Oaktree accused of shuttering fund to evade $50 million GM clawback suit

April 12, 2016

Remember the story of the Mayer Brown paralegal mistake that could cost GM lenders $1.5 billion? Now there’s a new development in the clawback litigation spurred by that fatal error. Creditors of the pre-bankruptcy GM are alleging that an Oaktree fund found a brazen way to sidestep their demand for the return of their money: The fund shut itself down before a court could decide whether it must pay back about $50 million.

In case you’ve forgotten the background, the 2nd U.S. Circuit Court of Appeals concluded last January that JPMorgan Chase, as the administrative agent for a $1.5 billion secured loan to GM in 2006, accidentally terminated lenders’ security interest when it approved repayment documents related to an older GM loan it also administered.

Mayer Brown represented GM in the repayment of the older loan, and a paralegal from the firm mistakenly included the Delaware financing statement securing the $1.5 billion loan with the closing documents for the other loan’s repayment. Neither JPMorgan nor its lawyers at Simpson Thacher & Bartlett caught the error. The bank subsequently argued that no one, including GM, intended to release lenders’ security interest in the $1.5 billion loan. But the 2nd Circuit – after consulting with the Delaware Supreme Court – said JPMorgan effectively authorized the termination of interest by allowing the erroneous Mayer Brown document to be filed.

This all became an issue, of course, because of GM’s 2008 bankruptcy. At the time, GM believed lenders in the $1.5 billion syndicate, whose loan had been secured by equipment in dozens of GM plants, had to be repaid immediately. The bankrupt company quickly shelled out $1.5 billion to lenders in the syndicate, including about $50 million to a passive investment fund, Oaktree Loan Fund LP, affiliated with the Los Angeles hedge fund Oaktree Capital.

GM’s unsecured creditors suspected GM had moved too fast to pay back the $1.5 billion loan. They filed an adversary proceeding in Manhattan bankruptcy court against the more than 500 lenders in the loan syndicate, including Oaktree Loan Fund (and several other Oaktree affiliates). 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.

After the 2nd Circuit ruled last January that JPMorgan had inadvertently terminated that interest, the unsecured creditors’ trust amended its complaint to demand the return of the $1.5 billion paid out to members of the loan syndicate. The trust also went about serving individual lenders with the amended complaint.

To the surprise of the trust, Oaktree Capital said Oaktree Loan Fund could not accept service because the fund no longer existed. It filed a dissolution certificate in Delaware in 2012.

The trust says that was dirty pool. Its 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.

Oaktree’s parent, meanwhile, is part of a big group of lenders who have asked U.S. Bankruptcy Judge Martin Glenn to dismiss the trust’s clawback claims against them, arguing that they were not properly served. 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.

Oaktree Capital’s lawyer in the GM creditors’ litigation, Bruce Bennett of Jones Day, referred my call to a spokesperson for the fund. She declined to comment, citing pending litigation.

(This post has been updated to include no comment from Oaktree.)

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