Residential Capital LLC ( fka RDCC)

[Enterprising Investor]

ResCap Bankruptcy Report Could Remain Sealed Until July 3 (5/13/13)

An independent examiner's report that could sway settlement negotiations in the bankruptcy of mortgage lender Residential Capital LLC may remain under seal until July 3, according to a judge's order on Monday.

The report's release has been highly anticipated by lawyers in the case because it could aid efforts by ResCap's creditors to hold parent Ally Financial Inc. responsible for an estimated $25 billion of liabilities they say it should be on the hook for.

Ally has pushed to sever itself from ResCap and those liabilities, mostly stemming from litigation over soured mortgage securities, so it can repay the $17.2 billion government bailout it received during the financial crisis.

Judge Martin Glenn said Monday he approved ResCap's request made earlier Monday to allow the examiner to file the report under seal. The report focuses on ResCap's relationship with Ally.

But the seal could expire as early as Tuesday if the parties don't reach a deal addressing billions of dollars of ResCap mortgage liabilities. But if they do reach a signed deal by 11 a.m. on Tuesday the report would remain sealed until May 21. By that date, ResCap must seek court approval of a support agreement for its bankruptcy plan, otherwise the report will be unsealed.

Judge Glenn would then keep the report under seal until July 3 or until the day he considers ResCap's approval of a support agreement if that happens earlier, according to his order.

The examiner, former U.S. Bankruptcy Judge Arthur J. Gonzalez, was approved to conduct an investigation last summer after ResCap creditor Berkshire Hathaway Inc. (BRKA, BRKB) requested an examiner to be appointed in the case. Berkshire argued in court filings that Ally may have "harvested assets from ResCap" to "seek a quick and easy divorce" from its troubled subsidiary through bankruptcy.

Mr. Gonzalez had planned to file his report with the court on Friday, but his attorney said that day in a filing that the mediator overseeing negotiations with Ally, ResCap and the creditors asked to delay the report until Monday at 3 p.m., citing progress in the settlement discussions.

Examiners' reports in most recent bankruptcy cases, like Dynegy Inc. (DYN) and Washington Mutual Inc., have been filed publicly, although sometimes with heavy redactions of information deemed confidential.

The ongoing negotiations between ResCap, creditors and Ally on a potential settlement could be upended by the public release of the report. Such a settlement could help ease ResCap out of bankruptcy.

Ally, the former in-house financing arm of General Motors Co. (GM), previously proposed making what Chief Executive Michael Carpenter has called a $750 million "hostage payment" to ResCap's bankruptcy estate in exchange for a release from all liabilities. But ResCap's creditors have argued the amount is a drop in the bucket compared with what they say are Ally's true liabilities.

Gina Proia, a spokeswoman for Ally, declined to comment on the status of mediation discussions.

A spokeswoman for ResCap didn't immediately respond to a request for comment.

The creditors' fiercest charge is that Ally "pierced the corporate veil" in its dealings with ResCap, meaning Ally and ResCap acted as "a single economic entity" where the subsidiary is only used to benefit the parent. Ally has argued that the companies were operated independently with their own boards of directors--and transactions conducted between the two were done at "arm's length."

Mr. Gonzalez's report is expected to weigh in on whether that veil was pierced.

If such a charge is ever held up in court, Ally could be deemed responsible for all the liabilities in ResCap's bankruptcy, the creditors say.

The report is also expected to look at the timing of ResCap's bankruptcy filing and transactions involving Ally Bank, which ResCap once had an ownership stake in. That stake was transferred from ResCap to Ally in a series of transactions completed in 2009, and creditors have argued these moves harmed the mortgage subsidiary.

A committee appointed to represent ResCap's unsecured creditors in its bankruptcy has sought court approval to pursue litigation against Ally if a deal isn't reached. Mr. Carpenter has vowed to fight such litigation.

ResCap filed for Chapter 11 bankruptcy protection last May as litigation over soured mortgage securities mounted and bond payments loomed. The move was intended to help Ally--which is 74% owned by the U.S. government after receiving a $17.2 billion bailout during the financial crisis--sever itself from those issues, which have hindered its ability to repay its bailout.

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

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