By Joseph Checkler 
 

A bankruptcy judge on Friday said a group of Residential Capital LLC's bondholders aren't entitled to interest accrued since the mortgage servicer's bankruptcy filing, at least as of now.

In a written opinion, Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan said ResCap's junior secured noteholders are owed $1.9 billion and thus aren't "oversecured," after the first phase of a trial held last month. If the bondholders are deemed oversecured--which could still happen--they'd be entitled to interest accrued since ResCap's May 2012 bankruptcy filing, which they say is being racked up at $250 million per year. Another phase of the trial could still alter the numbers and render the creditors oversecured.

But Judge Glenn said the bondholders were wrong when they said they are owed $2.22 billion and are actually undersecured by $318 million. He did deal ResCap a blow by saying the company can't collect $143 million in expenses related to the loans.

"It should not be lost on anyone that the [noteholders] stand virtually alone in this case in failing to reach a consensual agreement to resolve their issues," Judge Glenn wrote at the end of his 119-page opinion. "The result has been protracted proceedings that have burdened the estate and reduced funds available to satisfy creditor claims. That is unfortunate!"

The second phase of the trial will start next week, as part of a multiday proceeding over whether Judge Glenn should approve ResCap's bankruptcy-exit plan. While the first part dealt only with the issues related to the junior secured noteholders, the second phase will deal with those issues as they relate to other creditors. Judge Glenn said that his determination that the noteholders are undersecured could change after that phase, particularly after intercompany claims among ResCap entities are considered.

Lawyers for ResCap and the noteholders didn't immediately respond to requests for comment. The ResCap estate has racked up more than $430 million in fees for the professionals working on Chapter 11 case.

Judge Glenn has set aside six days for hearings for the next phase of the trial and the liquidation proposal. The plan is based largely on a settlement among the company, its creditors and government-controlled parent Ally Financial Inc. that calls for Ally to pay $2.1 billion to settle creditor claims but absolves it from future liabilities in the case. A ResCap lawyer said in court Thursday that the company continues to settle objections to the plan.

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.

When ResCap first filed for Chapter 11 protection, 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 have 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 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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