JPM JP Morgan Chase and Co

Creditors trying to recoup money they say is owed to them by the remnants of what was once General Motors won more time from a bankruptcy judge to pursue litigation over a $1.5 billion bankruptcy blunder.

During a hearing Monday, Judge Martin Glenn of the U.S. Bankruptcy Court in New York said he would give the trust working on behalf of the "old" General Motors' unsecured creditors an additional 36 months to work out what is expected to be a protracted legal battle, pitting the creditors against J.P. Morgan Chase & Co. and other lenders.

"The earliest possible adjudicated resolution of the action by the court would not be until 2017 with possible appeals and follow-on collection litigation in different jurisdictions beyond 2017, and possibly through 2019," lawyers for the trust said in court papers.

A federal appeals court said last year a paperwork mistake rendered a $1.5 billion bank loan made years ago to struggling General Motors Co. an unsecured debt, rather than a secured loan. The ruling was a win for unsecured creditors who have argued for years that a loan from a syndicate led by J.P. Morgan Chase & Co. shouldn't be ranked as a secured debt in GM's bankruptcy. The loan was paid off early in the chapter 11 proceeding, but unsecured creditors could be able to claw the money back to a trust that is still gathering funds for old GM's unpaid bills.

In 2008, GM paid off another loan, terminating the liens that secured it. In the process, however, the liens securing the $1.5 billion loan were also recorded as terminated in the loan records. At the time, no one at GM or the bank, or at their law firms, noticed the error, which came to light after GM filed for chapter 11 protection the following year.

J.P. Morgan, leader of the lending syndicate, revealed the mistake to unsecured creditors, touching off a chase through the courts over the question of where the loan ranked in the massive pile of debt addressed in GM's bankruptcy.

J.P. Morgan has tried to convince a series of courts that the loan error was harmless and that the loan was secured. But courts in both New York and Delaware have rejected those arguments, siding with junior creditors who say the paperwork that released lenders' collateral and rendered the loan unsecured is valid.

General Motors' 2009 bankruptcy, one of the largest in history, was one of the defining political and economic events of the Great Recession. Most of General Motors' assets, including its trademark, were sold off as part of the chapter 11 case, leaving behind a corporate shell—officially named Motors Liquidation Co.—to work out its final affairs.

Senior lenders were paid in full, but the bankruptcy plan left unsecured creditors with a trust holding the rights to pursue certain lawsuits. Payouts from those lawsuits could one day increase the recovery on their debts.

The life of the trust was last extended in November 2014 and was set to dissolve at the end of this year. The judge's order, which drew no objections Monday, extends it through at least Dec. 15, 2019. Without the extension, creditors say they wouldn't be able to resolve a dispute over the repayment of a $1.5 billion loan, which they say benefited big banks at their expense.

The judge conditioned his Monday ruling on a so-called private letter ruling from the Internal Revenue Service, which is expected to ensure the extension won't affect the trust's tax bill. Lawyers for the trust said in court papers that they anticipate a "favorable decision" in the near future.

While the judge's decision Monday keeps the trust from running out of time, its lawyers expect to return to bankruptcy court next month for another order to keep them from running out of cash. The trust initially had about $1.6 million and subsequently won another $13.7 million to cover fees and other expenses through 2014. But court papers show that as of June 30, the trust had only about $700,000 left to fund their litigation.

Lawyers for the trust have asked a bankruptcy judge to approve an agreement with U.S. Bank N.A., which is leading a group of investors putting up as much as $15 million to pay for the legal battle. If approved by Judge Glenn, these funders wouldn't have any control of the litigation, but would stand to take a cut of the proceeds if the legal fight is successful.

Peg Brickley contributed to this article.

Write to Tom Corrigan at tom.corrigan@wsj.com

(END) Dow Jones Newswires

July 18, 2016 17:55 ET (21:55 GMT)

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