Pressure Builds on Judge Robert Gerber's GM Bankruptcy Error - What will he do?
by Bob Price on March 21, 2013 at 1:18 PM
Hearings are nothing new in bankruptcy courts, or any other courts for that matter, but a hearing held this month in Judge Robert Gerber's court in the Southern District of New York could have a dramatic impact on the troubled General Motors (GM) bankruptcy. In "Bankruptcy Courts Part 7 - General Motors Revisited by Judge Robert Gerber... Oops", I reported about an error made during the rushed 44 day bankruptcy process of GM involving the failure of hedge funds to report transfers of payments to settle the debts of GM Nova Scotia. The payments were made by GM by transferring the company assets to the Canadian subsidiary.
Judge Gerber's ruling could cost the new GM (still owned by you and me) up to $918 million and could potentially unravel parts of the GM bankruptcy that President Obama held up as his shining star in the 2012 presidential election.
The Detroit Free Press reported today, "U.S. Judge Weights Old GM Deal with Hedge Funds" by Nathan Domey that if Judge Gerber rules in favor of the automakers, it could eliminate that expense ($918 million) and "put a nagging remnant from the 2009 bankruptcy to rest."
Creditors have accused the hedge funds, including Elliott Management and Fortress Investment Group, of settling a $1.3 billion claim against GM Nova Scotia for $367 million shortly after the bankruptcy of GM began. Hedge funds countered stating the transfer took place shortly before GM filed for bankruptcy, and therefore did not need to be reported. Even if that was the case, was it potentially a fraudulent transfer of assets?
According to a Reuters article, "The billion-dollar cloud lingering over GM's Bankruptcy" by Alison Frankel, lawyers for the new GM have argued that details of the settlement payment were disclosed repeatedly in various documents early in the bankruptcy process. If so, then how did Gerber miss this? Was he sleeping on the bench or just in too big a hurry to show how fast and efficient of a judge he is? Oops...
Excerpt from Frankel's article:
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.)
Under the terms of the last-minute settlement, the hedge funds that owned Nova Scotia notes received a $367 million "consent fee." GM also agreed that it would support the Nova Scotia noteholders' claim against the estate, which totaled about $2.7 billion (about $1.7 billion in statutory liability based on GM's position as the sole shareholder of Nova Scotia Financing and about $1 billion for outstanding notes). In return, the Nova Scotia noteholders released their claims against GM Canada.
Have the hedge funds made a mockery of Gerber's court by withholding the information about these payments from the bankruptcy process? Or was Gerber possibly negligent by rushing the bankruptcy process through and simply missing the transaction?
Gerber once told me his job was to get creditors paid and put people back to work. Yet this deal left GM's unsecured creditors with almost no payments. In the bankruptcy world, where foxes are routinely left to guard the henhouses, this looks like a case where the hedge funds (foxes) that Gerber needs in his henhouse got paid - so maybe that is what he thought his real job was...
What would be nice is if Gerber would just stick to the real job of a judge - to fairly, consistently and accurately apply the law to the facts of the case. The pressure is on Judge Gerber now to make a ruling in this case, and it is expected shortly. But then, Gerber has a history of sitting on cases and not making rulings in a timely manner, so we will see what happens.