GM Creditors' $1 Billion Fight Hangs on Fixture Definition

(Bloomberg) -- As the sun sets on an eight-year lawsuit over the spoils of General Motors Co.'s bankrupt predecessor, the fate of $1 billion may rest on a seemingly simple question: “What is a fixture?”

A two-week trial has delved into this existential question for the conveyor belts, furnaces and fluid-collecting pits of old GM's manufacturing plants, exploring when they were installed, how hard it would be to detach them from the property, and how the property would afterward be “healed.” A ruling or settlement -- either of which could come after the trial concluded without a ruling late Monday -- will determine whether senior creditors that were repaid in full during the 2009 bankruptcy have to give up to $1 billion to more junior creditors.

“We think a fundamental distinction is whether an asset benefits real estate as a whole versus a particular business being conducted on it,” Eric Fisher, a lawyer for unsecured creditors, said in closing arguments.

The quirky case arose after lawyers accidentally terminated a senior loan by filing the wrong form in 2008, jeopardizing the rights of about 500 secured creditors. JPMorgan Chase & Co., an agent on the loan, is arguing that the mistake shouldn't wipe out all their rights; some collateral wasn't affected because additional filings under the Uniform Commercial Code, or UCC, protected its right to fixtures at some GM plants. General Motors' current operations have no part in the suit.

High Stakes

The case could topple a pillar of secured finance -- a part of the UCC states that lenders are protected against unauthorized termination of asset-based loans, the Commercial Finance Association said in a 2013 court filing. An adverse finding may “dramatically increase the risk to lenders who underwrite asset-based loans” and drive up borrowing costs, it said. The agency stands by that today, spokeswoman Michele Ocejo said, adding that “clear wording” in the UCC supports its position.

If the judge rules against JPMorgan, unsecured creditors including the U.S. Treasury and Export Development Canada stand to benefit.

“It could be a big mess and we could be asked to play a role in how it gets resolved,” said Elliot Ganz, general counsel for the Loan Syndications and Trading Association.

JPMorgan spokesman Brian Marchiony declined to comment.

The ruling also threatens the long-standing relationship between JPMorgan and Simpson Thacher & Bartlett LLP, which signed off on the erroneous loan termination. Simpson Thacher spokesman Tom Orewyler and a lawyer for JPMorgan declined to comment on whether JPMorgan would turn on Simpson Thacher if it loses, and whether malpractice insurance would cover the verdict.

So how did one lawyer's mistake turn into a legal battle over the semantics of “fixture” that threatens a white-shoe law firm, the lending market, and more than 500 lenders to old GM? 

‘Nice Job'

It started in 2006, when General Motors took out a $1.5 billion term loan. The loan was secured by a first-priority interest in equipment, fixtures, documents, books and records, and proceeds at 42 GM facilities across the U.S. Following the usual protocol, JPMorgan filed a UCC statement about those fixtures. It went on to file additional UCC statements covering a subset of its plants, according to court records.

Then, on Oct. 20, 2008, a paralegal and an associate with Mayer Brown LLP -- counsel responsible for a different GM loan -- went to terminate that debt, but mistakenly filed forms for the $1.5 billion term loan instead, according to court papers. When Simpson Thacher, which JPMorgan looked to for legal counsel on the loan, reviewed the filings, it found no error, a judge said in a 2013 opinion. “Nice job on the documents,” a Simpson Thacher lawyer said, according to the ruling.

Then GM went bankrupt. Shortly after, the company repaid the $1.5 billion loan using some of its $33 billion in government bailout funds. When unsecured creditors later discovered the mistaken filing, they argued it made JPMorgan an unsecured creditor, just like them -- and entitled to mere cents on the dollar.

Settlement Talks

Some of the term-loan lenders, such as Ares Management LP, Eaton Vance Corp. and Fidelity Investments, have grouped together to file their own pleadings, saying they have hundreds of millions at stake. There are also disputes about when different lenders were officially notified, an imbroglio one lawyer referred to in court papers as “50 shades of notice.”

Several judgments have already been made: A bankruptcy court first ruled that the mistaken filing didn't terminate the liens because it had been submitted in error, making JPMorgan the victor. An appeal to the second circuit reversed that decision in 2013, and sent the case back to the bankruptcy court to enter summary judgment on behalf of unsecured creditors.

After the appeal verdict, Wachtell Lipton Rosen & Katz took up JPMorgan's battle, arguing that secondary UCC filings protected JPMorgan's liens on many assets that are fixtures, or physically attached to property. The debate has focused on 40 assets that are seen as representative of about 170,000 assets. Valuation method has also been at issue, with JPMorgan saying that the collateral is worth more than the loan, entitling it to keep all the $1.5 billion repaid after the bankruptcy. Settlement talks are expected to follow a ruling.

“Removing a stamping press is difficult, dangerous and expensive,” lawyers for JPMorgan argued in a 500-page recap of the trial that described how the metal-shaping tool should be considered a fixture because, if removed, it would leave a 20-foot deep hole.

The case is 09-00504; Motors Liquidation Avoidance Action Trust v. JPMorgan Chase Bank, N.A., et al., U.S. Bankruptcy Court, Southern District of New York (Manhattan.)

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Rachel Evans, Rick Green