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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