The GM bondholders’ “legal rights” meme

By Felix Salmon
June 1, 2009

A new website popped up last week called GM Bondholders Unite, and kicked off aggressively:

May 28, 2009 – “The latest GM ‘offer’ sends a chilling message to all individual bondholders, not just those, like us, holding GM bonds: contracts in America are no longer worth the paper they are written on,” said GM Bondholders Unite, a grassroots organization representing individual GM bondholders across the country.

Neil Collins picks up the meme today:

The big holders have delivered a slim majority in favour of a deal which bears no resemblance to the legal rights enshrined in the bonds’ trust deeds.

But for all the indignant assertions about legal rights, it’s far from clear what exactly is meant to be illegal here. After all, the GM bondholders (unlike the banks holding Chrysler loans) are not secured creditors, so there’s no issue about them being senior to other stakeholders like the UAW.

According to the annoyingly-anonymous website, the government has used its control over the bondholders “to promote its political agenda over the rule of law” and “has proposed a restructuring scheme that disregards and would overwrite contractual rights of lenders and the statutory protections afforded them through the bankruptcy code’s priority rules”. But I still haven’t found anybody actually spell out what those contractual rights are supposed to be, whether they’re “enshrined in the bonds’ trust deeds” or otherwise.

The GM bondholders do have a PR representative, Tom Vogel. When I asked him about this, he replied by giving me some “comments on background”, which means that he was asking me, weirdly, not to repeat what he said. So I’d just ask this: the next time that somebody claims that the treatment of GM bondholders in any way violates their legal rights, can they be specific about exactly what legal rights are being violated?

As far as I can make out, the main legitimate complaint of the GM bondholders is that they’re getting paid out less than other unsecured creditors (specifically the UAW) with whom they’re pari passu. But I don’t think there’s a legal right anywhere for all pari passu creditors to receive exactly the same treatment. If you owe money on four different credit cards, there’s no law saying you have to pay them all the same proportion of the total amount outstanding.

But if there’s a more substantive complaint, I’d love to see it spelled out explicitly, rather than just referred to in a vague and hand-waving manner.

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