Hedge funds that invested in an obscure bond of General Motors Corp.’s old businesses won approval of a settlement that will give some of them 1.8 times the return of other creditors and resolve disputes over how they acted on the eve of the automaker’s collapse.
U.S. Bankruptcy Judge Robert Gerber in Manhattan today approved a settlement that gives the holders of notes in GM’s Nova Scotia unit a $1.55 billion claim in the bankruptcy. Some, including Fortress Investment Group LLC and Elliott Management Corp., have already received shares of a $367 million payment to holders of the notes, which have a face amount of $1 billion.
Gerber said that while the settlement was unopposed, he reviewed it anyway, and found that while it was reasonable and should be approved, the action of some of the hedge funds leading up to the bankruptcy was “troublesome.”
“The greed and arrogance that several of them displayed at a time when the future of the entire auto industry was at stake was and is surprising to me even to this day,” Gerber said.
Nevertheless, he said, the issues would have been decided under the law, and the legal issues were difficult. He also found the settlement the best outcome since any ruling he made was likely to be appealed, resulting on more expensive litigation and delays in returning money to creditors.
The settlement is the culmination of a complex investment play that for Fortress dates to 2005.
It will release past, present and future holders of the Nova Scotia notes from liability and free more shares and warrants in the reorganized General Motors Co. for distribution to all creditors.
“This settlement will conclude years of complex litigation and substantially benefit the estate by reducing the claims at issue by more than $1.129 billion,” lawyers for creditors wrote in court papers. New GM also said in court documents that it supports the agreement.
Believing the auto giant was probably bound for bankruptcy, Fortress began in 2006 to buy bonds issued by General Motors Nova Scotia Finance Co., a unit of General Motors of Canada Ltd. Elliott started buying in 2008. By June 2009, those funds, along with Aurelius Capital Management LP and Appaloosa Management LP, had acquired, for pennies on the dollar, the majority of $1 billion in notes issued by the Nova Scotia unit.
The funds anticipated that in a GM bankruptcy Nova Scotia law governing the notes would let them make multiple claims on the same debt. One Elliott portfolio manager called the strategy a “double-dip litigation play.” A Morgan Stanley analyst said it was like putting “two straws in one milkshake.”
They struck a deal on the eve of GM’s June 1, 2009, bankruptcy that said all holders of the Nova Scotia notes should get the $367 million in cash plus $2.67 billion in claims. GM, fearful of having its Canadian unit tipped into bankruptcy by the hedge funds, acceded to a deal that promised the noteholders multiple recoveries.
A trust for other unsecured creditors sued in 2012, saying the deal improperly benefited the noteholders at their expense and that the hedge funds acted improperly to secure the deal.
The settlement, achieved in mediation overseen by U.S. Bankruptcy Judge James Peck in Manhattan, cuts the $2.67 billion in claims to $1.55 billion.
Gerber said the way a trustee for the Nova Scotia unit, Green Hunt Wedlake, had worked closely with the hedge funds was troubling, as was a suit they filed against the unit before GM’s bankruptcy. He said the transformation of a swap beneficial to GM into a liability “boggled” his mind.
Even had he found the hedge fund conduct was “egregious” enough to merit throwing out their claim, he wouldn’t have known how to handle it given that the Nova Scotia notes had changed hands, with new buyers stepping in, Gerber said.
Separately, Gerber today denied Paulson & Co.’s request for $1.5 million in legal fees for its role in negotiating the settlement.
Paulson, along with Morgan Stanley & Co. International Plc, is among the funds that bought the Nova Scotia notes after Aurelius and Appaloosa sold them.
U.S. Attorney Preet Bharara in Manhattan said the fees shouldn’t be paid in a bankruptcy funded by the U.S. Treasury and Export Development Canada, as they were incurred “seemingly entirely in one creditor group’s self-interested pursuit of its own recovery against the estate.”
Gerber criticized Paulson for saying it earned the fees for its contributions to the GM estate, citing the four years of expensive litigation over the Nova Scotia notes created by the hedge funds’ trying to get their “double dip” from the estate.
The judge also found it troubling that the funds at one point considered objecting to the government’s planned sale of GM in bankruptcy, and that funds had boasted about how they would fare better than other creditors.
Paulson, which bought the Nova Scotia notes after the pre-bankruptcy deal had been struck, took part in negotiating the settlement.
“The United States has not directly participated” in the mediation and lacks first-hand knowledge of the work Paulson did, the fund said in court papers defending its request.
Paulson said its contributions to the accord were substantial because it initiated talks, made efforts to ensure they would continue and negotiated a $50 million contribution from New GM.
Also, general creditors will no longer have to pay fees to litigate the dispute, Paulson said.
Bharara rejected that argument, saying any advantage to the general creditors is “merely a byproduct” of a decision by Paulson that was in its own self-interest.
The two Nova Scotia notes at issue, 8.375 percent notes due 2015 and 8.875 percent notes due 2023, both traded at 40.25 cents on the dollar, according to data compiled by Bloomberg on Sept. 30. Their 52-week high was 44.18.
Shares in the GM trust, which tracks general unsecured creditors’ recoveries, traded at $34.35.
The GM Chapter 11 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 Co. GUC Trust v. Appaloosa Investment LP I, 12-09802, U.S. Bankruptcy Court, Southern District of New York (Manhattan).