By Joseph Checkler
Hedge fund managers Paulson & Co. and Elliott Management LP are defending their bid to have the remnants of old General Motors pay investors' legal fees in connection with the settlement of a multibillion-dollar lawsuit tied to the automaker's 2009 bankruptcy.
In a Thursday filing with U.S. Bankruptcy Court in Manhattan, lawyers for John Paulson's Paulson funds and Paul Singer's Elliott, along with other bondholders of GM's Nova Scotia unit, said U.S. Attorney Preet Bharara's objection to the partial payment of the legal fees should be overruled. The lawyers point out that even in his own filing, Mr. Bharara said his office hasn't worked on the bankruptcy case and thus doesn't have first-hand knowledge of all its facts.
"But first-hand knowledge of these matters is needed," the lawyers said. A spokeswoman for Mr. Bharara declined to comment.
Mr. Bharara said in a filing last week that the investors haven't shown that they've made a "substantial contribution" to the old GM estate, in spite of their settlement of a $2.67 billion claims fight in GM's bankruptcy case.
The investors say they have, arguing that the settlement not only erased future legal costs related to litigation over the claims but also could increase recoveries for other creditors. After the deal was reached, lawyers for the creditors of GM's Nova Scotia unit--a group that also includes Morgan Stanley (>> Morgan Stanley), Fortress Investment Group (>> Fortress Investment Group LLC) and the trustee for GM Nova Scotia's bankruptcy estate--asked for $1.5 million of their professional fees to be paid for by old GM's estate.
In the filing, the lawyers said Mr. Bharara's claim that the settlement was made by "self-interested" creditors is "irrelevant," considering the advantageous terms of the deal for all creditors.
"The lawful pursuit of one's own interests in litigation does not preclude compensation pursuant to [the Bankruptcy Code]," the lawyers said.
The settlement, filed with the court last month, cuts $1.13 billion in claims against the GM bankruptcy estate, increasing possible payouts to unsecured creditors. The investors' fee request was negotiated as part of the settlement. Such fee requests for having made a "substantial contribution" to a Chapter 11 case are becoming more common.
"Here, the benefits to the remaining bankruptcy estate are clear," the lawyers for the bondholders said in their filing.
The bankruptcy court will consider the settlement and the fee request at an Oct. 21 hearing.
In 2012, a trust representing unsecured creditors of old GM sued the auto maker and the Nova Scotia creditors over a 2009 transaction intended to keep GM Canada out of bankruptcy. Four hedge funds, including those managed by Messrs. Paulson and Singer, in June 2009 had agreed to waive $1.3 billion in claims in exchange for a $367 million payment. The payment came from GM Canada, which borrowed $450 million from old GM to make it.
Lawyers for the trust had argued that the deal should be unwound under bankruptcy law. If the payment was canceled by the court, it would have put the reorganized GM on the hook for at least $1.3 billion in claims. The settlement reached last month cuts that number substantially and ends litigation between the trust and the hedge funds.
Two other well-known hedge-fund firms involved in the original transaction, David Tepper's Appaloosa Management and Mark Brodsky's Aurelius Capital Management, sold their bonds and weren't involved in the dispute.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)
Write to Joseph Checkler at email@example.com