Last year, General Motors' unsecured creditors won a pretty big victory, when a federal appeals court ruled that $1.5 billion in secured debt wasn’t secured anymore on a technicality. That technicality was, you know, what the loan agreements actually said, even if they only said because a paralegal at a law firm made a typo and no one at that firm or another law firm or GM or JPMorgan Chase noticed. “Ooops” was a pretty compelling legal argument in the district court, but the Second Circuit was feeling strict constructionist that day and decided that words meant what they said, and so GM’s always-unsecured creditors could go after the $1.5 billion GM paid out to its formerly-secured-but-now-also-unsecured creditors shortly after filing for bankruptcy because at the time that was a reasonable thing to do.
Unfortunately for the always-unsecured creditors, two can play at the technicalities game. And, technically, you can’t claw something back without formally notifying the person or entity you’d like to claw something back from. And you can’t formally notify something that doesn’t exist, like, say, an Oaktree Capital Management fund that gladly took its $50 million share of the once-but-no-longer-secured-debt payout and then ceased to be. Which is technically OK because, at least according to Oaktree, nobody at the always-unsecured creditors’ law firm technically told them they were going to appeal and therefore had to stay in business and hold on to that $50 mil just in case.
The unsecured creditors, who proceeded as a litigation trust after GM emerged from bankruptcy, served their initial adversary complaint only on JPMorgan as the administrative agent of the loan. The rest of the defendants remained unserved while the unsecured creditors and JPMorgan fought for years in bankruptcy court and eventually at the 2nd Circuit over the validity of the lenders’ security interest….
Lawyers at Binder & Schwartz argued in a complaint filed Monday in Delaware Chancery Court that Oaktree has been on notice of the trust’s potential claim since the adversary proceeding launched in 2009. JPMorgan kept lenders in the syndicate apprised of developments on the litigation yet the Oaktree fund disbursed its assets to investors without any notice to the trust or backup plan to recover the $50 million the trust wants to claw back. The trust asserts that the Oaktree dissolution was illegal and must be nullified….
According to the lenders’ filing, Oaktree Loan Fund is just one of several syndicate members that dissolved before it was ever sent official notice of the adversary proceeding.