GM bondholders unite (Bloomberg)

Chrysler Dissidents’ Lawyer Seeks GM Bondholders for New Fight


By Tiffany Kary and Christopher Scinta

May 27 (Bloomberg) -- The lawyer who represented Chrysler LLC’s dissident lenders is organizing some General Motors Corp. bondholders and plans to argue in any GM bankruptcy that the loser this time will be will be Main Street, not Wall Street.

GM, the largest U.S. automaker, faces a probable bankruptcy filing by June 1 following the refusal of bondholders to accept a 10 percent equity stake in a new company, part of a U.S.- backed plan to give the American and Canadian governments equity ownership of as much as 69 percent and a 17.5 percent trust for unions. GM bondholders hold $27 billion in claims.

“The difference with GM is that, whereas the ‘bad guys’ in Chrysler were hedge funds, who Obama called ‘speculators,’ here they’re Main Street -- individual retirees who bought bonds when they were like gold bullion,” said Thomas Lauria, a lawyer with White & Case LLP who represents Chrysler lenders fighting that company’s U.S. backed reorganization. Lauria said he is seeking to represent GM bondholders in any bankruptcy of that company.

In the Chrysler case, the dissident debt holders disbanded 10 days after the company collapsed, citing political pressure that began when U.S. President Barack Obama criticized the group. Evan Flaschen, chairman of the restructuring department at law firm Bracewell & Giuliani LLP, said uncooperative GM bondholders may be less politically vulnerable.

Retirees Versus Retirees

“The story that hasn’t been told is, this isn’t GM’s union retirees versus the bondholders. It’s retirees versus other retirees,” said Flaschen, who isn’t involved in the GM matter. While Chrysler’s dissidents lost steam because they were forced to identify themselves and faced public stigma, including alleged death threats, GM’s opponents may be harder to criticize, Flaschen said.

GM Chief Executive Officer Fritz Henderson has said the U.S. Treasury allowed the automaker very little flexibility in its negotiations with bondholders. Julie Gibson, a spokeswoman for GM, declined to comment.

“We’re stuck, we need the white knight,” said Gary Thomas, a retired auto mechanic and GM bondholder, in an interview. “I’m not asking for special treatment, I’m just asking for parity. I just feel like whatever the UAW gets, the bondholders should get.”

Roger Kerson, a spokesman for the United Automobile Workers Union, didn’t return a call seeking comment. Jenni Engebretsen, a spokeswoman for the Treasury, didn’t respond to an e-mail seeking comment.

Individual Creditors

Thomas said he has joined a group of individual creditors called GM Bondholders Unite that wants Lauria to represent them. The group is trying to gather investors and hire legal representation to get “fair and equitable treatment” in a bankruptcy, according to its Web site.

Former GM employee Jim Graves, 58, said he represents his 80 year-old mother, Vivian Floyd. Graves, of Celebration, Florida, said he plans to fight the government’s offer to return pennies on the dollar for her $100,000 investment in GM bonds.

“What it boils down to is about half a cent on the dollar at today’s price of GM stock,” he said. “It’s stunningly unfair.”

Graves calculated that his mother’s bonds may be worth 9 cents on the dollar if stock in the new GM reaches half of the company’s decade-long high of about $63 a share. Graves, part of a group calling itself The Main Street Bondholders Coalition, said he didn’t have legal counsel.

Lauria said he seeks to represent some individual GM retirees if Detroit-based GM seeks court protection. As with Chrysler, the attorney said the Obama administration is subverting the U.S. bankruptcy code.

Last Month

In the case of Auburn Hills, Michigan-based Chrysler, filed last month in U.S. Bankruptcy Court in Manhattan, Lauria argued on behalf of a group of hedge funds calling themselves “Non- TARP” lenders. He sought to distinguish his clients from recipients of taxpayer money from the Troubled Asset Relief Program who backed the U.S. plan.

The lawyer claimed that the U.S.-backed reorganization plan for Chrysler subverted the law by paying some unsecured creditors more than secured creditors, who by law, he said, should have priority.

“Obama painted the Chrysler non-TARP lenders as evil, but when you look at whose investing in these funds, it’s pension plans and mutual funds,” said attorney Michael Foreman of Dorsey & Whitney LLP. “Who’s investing in mutual funds and pensions? It’s people on Main Street.”

Lauria didn’t disclose which GM bondholders he represents. He said he would seek to have his fees paid out of the GM bankruptcy estate.

Nevin Reilly, a spokesman representing the ad hoc group of bondholders that has been negotiating with GM, declined to disclose the identities of the holders his group represents.

Junior Creditors

Workers aren’t always treated as junior creditors. The U.S. bankruptcy code specifically provides for employees to get preference over bondholders, said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm, who isn’t involved in the GM negotiations.

Section 1114 of the code requires a debtor “timely pay” all retiree benefits unless the bankruptcy court orders otherwise, or the authorized representative of the recipients of those benefits agrees to other treatment, Hahn said.

In a GM bankruptcy case, Lauria said he would argue that, because unions and bondholders are both unsecured creditors, their claims should get equal treatment.

He said GM’s initial offer to bondholders would have given union-workers 12 times their recovery. Under the new U.S.- plan, bondholders will still get less than the unions, he said.

“The new paradigm seems to be that the contractual rights of creditors can be overwritten to protect politically favored entities like labor unions,” Lauria said.

‘Unfair’ Plan

Flaschen predicted that, while the U.S.-backed reorganization plan for GM may be “unfair” under the bankruptcy code, it’s bound to succeed.

“To put it crassly, you need the employees going forward, you don’t need the bondholders,” Flaschen said.

Flashchen said bondholders may argue against the U.S.- funded debtor-in-possession loan that calls for a “good GM” and a “bad GM,” claiming it violates federal bankruptcy law by being a secret plan of reorganization.

GM’s $3 billion of 8.375 percent bonds maturing in 2033 have fallen to 7.13 cents on the dollar from 21 cents at the beginning of the year and 70 cents 12 months ago, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 115 percent.

GM and the U.S. are likely to say that bondholders will get more under its plan than in a liquidation, Flaschen said.

“If you were the judge, you would be told by the government, that if GM liquidates--if you don’t do this--another 2 million people will be out of jobs,” Flaschen said. “Do you want to be the judge who decides that?”

The Chrysler bankruptcy case is In re Chrysler LLC, 09- 50002, U.S. Bankruptcy Court for the Southern District of New York (Manhattan)

To contact the reporters on this story: Tiffany Kary in U.S. Bankruptcy Court in New York at tkary@bloomberg.net and; Christopher Scinta in U.S. Bankruptcy Court in New York at cscinta@bloomberg.net.
Last Updated: May 27, 2009 17:44 EDT