GM Creditors to Mediate Dispute With Elliott, Fortress

Creditors of General Motors Co.’s old assets in bankruptcy will start settlement talks with funds including Elliott International LP, Fortress Investment Group LLC, Morgan Stanley & Co. International and units of Paulson & Co. over $3 billion in disputed claims.

The court-ordered mediation will be overseen by Judge James Peck, according to court papers filed today in U.S. Bankruptcy Court in Manhattan. The dispute stems from a settlement made by the hedge funds regarding their investment in a Canadian unit of GM on the day of the automaker’s 2009 bankruptcy.

The mediation has been agreed to “for the purpose of facilitating a settlement,” creditors said in court papers.

A trust sued the hedge funds on behalf of creditors in March 2012 as part of the bankruptcy, questioning their right to a $367 million cash fee and a claim of $2.67 billion. GM Chief Financial Officer Daniel Ammann testified in court hearings that a negative outcome in the dispute could cost the automaker, now out of bankruptcy, as much as $918 million, or 50 cents a share.

The creditors’ lawsuit alleges that while GM was preparing its bankruptcy filing, the funds steered events to gain a position of power that allowed them to make the claim three times the size of what they were actually owed, improperly benefiting themselves at the expense of general creditors. The funds held two-thirds of notes in a Nova Scotia unit of GM at the time.

Scuttle Deal

The 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.

Units of the GUC Trust, which represents creditors’ rights to recover stock and warrants in the case, recently rose 1.6 percent to $30.64 in over-the-counter trading at 11:55 a.m. in New York. They have climbed 47 percent this year.

The Nova Scotia notes at issue -- 8.375 percent notes due in 2015 and the 8.875 percent notes due in 2023 -- recently traded at 40.19 cents on the dollar and 40.88 cents on the dollar, respectively, according to Trace, the bond price reporting system of the Financial Regulatory Authority.

The main bankruptcy case is In re Motors Liquidation Co., 09-bk-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-bk-09802, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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