By Joseph Checkler
Residential Capital LLC, as it marches toward exiting
bankruptcy, is asking a judge to approve the settlement of a $99.7
million class-action lawsuit over alleged improper fees it charged
on loans made more than nine years ago.
In a Tuesday filing with the U.S. Bankruptcy Court in Manhattan,
ResCap said it will pay $14.5 million to the borrowers, in addition
to the $12.9 million it already paid after losing previous court
trials on the matter. While the settlement was reached in early
2012, ResCap's bankruptcy case triggered a halt of pending
litigation. Now, less than a week away from asking a judge to clear
its Chapter 11 exit, ResCap is asking him to lift the automatic
stay allowed by bankruptcy law so he can approve the deal.
The settlement includes 248 loans and about 365 potential
borrowers on those loans, ResCap said. The plaintiffs alleged that
two ResCap subsidiaries collected improper fees and interest on
second mortgages. While those borrowers initially won a $99.7
million judgement, a lower court called for a new trial over much
of that money.
ResCap will ask Judge Martin Glenn to approve the deal at a Dec.
17 hearing. The settlement also requires state court approval, the
company said. If approved, the remaining borrowers will receive
$14.5 million and will promise not to go after ResCap or its
affiliates for more money related to the loans in the future.
ResCap, the mortgage servicing subsidiary of
government-controlled Ally Financial Inc., will ask Judge Glenn to
approve its plan to exit bankruptcy and eventually liquidate at a
multi-day hearing starting next week. Recently, the company has
been satisfying objections to its proposal, as well as settling
lawsuits with parties both inside and outside of bankruptcy
court.
Last month, a federal judge approved ResCap's $100 million
settlement of a class-action lawsuit over soured mortgage-backed
securities, some $37.66 billion worth of investments which went bad
in the collapse of the housing market. And this past summer, the
company agreed to set aside nearly $60 million as part of a
settlement for borrowers with high-cost loans.
The company is still working on satisfying many objections to
its liquidation plan, and Judge Glenn has set aside six days on his
calendar for hearings to consider the proposal. The plan is based
largely on a settlement among the company, its creditors and Ally
that calls for Ally to pay $2.1 billion to settle creditor claims
but absolves it from future liabilities in the case.
ResCap, once one of the country's largest mortgage servicers and
mortgage lenders, filed for Chapter 11 protection in May 2012 as
litigation over soured mortgage securities mounted and bond
payments loomed. The move was intended to help Ally, which isn't
part of the bankruptcy, sever itself from those issues so it could
focus on repaying the bailout it received during the financial
crisis.
During its bankruptcy, ResCap struck deals to sell
mortgage-servicing platforms and loan portfolios as a part of
bankruptcy auctions that generated $4.5 billion in proceeds. The
ResCap estate has also racked up more than $430 million in fees for
the professionals working on its case.
When ResCap first filed for Chapter 11, the Ally payment was set
at $750 million, but it became clear very early that creditors
wanted more. A court-ordered examiner's report by former U.S.
Bankruptcy Court Judge Arthur J. Gonzalez concluded that while Ally
didn't set up ResCap for failure, as some creditors charged, the
$750 million settlement would have been too low.
If the plan is approved by Judge Glenn, creditors will receive
different amounts of recovery based on which ResCap-related entity
owes them money, but most unsecured creditors will receive the 36.3
cents on the dollar.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@wsj.com
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