General Motors Company (GM) was dealt a favorable ruling in the court case regarding payment of medical benefits worth $450 million to retirees under a contract that precedes the company’s bankruptcy filing. A U.S. district court stated that the new General Motors formed after bankruptcy did not take responsibility for payment obligations under the contract made by the old General Motors in 2007.
Companies reorganized after Chapter 11 bankruptcy filing can reject their debt obligations from the period before the filing of bankruptcy. General Motors filed for bankruptcy in Jun 2009. However, the payment was part of the contract inked in Jun 2007 between the old General Motors, its former Delphi Corp affiliate and the United Auto Workers union (UAW).
As the payment was not included in the new medical benefits contract signed by General Motors post bankruptcy, the company is not legally obligated to pay it.
However, the UAW is not happy with the court’s decision as it believes that the automaker is obligated to make the payment since Delphi emerged from bankruptcy in Oct 2009. The auto union is yet to decide whether it will file an appeal against the ruling. UAW represents almost 48,500 employees of General Motors at present.
The decision comes a few days after the U.S. Department of Treasury completed the divestment of its remaining stake in General Motors. The Treasury department provided a bailout loan of $49.5 billion to General Motors following its bankruptcy in 2009. It recovered a total of $39 billion, thus incurring a loss of $10.5 billion.
General Motors currently carries a Zacks Rank #3 (Hold). Better-ranked major automobile stocks worth considering are Fuji Heavy Industries Ltd. (FUJHY), Ford Motor Co. (F) and Honda Motor Co., Ltd. (HMC). All these stocks hold a Zacks Rank #2 (Buy).
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