The billion-dollar cloud lingering over GM's bankruptcy

More than two years after General Motors received court approval for a plan to issue its old creditors stock in its shiny new self, a dispute among those creditors threatens to saddle the new company with almost $1 billion in liability. In a statement filed this week before U.S. Bankruptcy Judge Robert Gerber of Manhattan, the new company and warring creditor factions disclosed that mediation has failed to produce a settlement of creditor allegations that one group of noteholders extracted preferential treatment from the company as it teetered on the verge of Chapter 11 in 2009. The failure of mediation means that Gerber will be left to reach a ruling based on testimony he heard last fall in an adversary proceeding initiated by the trustee for GM's unsecured creditors. Depending on what the judge makes of the trustee's allegations that four distressed debt hedge funds - Elliot, Appaloosa, Aurelius and Fortress - forced old GM to accede to what amounts to a $367 million fraudulent conveyance, there's even an outside chance that GM's entire 2009 asset sale could be voided. That's a very remote prospect, but the mere possibility shows the risk to new GM in this little-noticed case. The backstory on the hedge funds and their deal with old GM is incredibly complicated, but I'll boil it down. According to the trustee's complaint, filed in March 2012, distressed debt investors began snatching up notes issued by a GM subsidiary called Nova Scotia Financing Company in late 2008 and early 2009, when GM seemed to be well on its way to Chapter 11. Nova Scotia's only real assets were two intercompany loans to GM Canada, which was operating in the same straits as its parent company. GM did not want GM Canada to go into bankruptcy, presumably because it didn't want to deal with bankruptcy proceedings in two different countries at the same time. So the hedge funds that held Nova Scotia notes knew GM was desperate to resolve their potential claims against GM Canada. Days before GM filed for Chapter 11, the parent company loaned $450 million to GM Canada, earmarked for a deal with the Nova Scotia noteholders. Lawyers for GM and the noteholders negotiated right up to - or possibly just after - GM's filing on June 1, 2009. Indeed, the precise timing of their actual settlement is a matter of dispute (and legal consequence). The trustee for GM's other secured creditors claims that the final agreement was not completed until after GM filed for Chapter 11, which would make the deal subject to the bankruptcy court's approval. GM says it reached the agreement minutes before it filed its Chapter 11 petition. (New GM's lawyers at King & Spalding have also argued that details of the settlement with the Nova Scotia noteholders were repeatedly disclosed in various documents early in the bankruptcy.) Read the rest at http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=72143&terms=%40ReutersTopicCodes+CONTAINS+'ANV'