Residential Capital LLC ( fka RDCC)

[Enterprising Investor]

ResCap Creditors May Pursue Litigation Against Ally Financial (2/27/13)

By Andrew R. Johnson

Residential Capital LLC won't stand in the way of creditors seeking to litigate claims against the mortgage lender's parent, Ally Financial Inc., for actions they say harmed ResCap, a court filing shows.

The official committee representing unsecured creditors in ResCap's Chapter 11 bankruptcy said in a filing late Tuesday that the lender will consent to a motion the committee may seek to gain court approval to pursue such claims.

In exchange, the committee, which includes Wilmington Trust Corp., MBIA Inc. ( MBI ) and American International Group Inc. ( AIG ), said it would support the extension of a period during which ResCap has the exclusive right to file a bankruptcy plan to April 30, as well as the lender's request to appoint a seasoned bankruptcy attorney as its chief restructuring officer.

The move potentially paves the way for more legal battles for Ally, the government-owned auto lender that is trying to rid itself of mounting mortgage liabilities that had stalled its ability to repay the $17.2 billion bailout it received during the financial crisis.

As part of ResCap's Chapter 11 filing in May, Ally reached a settlement under which it would pay the subsidiary's estate $750 million in return for a release from potential liabilities it could face as the mortgage lender's parent.

Creditors have been pressing ResCap to cancel the settlement, though, arguing the amount is a drop in the bucket compared with they say Ally's true liabilities are. They claim the parent company stripped ResCap of its most valuable asset--an ownership stake in Ally Financial's depository unit, Ally Bank--as part of a transaction completed in 2009.

Ally Chief Executive Michael Carpenter has repeatedly said the company would fight creditors, calling such claims meritless. Earlier this month he said Ally believed its defenses against such accusations were strong, and that it would not be held to a "ransom payment" by creditors.

"Ally remains highly confident in its position against any litigation that might be brought against it by ResCap's creditors," Ally said in a statement late Tuesday.

ResCap will let a so-called plan support agreement with Ally expire at the end of the month and won't fight the official committee if it files a motion to seek standing to "pursue estate causes of action against Ally," the committee said in its filing. ResCap has determined that the committee "is in the best position to pursue the claims" and "agreed to support the committee in a process to prosecute the claims on behalf of the estate."

Ally called ResCap's decision to not support a temporary waiver extending the plan support agreement an "unfortunate step."

However, the committee said it will not file a complaint during ResCap's extended exclusivity period to "leave open the possibility of continued negotiations with Ally." If settlement negotiations don't progress, the committee plans to "commence litigation against Ally in a timely manner after obtaining standing" in the court.

ResCap, Ally and creditors have been in negotiations as part of a court-sanctioned mediation process that was scheduled to run through Feb. 28. The purpose was to try to resolve differences so that ResCap can move forward with filing a consensual plan for how it will distribute proceeds from completed asset sales and other funds to creditors. The Wall Street Journal reported last week that negotiations had broke down in that process, with the chances that Ally would face litigation looking more likely.

"Despite the committee's significant efforts over the past two months, the mediation has stalled," the committee said in its filing. "As a result, the committee is now left with no alternative but to examine alternative plan structures that contemplate the debtors' emergence from bankruptcy without a resolution of the claims against its ultimate parent, Ally."

Ally said it has "participated in good faith consistently" through the process and is "guided by its responsibility to its shareholders, especially the U.S. taxpayer."

ResCap's Chapter 11 filing was spurred by litigation over soured mortgage securities and looming bond payments. The move was intended to help Ally sever itself from those issues so it could focus on its core U.S. auto-lending and online-banking businesses.

Ally, the former in-house financing arm of General Motors Co. ( GM ), is 74% owned by the U.S. government after receiving its bailout. The company last year announced several deals to sell international operations, which are expected to generate $9.2 billion in proceeds that Ally has said it would put toward paying back the government.

Write to Andrew R. Johnson at [e-mail]

http://www.nasdaq.com/article/rescap-creditors-say-they-may-pursue-litigation-against-ally-financial-20130226-01764