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The Cost of Rushing GM?

posted by Stephen Lubben

Recently a reporter emailed me a claims objection from the "old" GM case. In the objection, the GM Committee objects to two claims filed in connection with an interesting lending arrangement that GM entered into before bankruptcy.

It seems that GM set up an unlimited liability subsidiary in Nova Scotia ("NSF") that borrowed money in GB pounds. This borrowing was guaranteed by GM. NSF then entered into currency swaps with GM to convert the money into Canadian dollars, and then lent the same to GM Canada.

Shortly before the GM chapter 11 case, the NSF lenders understandably became concerned about getting paid. They brought a suit in Nova Scotia against GM, NSF, and an entity called Nova Scotia Investments, whose role in this transaction is totally unexplained in the claims objection.

Then on the eve of GM's chapter 11 case, GM entered into a settlement with these lenders that involved, among other things, GM transferring more than $300 million to GM Canada for ultimate payment to the lenders. The claims objection deals with this agreement, but explains the terms of the deal in a way that is, to put it mildly, rather confusing and not altogether plausible. Moreover, the Committee asserts several causes of action that probably have to be brought in an adversary proceeding.

OK, but what is really going on here? My suspicion is that GM had to pay off these lenders on the eve of its chapter 11 case to avoid having to put GM Canada into a CCAA proceeding in Canada. Presumably upon GM's filing in the US, the BIA trustee in Nova Scotia could have demanded payment of GM Canada's more than 13 billion CDN of debt. As Stephanie Ben-Ishai and I have written elsewhere, there was a pretty obvious effort to keep GM Canada out of bankruptcy in Canada, probably because of the desire to move GM through chapter 11 at extreme speed. That speed would have been hard to achieve while coordinating with a parallel CCAA proceeding.

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