GM Linsanity: Buzzer Beater or Billion-Dollar Backdating?

The game is tied with three seconds to play in regulation: an inbounds pass, one dribble—and a long shot at the buzzer. It’s the drama we love and expect this month, but whether the result is the thrill of victory or the agony of defeat depends not only on whether the shot goes in but also whether it leaves the shooter’s hands before the buzzer sounds.¹ Analogous madness arose this March in a recent complaint filed against an ad hoc group of hedge fund noteholders (the “Noteholders”) in Motors Liquidation Company GUC Trust v. Appaloosa Investment Limited Partnership (In re Motors Liquidation Co.), Case No. 09-50026 (REG) (click here to read the Complaint) before the United States Bankruptcy Court for the Southern District of New York. Plaintiff (a trust established in connection with General Motors’ second amended Chapter 11 plan confirmed in March 2011) alleged that the Noteholders entered into a litigation settlement agreement (the “Settlement Agreement”) with General Motors Corporation (“Old GM”) and Canadian subsidiaries of Old GM that, while back-dated prepetition, was actually consummated postpetition. As a result, Plaintiff asserted, the Settlement Agreement should be reviewed by the Bankruptcy Court as a postpetition transaction and, as a result of such review, held to be inappropriate and sanctionable.

Before checking the scoreboard, we must caution that only the Plaintiff has taken the court so far via the filing of the Complaint. The Noteholders are still in the locker room and, if their game faces are any indication, this is going to be a very physical contest. Thus, we are writing this blog not to express a view on the Plaintiff’s histrionics² in general but to focus on the single allegation that the Settlement Agreement was not launched until after the (prepetition) game ended.

According to the Complaint, as Old GM was failing, the Noteholders purchased steeply discounted notes issued by General Motors Nova Scotia Finance Company and guaranteed by Old GM. In the weeks leading up to Old GM’s anticipated bankruptcy petition, the Noteholders filed a purportedly meritless action in the Supreme Court of Nova Scotia alleging oppressive acts by Old GM and its Canadian subsidiaries whereby Old GM had been unjustly enriched, and demanding that Old GM and another Canadian subsidiary repay intercompany loans to Nova Scotia Finance. Old GM, under time pressure to reach agreement with its lenders and noteholders in order to secure bail-out funding from Uncle Sam, settled the Canadian litigation with the Noteholders. In exchange for releasing Old GM and its Canadian subsidiaries from certain claims under the Settlement Agreement, Old GM agreed to pay the Noteholders $367 million in cash (dubbed a “consent fee”) while effectively permitting the Noteholders to transform less than $1 billion in face amount of claims against Old GM into $2.67 billion of allowed claims against Old GM’s estate pursuant to new cross-guarantees.

According to the Complaint, the last-minute Settlement Agreement ran up the score in the Noteholders’ favor worse than a Harlem Globetrotters beat-down of the Washington Generals. Ignoring whether the Plaintiff was mauled by Anthony Mason as it claims or, instead, is a bigger flopper than Reggie Miller, the Noteholders believe they got off their shot in time, given that the Settlement Agreement was dated the day before the petition date. However, let’s rewind the game tape, recognizing that we are only looking at the Plaintiff’s home videos and that the Bankruptcy Court has not yet reviewed the official replay monitor.

The key allegation for the purposes of this blog is that some of the Noteholder signature pages were not delivered until June1—after the chapter 11 filing earlier that day—rather than on May 31, the date of the Settlement Agreement. If true, the signature pages were not delivered until after the automatic stay was in effect. In another context, the Delaware Bankruptcy Court has twice held that the postpetition delivery of signature pages to an agreement that was negotiated prepetition made the entire agreement a sanctionable postpetition transaction.³

The Complaint alleges that, because the Settlement Agreement was purportedly executed and funded postpetition, the Noteholders should be whistled for multiple flagrant fouls and ejected altogether from the game. As a warm-up, the Complaint asserts violation of the automatic stay. The Plaintiff then seeks to score a few baskets by alleging that the substantial consent fee paid pursuant to the Settlement Agreement comprised both an act outside the ordinary course of business in violation of Bankruptcy Code § 363(b) and an unauthorized postpetition transaction proscribed by Bankruptcy Code § 549, subject to certain exceptions.

The Complaint then goes into a full-court press, throwing out terms such as “wrongful conduct,” “repeated misrepresentations,” “collusion,” “equitable subordination,” “recharacterization,” and “halitosis.” The book in Vegas, however, is not yet open for bets, preferring to await the Noteholders’ response to the Complaint. It is curious, for example, that Old GM would settle claims by offering a “sweetheart deal” to the Noteholders and agreeing to an “exorbitant and commercially unreasonable” settlement if the Noteholders’ litigation claims were in fact as “meritless” as the Complaint asserts.

In the meantime, a lesson of prudence may be extracted, regardless of whether the Bankruptcy Court slam dunks the Noteholders. As in Stations Holding and NII Holdings, and as most famously sung (but not written) by Dinah Washington, “What a Diff’rence a Day Makes.” Unlike so many artificial deadlines, the filing of a Chapter 11 petition, including an involuntary petition, really does draw an indelible end line on the court. While you can still get two points if your toe nudges the three-point line, a shot taken with your toe on the end line is worth no points at all and could actually cost you the game. The problem with the view that a postpetition signature changes everything is that all else could truly have been negotiated and agreed prepetition, leaving only a mechanical step that should not unfairly penalize the non-debtor party. Conversely, the virtue of a bright-line test is that you know for certain where you stand on the court—the replay monitor does not lie.

Coach Calhoun tells us that the bright-line test is likely to apply, so if ever there was a hard deadline in prepetition negotiations, the date and time of the bankruptcy filing must be considered the hardest deadline of them all. Whether a holiday weekend (which delayed the final NII Holdings signature page) or an hour before the bankruptcy filing, it’s game time in the prepetition bankruptcy world. As the game approaches, remember that the closing mechanics should be kept within your control. Get those signature pages signed in advance, get those evening and weekend client home and mobile phone numbers, and pump up your kicks. Simply put, in the sport of restructuring, March Madness can happen at any time of the year, so keep your eye on the game clock and release the darn ball in time, otherwise you could lose not only the game but, if adversaries such as the Plaintiff in Motors Liquidation are allowed to have their way, you could be knocked out of the entire next season, as well.

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_{1 UConn fans (guilty as charged!) will long remember the thrill of March Madness buzzer-beater victories thanks to Kemba Walker, Sue Bird, Rip Hamilton and Tate George, and the agony of buzzer-beater defeat courtesy of the accursed Christian Laettner (yes, Kentucky fans, Laettner broke our hearts two years before he broke yours).}

_{2 We adhere to the belief that strong facts speak for themselves and do not require embellishment, whereas weak facts reveal themselves through excessive and hyperbolic adjectival qualification. The Complaint is heavy on the latter, although whether this suggests weakness or merely a difference of style remains to be seen.}

_{3 The two cases are In re Stations Holding and In re NII Holdings, both of which are discussed in an article written by our partner Kurt Mayr: Unlocking the Lockup: The Revival of Plan Support Agreements Under New § 1125(g) of the Bankruptcy Code, 15 Norton J. Bankr. L. & Prac. 729 (2006), which can be foundhere.}