By Peg Brickley
A federal appeals court in New York on Wednesday said 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.
A J.P. Morgan spokesman said the firm was reviewing the decision
and its options for next steps in the case.
The decision from the U.S. Court of Appeals for the Second
Circuit opens the way for creditors left unpaid from GM's 2009
bankruptcy to ask J.P. Morgan and its lending syndicate to return
money they collected when the loan was paid off. If the banks
ultimately return the money, they may then reclaim some of it,
sharing with other unsecured creditors of the old GM.
The federal appeals court ruling focused on an error in a
financing document that enumerated the collateral--all the
equipment and fixtures at 42 GM facilities--backing the bank loan.
According to the New York court, a mistake in document broke the
link that anchored the $1.5 billion bank loan to a significant
parcel of GM assets.
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.
No one at GM or the bank, or at their law firms, noticed the error
at the time
The error 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.
The bank contended the error was irrelevant, since neither GM
nor its lenders intended to release the collateral securing the
loan. A bankruptcy judge agreed, ruling against unsecured creditors
who argued the flawed paperwork meant much of the loan wasn't
supported by collateral.
When the matter came up for appeal, the federal appeals court in
New York turned to Delaware's Supreme Court for the answer to a key
question: if J.P. Morgan authorized the filing of the erroneous
loan documents, but didn't authorize the release of the lien, was
the lien released?
Delaware's high court said yes, reasoning that creditors who
check loan paperwork can't be required to guess at the subjective
intent of those who filed it. As long as J.P. Morgan authorized the
filing of the document, the lien was released, just as it said in
the paperwork, the Delaware judges said.
Wednesday, the appeals court said that regardless of what J.P.
Morgan intended to accomplish, it did authorize the filing of the
loan paperwork, including the mistake. The decision reversed the
bankruptcy court, which was instructed to grant partial summary
judgment to the GM official committee of unsecured creditors. The
committee has been pursuing the money since 2009.
The events that led to the error involved both the old GM and
J.P. Morgan, and their law firms, Mayer Brown LLP for GM and
Simpson Thacher & Bartlett for J.P. Morgan.
Mayer Brown, through a spokesman, declined to comment, citing a
policy of not discussing matters in litigation. A spokesman for
Simpson Thacher wasn't immediately available for comment.
A spokesman for new GM declined to comment on the decision,
which affects only the continuing action in the bankruptcy case of
its predecessor.
Write to Peg Brickley at peg.brickley@wsj.com
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