper end of a range, Amman said, and was disclosed in the company’s August quarterly report. Through the settlement, the note holders had a $3 billion claim against Old GM’s estate, more than the $1 billion face value of their notes, according to lawsuit.
Mediation “has now concluded without the parties reaching a settlement,” lawyers for the trust wrote.
11th Hour Opportunity
The trust sued four hedge funds in Manhattan bankruptcy court last March, alleging that while GM was preparing its bankruptcy filing on June 1, 2009, the funds, which held notes in a Canadian unit of GM, “saw an eleventh-hour opportunity for profit and pounced.”
The four funds, which bought stakes in the Nova Scotia unit before the filing, negotiated the terms of the Nova Scotia notes’ claim based on issues such as an intercompany loan just before the bankruptcy filing. They are still waiting to have their recovery in the bankruptcy finalized, along with other creditors.
General unsecured creditors allege in the lawsuit that the funds steered events leading up to GM’s Chapter 11 filing to give them a position of power that allowed them to make the claim three times the size of what they were actually owed, improperly benefitting themselves at the expense of general creditors.
Hedge funds say they didn’t do anything improper, and that if general creditors undo the agreement they struck in the hours before the bankruptcy, it will scuttle the entire deal that separated liabilities from GM’s profitable business, hurting the reorganized automaker.
Motors Liquidation Co.’s bankruptcy plan repays general unsecured creditors through a trust with stock and two series of warrants, according to court papers. The GUC Trust brought the lawsuit on behalf of general unsecured creditors.
Ammann, Morgan Stanley’s former head of industrials investment banking, made his testimony about the damage GM might suffer in September in a trial over how the bankruptcy treats general creditors and hedge funds.
The initial funds sued were units of Elliott Management Corp., Fortress Investment Group LLC, Appaloosa Management LP and Aurelius Capital Management LP.
The current note holders are Elliott International LP, Liverpool, LP, Drawbridge DSO Securities LLC, Drawbridge OSO Securities LLC, FCOF UB Securities LLC and Morgan Stanley & CO. International Plc, according to court papers. FCOF is a unit of Fortress.
As the trial resumed today in the courtroom of U.S. Bankruptcy Judge Robert Gerber, Gerber said the last arguments would be heard.
“We’re going to finish up this trial today,” Gerber said.
GM has said in court papers that the lawsuit’s claims “threaten to disturb” the sale that saved the automaker by splitting it into a new company and old assets that would liquidate in bankruptcy.
The agreement negotiated before the filing with the hedge funds, known as the “lock-up agreement” resolved a dispute over intercompany loans and allowed the U.S. and Canadian governments to buy GM Canada without requiring a separate bankruptcy, GM said.
Voiding the lock-up agreement “could create a chaotic situation for GM Canada, spawn new litigation in other forums, and potentially provide a windfall to the noteholders,” lawyers for GM wrote in court papers.
The notes at issue -- 8.375 percent notes due in 2015 and the 8.875 percent notes due in 2023 -- both recently traded at the same price, 44.13 cents on the dollar, up 1 percent from their low of 43.75 cents on the dollar on March 18, according to Trace, the bond price reporting system of the Financial Regulatory Authority.
Units of the GUC Trust rose to $26.76 today in over-the-counter trading, up 31 percent since the start of the year.
The main bankruptcy case is In re Motors Liquidation Co., 09-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The adversary case is Motors Liquidation Company GUC Trust v. Appaloosa Investment Limited Partnership I, 12-09802, U.S. Bankruptcy Court, Southern District of New York (Manhattan).