Will Politics or Law Govern Upcoming Ruling on GM Creditor Case?

There has been an important story brewing over the past several months regarding General Motors’ flawed bankruptcy process that has been widely ignored by the media. GM may have to readdress its 2009 bankruptcy settlement due to a lawsuit by a group of GM creditors against hedge funds over a settlement involving the company’s Nova Scotia debt. The creditors brought to light the fact that the company did not have its ducks in a row at the time of its 2009 bankruptcy filing and allege that GM was still in the middle of backroom negotiations with hedge funds beyond the deadline. A court decision is now imminent.

Essentially, the dealings should have been finalized and reviewed by presiding judge Robert Gerber but were not properly disclosed. This is no small matter and it is estimated that the cost to GM could be about a billion dollars, which was approximately the amount it provided for a Nova Scotia subsidiary to seal the backroom deal. In addition, GM may have to readdress prior claims that were relieved in the first bankruptcy ruling. The bankruptcy could now become unwound as a favorable ruling to the creditors may open the door to further litigation by other parties that could question the validity of the original settlement.

This story was first reported on by The Wall Street Journal back in September of 2012. The allegations are troubling and add to the sense that the rule of law was trampled in the GM bankruptcy proceedings that saw politically-favored groups like the UAW receive disproportionate payouts on its claims compared to creditors like the GM bondholders that did not have the same political clout as the unions. Union retirees were also favored over others as GM provided the funds to “top-off” Delphi (GM’s parts supplier) UAW retirees’ pensions while Delphi’s non-unionized retirees lost about everything.

During the original GM bankruptcy case, Judge Gerber appeared to have been influenced by political rhetoric that warned of a catastrophic collapse of the whole auto industry if the process was not carried out precisely as the US Treasury Department dictated. Gerber took the threats seriously and did not allow claims by non-UAW creditors to receive due process. The original bankruptcy ruling was rushed through in about a month.

Sources now say that Gerber “…is greatly dissatisfied with the process” and, regarding the dealings in question, “He’s basically implying that GM hid it from him and that reopening the (bankruptcy) sale is a possibility.” Despite the strong words, it is unlikely that Gerber will cause too much grief for the politically-connected GM since his court has a reputation of being debtor-friendly – which was confirmed by how quickly the GM bankruptcy sped through the process. That reputation was the reason that the New York venue for the bankruptcy was hand-picked by GM as it started the proceedings there by entering a claim by GM-owned Saturn of Harlem. 

It is also my opinion that Judge Gerber has shown bias in the case as revealed by his comments on the original bankruptcy process when he stated, “When I approved the (bankruptcy) sale agreement and entered the sale approval order I mistakenly thought that I was merely saving GM, the supply chain, and about a million jobs.” I would argue that Gerber should have had his actions dictated by the rule of law and not on speculation (as fed by the Obama Administration) that a million jobs would have been lost if additional time was taken to assure fair treatment for non-unionized creditors.

I will leave the technical legal analysis of what transpired during the GM bankruptcy process to those with expertise in the field of law, but the outward appearance of a politically-motivated travesty of law can not be ignored. Judge Gerber should now rule on the pending case strictly on legal merit and without political influence. Gerber has the tremendous responsibility of setting legal precedent and the American justice system and the people it serves deserve to have the law upheld without political influence.

Our government has had way too much influence on the happenings at GM and spent way too many taxpayer dollars on the auto bailouts. The culmination was a presidential election that saw the incumbent campaign on the “success” of GM and the auto industry. Taxpayers paid billions of dollars primarily to protect the UAW who then came out in force to help reelect President Obama. I will maintain the view that the GM bankruptcy process exhibited a blatant disregard for over 200 years of contract law as it rewarded political cronies, regardless of how history chooses to record the auto bailouts. That history will now be greatly dictated by how Judge Gerber rules on the case before him. We can only hope that the ruling is based solely on the rule of law and without political pressure, despite how unlikely that outcome may be.

Mark Modica is an NLPC Associate Fellow.