Judge to Rule Whether GM Bankruptcy Favored Hedge Funds Over Creditors

by Joel R. Glucksman on January 18, 2013

Bankruptcy Judge to Provide Ruling

U.S. Bankruptcy Judge Robert Gerber is expected to hand down a ruling shortly on a controversial provision of the 2009 restructuring of General Motors, the results of which may cost GM upwards of $1 billion dollars.

General Motors Bankruptcy

The issue is whether GM unfairly favored hedge fund investors over its unsecured creditors when it entered into a "lock-up agreement" during its restructuring, in which it sent $367 million to a group of hedge funds, according to Reuters. The unsecured creditors argue that this lock-up agreement should be invalidated by Judge Gerber, asserting that

it was a secret deal that took place after the company filed for protection under bankruptcy law. As a result, the creditors say that the deal required Gerber's approval before being honored.

GM and the hedge funds have responded to these claims by saying that the lock-up agreement took place prior to the bankruptcy and that the terms are included in security filings.

The hedge funds currently hold roughly $1 billion in notes at face value, and received a claim against GM for $2.67 billion, Reuters reports. While they received $367 million after the agreement, creditors received pennies on the dollar, the news source added.

Although Gerber has not yet issued a ruling, he did note his surprise at the agreement struck between hedge fund investors and GM.

"The bottom line is, is that this matter is huge," Gerber said in a court hearing, according to Reuters. "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."

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