Old GM Cuts Nova Scotia Debt Claims to $1.55 Billion

Creditors of General Motors Co.’s old businesses in bankruptcy settled a dispute over a $3 billion deal four hedge funds made on the eve of the automaker’s 2009 Chapter 11 filing, paving the way for more distributions.

The agreement cuts $2.67 billion in claims that holders of notes in a Nova Scotia unit of GM Canada made in the Motors Liquidation Co. bankruptcy to $1.55 billion, according to papers filed today in Manhattan bankruptcy court. A trust in March 2012 sued the hedge funds that held most of the Nova Scotia notes before GM’s bankruptcy, saying their deal, which included a $367 million cash payment, unfairly enriched them at other creditors’ expense.

“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 today’s filing.

The settlement, which still requires court approval, paves the way for distributions of stock and warrants to all parties. A special distribution will be made both to holders of notes in a Nova Scotia unit of GM and to creditors who held general bonds, according to the settlement.

Cash Payment

Green Hunt Wedlake Inc., which acted as a trustee for the noteholders, also will get $50 million in cash, with $17.5 million going to cover the cost of mediation and the rest flowing to Nova Scotia note holders, according to a filing with the U.S. Securities and Exchange Commission.

In June, settlement talks began with funds including Elliott International LP, Fortress Investment Group LLC, Morgan Stanley & Co. International and units of Paulson & Co. over the disputed claims.

Elliott, Fortress, Appaloosa Management LP and Aurelius Capital Management LP made the deal that determined how the Nova Scotia notes would be treated. On the eve of the June 1, 2009, bankruptcy, they together held more than 66 percent of the notes. Appaloosa and Aurelius later sold their stakes.

The settlement will determine recoveries for current holders of the Nova Scotia notes. It also releases past, present and future holders of the notes from liability.

Creditors’ Suit

The lawsuit had questioned the noteholders’ rights to the $367 million fee and a bankruptcy claim of $2.67 billion. GM Chief Financial Officer Daniel Ammann testified in court that a negative outcome in the dispute might cost the automaker, now out of bankruptcy, as much as $918 million, or 50 cents a share.

Creditors alleged 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.

The hedge funds said they didn’t do anything improper, and that undoing the agreement struck in the hours before the bankruptcy would 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, jumped as much as 11 percent today to a record $37 in over-the-counter trading. They traded at $36.57 at 11:19 a.m. New York time, bringing the year’s gain to 73 percent.

The Nova Scotia notes at issue -- 8.375 percent notes due in 2015 and the 8.875 percent notes due in 2023 -- most recently traded at 40.75 cents on the dollar, according to data compiled by Bloomberg.

GM Upgrade

General Motors was raised to investment grade for the first time in eight years this week. Moody’s Investors Service upgraded Detroit-based GM to Baa3 from Ba1 on Sept. 23, citing new models for the U.S. market, strength in China and what it calculates as $31 billion of cash, including credit facilities.

The U.S. Treasury Department has reduced its stake in the automaker to 7.3 percent as part of a program to sell all of its shares within 12 to 15 months.

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).

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