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June 23, 2009 6:55 PM

Judge Shoots Down Plea for Extra GM Bondholders Committee

Posted by Zach Lowe

We went down to federal bankruptcy court in lower Manhattan today to see whether Judge Robert Gerber would grant a motion to appoint an official committee for dissident bondholders opposed to the plan to sell General Motors to a new government-controlled entity.

Gerber ended the suspense quickly. Minutes into Patton Boggs bankruptcy cochair Michael Richman's argument on behalf of the unofficial committee of dissident bondholders, Harvey Miller of Weil, Gotshal and Manges--the lead attorney for GM--raised a minor objection.

Gerber granted it, and when Richman tried to explain himself, Gerber cut him off. "We've gotta move on," the judge said. "After I rule, I rule." (Lawyers aren't kidding when they say Gerber knows how to control his courtroom.)

The writing, as they say, was on the wall. Richman proceeded to argue that the bondholders needed their own committee to fight a proposed sale orchestrated by the Obama administration in cooperation with GM, its institutional bondholders, and even the official committee of unsecured creditors. (Kramer Levin Naftalis & Frankel is representing the committee. A team from Paul, Weiss, Rifkind, Wharton & Garrison is representing an ad hoc committee of large bondholders who hold 50 percent--possibly more--of GM's $27 billion in bond debt.)

Critics have said the proposed transaction unfairly favors some unsecured creditors over others. The United Auto Workers retiree trust, for instance, would get a large minority stake in the new GM, while individual bondholders could be wiped out, according to Bloomberg.

Richman argued that the official creditors committee appeared to be going along with the transaction without protecting the interests of small bondholders. He estimates that about 2,000 such bondholders have contacted his firm, and that they may hold as much as $500 million in GM bonds.

The problem, Richman says, is that those bondholders cannot afford the legal fees required to press their case. Appointing an official committee for them shifts the fee burden to GM's estate--or, in this case, the U.S. government, Richman says. (As Gerber later put in rejecting Richman's argument: "Everybody wants to fight with someone else's money.")

Miller and Kenneth Eckstein from Kramer Levin objected, saying there was no need for the extra committee. Eckstein argued that the official creditors committee would represent the interests of all bondholders and planned to file a response to the proposed sales arrangement on Wednesday.

The committee is composed of a variety of creditors, ranging from large bondholders to individual torts plaintiffs, they argued. The committee of 15 also includes two so-called indenture trustees (Wilmington Trust Company and Law Debenture Trust, advised, respectively, by Gibson, Dunn & Crutcher and Kelley Drye and & Warren), who represent the interests of all bondholders, the lawyers argued. 

Richman disagreed, saying it appeared that everyone was lining up behind the proposed section 363 sale. To his credit, he did not duck the argument that his motion was, in part, a play to get GM's estate to pay the small bondholders' legal fees. "That's what the statute is designed to do," he told Gerber.

The judge said there wasn't enough evidence to shift the legal fees that way. He also concluded that the creditors committee would adequately represent the bondholders, therefore eliminating the need for the "extraordinary remedy" of an extra official committee. "Mr. Richman suggested that this case was special," Gerber said. "I can't agree."

After the hearing, Richman said he will likely press on with the bondholders' objection to the sales plan, but that he's not sure how the bondholders will pay for continued high-quality legal representation. "It's a challenge of resources," he says.

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Your story leaves an important fact out. While thousands of bondholders where excluded from the official negotiations, those who were included own the TOTALITY of credit default swaps which are paid out at PAR value (or a discount of PAR). For those Institutional investors, MINIMIZING the participation in the new GM MAXIMIZES their return. Their interest is by definition diametrically opposed to the individual bondholders' interest. So one can only wonder how the judge can call this adequate representation.

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