There may soon be a ruling from a U.S. bankruptcy judge on whether the 2009 government-led restructuring of General Motors Co. had improperly favored hedge funds. GM may lose almost $1 billion if it gets an adverse decision. Judge Robert Gerber has to decide if a "lock-up agreement" in the restructuring released $367 million to a certain hedge fund noteholders at the expense of other creditors.
A lawsuit was filed by a trust that represents unsecured creditors to undo the lock-up agreement, asserting that it was a last-minute agreement hidden into GM's bankruptcy to guarantee the support of the hedge funds. Soon after "Old GM" filed for bankruptcy in 2009, its premium assets were sold to the new General Motors Co. What was left of the company was liquidated to benefit the creditors.
The hedge funds, which hold notes with about $1 billion in face value, got the $367 million under the lock-up agreement; however, unsecured creditors got only pennies on the dollar. In addition, the hedge funds and other investors in the notes received a claim against "Old GM" that cost $2.67 billion. Under this lawsuit pending before the U.S. Bankruptcy Court in Manhattan, the creditors' trust claimed that the lock-up agreement was not fair to "Old GM" creditors.
The trust said that the agreement happened after the bankruptcy filing and so it needed Gerber's approval. To undo the deal, Gerber was called again. GM and the hedge funds have asserted that since the lock-up agreement was sealed before the bankruptcy, Gerber didn’t need to approve it. Furthermore, they alleged that the deal wasn’t kept a secret since it was divulged in securities filings. They also insisted that the lock-up agreement cannot be unwound without undoing the entire restructuring.