Residential Capital LLC ( fka RDCC)

[Enterprising Investor]

Judge Clears $2.1B ResCap Deal, Makes Examiner's Report Public (6/26/13)

Andrew R. Johnson
A judge Wednesday approved a $2.1 billion settlement involving Residential Capital and parent company Ally Financial Inc . and unsealed the contents of a widely anticipated probe that concluded that the mortgage lender could have prevailed on as much as $3 billion in claims against its parent.

At a court hearing, Judge Martin Glenn of the U.S. Bankruptcy Court in Manhattan ordered that the independent examiner's 1,900-page report reviewing ResCap's relationship with Ally be made public. The report, filed later in the afternoon, was initially filed under seal last month to encourage parties in the case to reach the settlement that Judge Glenn approved Wednesday.

The examiner, retired U.S. Bankruptcy Judge Arthur J. Gonzalez, concluded that ResCap and its creditors likely wouldn't have prevailed on fraud claims against Ally but nevertheless found that the company could have prevailed on as much as $3 billion in claims against its parent.

The settlement ResCap and its key creditor groups reached with Ally, however, bars them from taking action against Ally on account of the examiner's findings.

The settlement, known as a plan support agreement, is seen as a crucial step to easing ResCap out of Chapter 11 bankruptcy. Progress in the case hit a roadblock earlier this year as the firm's creditors, including mortgage insurers and bondholders, alleged Ally is responsible for billions of dollars of the mortgage subsidiary's liabilities because the parent company controlled the subsidiary prior to its bankruptcy filing.

Ally, which is 74% owned by the U.S. government after receiving a $17.2 billion bailout during the financial crisis, argued it wasn't responsible for such liabilities, contending that it and ResCap operated as separate entities throughout their existence.

At the start of ResCap's Chapter 11 case in May 2012, Ally proposed paying the ResCap bankruptcy estate $750 million to settle the dispute, but the subsidiary's creditors balked at the amount.

In his report, Judge Gonzalez said it was "unlikely" that a court would have approved the prior settlement because the liability releases that deal afforded Ally were worth more than its $750 million price tag.

Last month, Ally agreed to increase its offer to $2.1 billion in exchange for a release from ResCap's legal liabilities. The money will go toward repaying ResCap's creditors, including American International Group Inc ., Paulson & Co ., MBIA Inc . and Allstate Corp .

Some creditors had threatened to sue Ally to hold it responsible for ResCap liabilities.

Gary Lee, a partner with law firm Morrison & Foerster LLP who represents ResCap, said during the hearing that the settlement is a "very significant milestone" in the case because of the "sheer breadth" of parties involved. The various parties "have been at war" with ResCap and Ally for several years.

The settlement had drawn a handful of objections from some investors, bond insurers and other parties who criticized the legal release it grants to Ally.

The U.S. Justice Department voiced concerns over whether the agreement releases Ally from liability for ResCap's activities under a nationwide, $25 billion foreclosure settlement reached with large mortgage servicers last year.

The settlement has the backing of the committee representing ResCap's unsecured creditors, trustees for ResCap's mortgage-backed securities and other stakeholders.

Uncertainty over ResCap's legal issues have cast a shadow over Ally's efforts to repay its bailout. In March, the Federal Reserve rejected a capital plan Ally submitted under the regulator's most recent round of bank "stress tests," deeming the lender's capital levels insufficient to survive a severe economic downturn.

The results factored in Ally's ongoing ties to ResCap.

Ally has said it wants to eliminate $5.9 billion of preferred shares that the U.S. Treasury Department owns in the company this year, but it needs the Fed's approval to do so. The company's long-term goal is to focus exclusively on its U.S. auto-lending and online-banking businesses.

"Ally is highly encouraged by this pivotal court approval, which enables all parties involved to move forward to the final stages of ResCap's Chapter 11 cases and resolve the associated mortgage-related issues," Ally said in a statement Wednesday.

The impending examiner's report helped nudge the parties toward a broad deal that was struck in May through court-sanctioned mediation. The report was slated for release last month, but Judge Glenn agreed to keep the report under seal while they put the finishing touches on the settlement.

Parties in the case feared that release of the report could upend negotiations by fueling creditors' arguments that Ally should be held responsible for ResCap.

-Patrick Fitzgerald and Jacqueline Palank contributed to this article.

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

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