The Work

June 30, 2009 4:46 PM

GM's Fritz Henderson Takes the Stand

Posted by Zach Lowe

With the U.S. Treasury Department planning on pulling its funding for General Motors unless the company sells itself out of bankruptcy by July 10--a step GM's chief executive said Tuesday would lead to certain liquidation--lawyers may have to work around the clock between now and then.

And it would help if the federal bankruptcy court could get its sound system--not to mention the air conditioning--working before 11 a.m.

After an hour delay, lawyers representing various GM creditors questioned GM CEO Fritz Henderson about the proposed sale of General Motors to a consortium of new owners headed by the Treasury Department. Most of the questioners--especially Patton Boggs partner Mark Salzberg--sought to portray the deal as a rushed arrangement planned to save GM and help some creditors at the expense of others.

Many of the lawyers pointed the finger at the Obama administration's Auto Task Force and its counsel at Cadwalader, Wickersham & Taft as much as GM and its lawyers at Weil, Gotshal & Manges.

Under the terms of the deal, the United Auto Workers, an unsecured creditor, would receive a 17.5 percent equity stake in the company and billions in preferred stock warrants. Other unsecured creditors--including a group of dissident small bondholders--would receive pennies on the dollar for their bonds and a smaller equity stake, according to court records and our prior reports. (Bondholders are carrying about $27 billion in GM debt, while the company owes the UAW $21 billion, according to Henderson's testimony today.)

The government will take a majority stake in the new GM via a $60 billion investment, according to Reuters.

During his questioning of Henderson, Salzberg focused on a memo Cadwalader lawyers drafted in May outlining GM's bankruptcy alternatives. The memo concluded that selling GM's assets to a new entity was a better strategy than filing for a prepackaged bankruptcy that would have allowed the company to emerge with the same ownership structure but fewer liabilities. The reason, Salzberg asserted, was that a so-called Section 363 sale does not require the approval of all creditors and shareholders.

"One of the issues pointed out by Cadwalader in support of the Section 363 sale was that consent of shareholders and creditors would not be required, is that correct?" Salzburg asked Henderson.

"That is correct," the CEO replied.

Salzberg focused most of his 90 minutes of questioning on the Treasury Department's influence on GM--the highlight being Henderson's admission that the Treasury requested the resignation of ex-CEO Richard Wagoner even though it had no contractual authority to do so.

Following the tense exchange, Judge Robert Gerber and Weil bankruptcy partner Harvey Miller provided some comic relief when Gerber, concerned about the delay getting started, asked the lawyers whether they would be willing to cut their lunch break short.

"We are prepared to waive dinner, too, your honor," Miller said. He wasn't joking.

The banter drew a much-needed laugh from a hungry crowd that overflowed into three separate courtrooms (two of which had video and audio feed of the hearing) and sweated in an unconditioned hearing room that was so hot Gerber urged lawyers to take off their suit coats. Few took him up on the offer.

The rest of Henderson's testimony Tuesday concerned which liabilities the new GM would assume, and which it would leave in bankruptcy with "old GM."

Miller announced today that the new GM will take on liabilities related to accidents or product defects that happened after GM filed for bankruptcy on June 1--and for future incidents involving related issues in old GM cars. The company had planned to leave those claims behind in bankruptcy, drawing criticism from state attorneys general who argued the company was skirting consumer rights, according to The Wall Street Journal.

Other claims, including asbestos torts related to faulty brakes, will be left in the old GM bankruptcy case. Treasury officials and GM execs made that decision after consulting with lawyers from Cadwalader and Weil, Henderson testified. (Lawyers for the asbestos plaintiffs are protesting the proposed sale on those grounds.)

The sale hearing is expected to continue through Thursday.

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