GM on the Brink of Being Hit with $1 Billion Penalty

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In a matter, Motors Liquidation Company GUC Trust v The Liverpool Limited Partnership et al, U.S. Bankruptcy Court, Southern District of New York, No. 12-09802, the automaker, General Motors could soon be hit with a fine close to $1 billion. The matter involves the question as to whether, during the government restructuring of the company, a “lock-up agreement” resulted in shifting an amount of $367 million to a group of hedge fund noteholders at the expense of other creditors.

The Motors Liquidation Company GUC Trust, representing unsecured creditors has sued to have the lock-up agreement undone on the grounds that it was a last-minute secret deal made to ensure support from hedge funds. During the bankruptcy of the automaker, the best parts of its assets were sold to the new General Motors Co, while the remainder was liquidated for the benefit of creditors. In between, the lock-up agreement happened.

Unsecured creditors have alleged that the deal resulted in unsecured creditors receiving mere pennies on the dollar, while the hedge funds, which held notes with $1 billion face value, received $367 million under the lock-up agreement. At the same time the hedge funds and other secured creditors managed to receive about $2.67 billion on a separate claim.

  

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The creditors’ trust filed the lawsuit in the U.S. Bankruptcy Court in Manhattan alleging that the lock-up agreement was grossly inequitable to creditors of the old GM company, and that the deal took place after the company had filed for bankruptcy. Since the deal had required approval by the bankruptcy court, now the unsecured creditors have called upon the bankruptcy court to undo the deal.

Judge Robert Gerber, who is presiding over the matter, however, admitted in a court hearing in July that he was “shocked” to learn about the hedge fund deal. Gerber had said at the time: The bottom line is this matter is huge. He further said, “There was a lack of disclosure to the court on the matter with the potential to injure ‘Old GM’ creditors to the extent of hundreds of millions, if not billions of dollars.”

Several days of trial has already been held in the matter between August and October, and a ruling is expected this month.