(Adds comments from GM spokesman and timing of charge in ninth and 10th paragraphs.)
By Patrick Fitzgerald
The trust representing "old" General Motors' creditors and a group of hedge funds, among them affiliates of Paul Singer's Elliott Management and John Paulson's Paulson Partners, have settled a long-running legal fight over a little-noticed feature of the 2009 government-orchestrated sale of the auto maker.
The settlement, disclosed in a filing Friday in U.S. Bankruptcy Court in New York, cuts $1.13 billion in claims against old GM's estate. In return, the trust is dropping its legal challenge to the auto maker's 2009 "lockup agreement" with bondholders that funnelled hundreds of millions of dollars to a group of hedge funds in exchange for the funds dropping their $1.3 billion in claims against GM's Nova Scotia unit.
The 2009 deal helped keep the unit's parent, GM Canada, out of bankruptcy, but old GM's creditors claimed it benefited the new company, General Motors Co. (GM), at their expense. The deal funneled $367 million to four hedge funds, among them funds managed by Elliott and Fortress Investment Group. It also saw the hedge funds receive $2.67 billion in claims against old GM's estate.
Two other hedge funds, David Tepper's Appaloosa Management and Mark Brodsky's Aurelius Capital Management, involved in the original transaction later sold their bonds and are no longer involved in the dispute.
In 2012, the trust representing old GM's creditors sued new GM and the hedge funds over the 2009 transaction. The trust, which is recovering money for old GM's unsecured creditors, argued the deal was completed after GM's bankruptcy filing, meaning it should have been reviewed by Judge Robert E. Gerber of the U.S. Bankruptcy Court in Manhattan. Lawyers for the trust argued the deal could be unwound under bankruptcy law, which would have put new GM on the hook for at least $1.3 billion in claims.
The bondholders, now including Paulson and Morgan Stanley (MS), consistently denied any wrongdoing and fought the lawsuit.
Following a trial, Paulson and Elliott, joined by the new General Motors--who called the creditors' lawsuit "an unabashed money grab," in court filings--entered mediation with the trust and others. That mediation, under the supervision of U.S. Bankruptcy Judge James Peck, bore fruit last week.
Under the deal, which requires court approval, the bondholders will receive general unsecured claims totaling $1.55 billion against old GM. In addition to resolving the competing bankruptcy claims, the settlement calls for GM Canada to pay $50 million to the bondholders, with $16 million earmarked for the bondholders' lawyers and another $1.5 million going to the Nova Scotia unit's legal team. The deal also releases the bondholders and both old and new GM official from any future legal challenges tied to the 2009 transaction.
A GM spokesman said the company was pleased to resolve the litigation over the Nova Scotia unit, which stretches back more than four years.
The auto maker said in regulatory filing it will take a $50 million charge related to the settlement in the third quarter via GM Canada.
Representatives for the trust, Paulson and Elliott declined to comment. Bankruptcy Judge Robert E. Gerber has scheduled a hearing to consider approval of the settlement for Oct. 21.
GM returned to the public markets in November 2010, less than two years after its historic bankruptcy filing led critics to rename the auto maker "Government Motors."
U.S. taxpayers still own about 7.8% of the company, but the auto maker's recent turnaround--earlier this year the stock topped its $33-a-share initial public offering price and its stock traded at $36.12 a share Monday afternoon--has led to the U.S. Treasury to continue to sell its stake in the company.
The Treasury, which has set an April 2014 goal to complete its exit from the auto maker, launched a third round of GM common shares sales last week.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)
--Jeff Bennett contributed to this article.
Write to Patrick Fitzgerald at firstname.lastname@example.org
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
September 30, 2013 16:23 ET (20:23 GMT)Copyright (c) 2013 Dow Jones & Company, Inc.
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