(Bloomberg) -- Bombardier Inc.’s strategy of selling new bonds to a Canadian investor to fend off a group of hedge funds has run into a skeptical judge in a New York courtroom. 

The Montreal-based aerospace manufacturer, facing financial pressure, sold off major assets including its rail business, regional jet program and aerostructures division in 2020 and 2021. A group of holders of its 7.45% bonds due in 2034 argued that the deals violated the terms of the debt. 

So the company sold an additional $260 million of the bonds to Richmond Hill, Ontario-based Canso Investment Counsel Ltd. That gave Canso a majority of those notes outstanding — and it then voted to waive the alleged default, thwarting other bondholders. 

That tactic is now part of a lawsuit by creditors. On Thursday, the judge overseeing the case indicated he doesn’t think Canso’s purchase of new notes should allow it to trample the rights of other holders of the debt. 

“I don’t think that I would be prepared to count debt issued after the alleged default for the purposes of the solicitation,” New York Supreme Court Justice Andrew Borrok said during a hearing. Letting new bondholders decide how to cure an alleged default would render meaningless the rights of older bondholders, he said. 

Hedge funds Antara Capital Master Fund, Corbin Erisa Opportunity Fund and Corbin Opportunity Fund sued Bombardier in January 2022, claiming the company triggered a default on the bonds when its sold those business units. The deals turned the sprawling manufacturer into a much smaller company that’s now focused primarily on making private jets.

The hedge funds, which are represented by Pallas Partners lawyers led by Duane Loft, collectively own almost $130 million of the notes. They’re arguing that the debt should be repaid in full — including the present value of future coupons. 

Antara and Corbin should ask Bank of New York Mellon — which is the trustee under the bonds at issue — to file the lawsuit on behalf of bondholders, Borrok said. If the trustee doesn’t agree to the request, the investors could pursue the lawsuit on their own, he said. 

Borrok did not make any final rulings on the merits of Antara and Corbin’s default allegations. The arguments Thursday were part of Bombardier’s attempt to dismiss the lawsuit entirely.

Bombardier and Canso didn’t immediately respond to requests for comment. BNY Mellon declined to comment. 

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