GM Clears Key Hurdles to Bankruptcy Exit

Business Week (Link) - David Welch (July 6, 2009)

Save one appeal, there hasn't been much opposition to the government's acquisition of a controlling stake in General Motors through bankruptcy court. If opponents of the sale remain on the sidelines, GM could get out of bankruptcy this month.

An attorney representing liability claimants appealed the ruling late on July 5 by U.S. Bankruptcy Judge Robert Gerber that cleared the sale of GM's viable assets to the federal government. However, another attorney representing a small number of bondholders said his clients would not challenge Judge Gerber's decision, citing the huge legal costs required to battle the massive legal teams assembled by the bankrupt carmaker and the federal government.

If GM can get through the week without appeals from other bondholders or litigants with product liability claims, the sale could be completed on Friday, July 10, said one Treasury Dept. official. That would knock down a major hurdle to getting GM out of bankruptcy quickly. After that, GM needs to get a reorganization plan approved by the court.

Old GM Gets Pontiac

The Unofficial Committee of Family and Dissident GM Bondholders decided against an appeal of the sale, said Michael Richman, an attorney with Patton Boggs, which represents some bondholders.

The separation of GM's "good" and "bad" assets is key: If that happens, GM would emerge with $17 billion in debt instead of more than $70 billion. It would have just the Cadillac, Chevrolet, Buick, and GMC brands. Its troubled brands�Hummer, Saab, Saturn, and Pontiac�will be sold off or dismantled. The old GM would keep the Pontiac name as well as any factories and assets GM wants to ditch.

The government would own 61% of GM, the Canadian government would get 12%, and the United Auto Workers would own 17.5% through a trust covering retiree medical benefits. The rest would go into the old GM to pay back bondholders and other creditors.

Some of the bondholders who decided against an appeal and their legal counsel still believe they have a case. But they thought it would be too expensive to fight, Richman said in an interview. His three clients collectively held just $2.3 million in GM debt. But they were in frequent contact with noteholders of up to $500 million in debt. None of them thought the fight would be worth the money. "It's disappointing. I'd like to carry on the case," Richman said. "I think the appeals court could act different [than in the case of Chrysler, which preceded GM into bankruptcy] because there is no Fiat buying the company to run it."

One other potential adversary could be the tort claimants, people with accident or product liability claims against GM. Bankruptcy court has ruled that past claimants have to sue the old GM.

Barry Bressler, an attorney representing people with liability claims, wouldn't say whether he will appeal Judge Gerber's decision. But he didn't seem optimistic that his clients or any other claimants could win an appeal and stop the sale to the government in order to get more for their claims. "As far as the court is concerned, they'd like to see this case barrel through," Bressler said.

For creditors who can only collect their debts from the old GM, prospects are grim. GM will give the old GM $1.25 billion for administrative fees, 10% of stock in the new company, and warrants to purchase another 15% of the stock later on.

That's what GM bondholders agreed to take. But they cut that deal with GM and the government before the liability claimants entered the scene. Those claimants were shut out in Chrysler's case, but in GM's bankruptcy they have been heard. Those with claims filed after the automaker emerges from bankruptcy can still collect a settlement from new GM. Others must try to collect from old GM.

Now that there are product liability claims against the old GM, getting money for bondholders could be tough. First, Richman says, if the $1.25 billion set aside for administrative fees is spent, GM stock would have to be sold to pay any new costs for legal work, court costs, or anything else associated with liquidating the assets. Then someone will have to put a value on the product- or injury-liability claims. That could take time in court, Bressler says. Bondholders can only be paid once those claims are complete.

Even if GM's stock has significant value, it might only be worth 10� to 20� on the dollar for the claims on the old GM. For litigants to get their cash out of old GM, Bressler says, "it will take a long time, it will be expensive, and we're not sure how much we'd get."