GM pays $50 million to end lawsuit over 2009 hedge fund deal

General Motors Co has agreed to pay $50 million to end long-running litigation over a secretive deal that was struck on the eve of the automaker's 2009 bankruptcy that critics said favored hedge funds.

The agreement ends complex litigation in which hedge funds affiliated with John Paulson and Paul Singer's Elliott Management agreed to reduce the amount they said they were owed in the bankruptcy of "Old GM." The agreement was reached on Friday.

GM had warned the litigation could put it on the hook for $918 million. That threat was removed by the settlement, which still needs to be approved by the U.S. Bankruptcy Court in Manhattan at a hearing scheduled for October 21.

The litigation was brought by a trust that was set up to uncover money for creditors who were shortchanged by the 2009 bankruptcy of GM.

The trust sued GM and the hedge funds in 2012, attacking a deal that was struck as the automaker was filing for bankruptcy. Under the deal, the hedge funds agreed to waive their claims of more than $1 billion owed to them by a Nova Scotia unit of GM in return for $367 million.

The deal was meant to keep GM Canada out of insolvency, which would have complicated the snap sale of the best assets to General Motors Co. Also known as "New GM," the company returned to the stock market in 2010 while unwanted factories and equipment were liquidated for the benefit of creditors.

But to other creditors of Old GM, who received pennies on the dollar, it looked like a sweetheart deal.

The creditors trust argued the deal should have been presented to the U.S. Bankruptcy Court for approval and should be unwound. GM had said that doing so would potentially expose it to claims of up to $918 million.

During the litigation, Judge Robert Gerber had said he was "shocked" to learn of the deal. Closing arguments in the dispute were scheduled for October 9, although Gerber had indicated he might take a long time to issue a ruling.

GM and the hedge funds denied wrongdoing and said the deal was disclosed in securities filings. GM said in a statement it was pleased to resolve the litigation.

GM will make the $50 million payment to a trust representing the former Nova Scotia unit. The hedge funds agreed to cut their claims against Old GM to around $1.54 billion from around $2.67 billion. Reducing their claim potentially increases the amount available for other creditors.

The trust also issued about 6.2 million shares of GM stock to the hedge funds along with about 10 million warrants for additional shares.

Shares of GM were down 0.2 percent at $35.89 on Tuesday afternoon on the New York Stock Exchange.

The agreement was reached following mediation overseen by U.S. Bankruptcy Court Judge James Peck of New York.

The lawsuit originally named Aurelius Capital Management and Appaloosa Management, but those hedge funds were dismissed after they sold their holdings of the debt of the Nova Scotia unit.

The case is Motors Liquidation Co GUC Trust v Appaloosa Investment Limited et al, U.S. Bankruptcy Court, Southern District of New York, No. 12-09802

(Reporting by Tom Hals in Wilmington, Del.; editing by Matthew Lewis)