Creditors Line Up Financing to Continue Fight Over GM Loan

Creditors awaiting a crucial ruling in a long-running $1.5 billion dispute growing out of the General Motors bankruptcy have turned to outside lenders to bankroll the litigation.

Cash is running low, and private litigation- funding vehicles Cynthania LLC and Earlham LLC have agreed to provide up to $15 million to allow GM creditors to continue a battle with J.P. Morgan Chase & Co. and hundreds of other lenders.

A bankruptcy judge in New York will weigh the financing request at a June 30 hearing.

The fight dates back years, to the time when the national economy was shaken by mortgage losses and the fabled U.S. auto maker needed a government assist to avoid being crushed under its load of debt.

A paperwork gaffe resulted in the release of lender claims on a large collection of GM assets -- equipment and fixtures at 42 GM plants -- meaning loans J.P. Morgan believed were secured were in fact unsecured. That is the creditors' position.

Backed by other lenders, J.P. Morgan contends it had claims to other collateral with enough value to anchor its $1.5 billion loan to GM as secured, in spite of the slip-up. Creditors say the other collateral wasn't worth as much as J.P. Morgan says, so payments lenders received should be returned to a trust.

Trial of the dispute over what the other collateral is worth has wrapped up and closing arguments were made earlier this week. Once there is a ruling on the collateral question, creditors expect to go to mediation, with possible continued litigation past the end of the year.

Creditor lawyers fear they won't have the funds to press forward unless they get financing.

Court fights began not long after GM sought chapter 11 protection. The dispute over whether the paperwork error was a harmless oversight or an effective release of the lender claims took years, winding through the courts of New York and Delaware.

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

June 08, 2017 15:15 ET (19:15 GMT)