His Work Done, ResCap Examiner Gonzalez Asks to be Discharged

   By Joseph Checkler 
 

The author of Residential Capital LLC's mammoth examiner's report is asking to be relieved from his duties.

Retired U.S. Bankruptcy Court Judge Arthur J. Gonzalez, whose 2,200-plus page independent report concluded that ResCap parent Ally Financial Inc. didn't set its subsidiary up for failure as some creditors charged, said in a Friday filing that his work is done.

The lingering deadline for Mr. Gonzalez's report was considered a major factor in Ally's June settlement with creditors, which calls for the company to pay $2.1 billion to settle those creditors' claims. Judge Martin Glenn allowed Mr. Gonzalez's report--one of the largest in the history of bankruptcy--to be filed with the court confidentially at first as the sides finalized details on their settlement.

The report cost ResCap's estate more than $80 million in fees paid to professionals, and said despite not setting up ResCap for failure, Ally could have been on the hook for as much as $3 billion in creditor claims. A $750 million offer to creditors made at the beginning of ResCap's bankruptcy case would have been too low, Mr. Gonzalez said, a conclusion shared by the creditors who fought for more.

In his Friday filing, Mr. Gonzalez said that aside from being relieved, he wants the work done by himself and his hired professionals to be kept confidential and for them to be immune from future investigations regarding the report. He also said that to avoid "wasteful collateral litigation," he and his professionals shouldn't be considered liable for anything related to ResCap's Chapter 11.

Such requests by examiners are common in bankruptcy cases, and judges usually grant them with few questions. A hearing on Mr. Gonzalez's request is set for Sept. 24.

Judge Glenn last week cleared creditors to vote on ResCap's Chapter 11 plan, which would pay most unsecured creditors about 36 cents on the dollar in the company's liquidation.

The plan is based largely on the $2.1 billion settlement between government-controlled parent Ally and the company's official committee of unsecured creditors. The deal leaves Ally off the hook for further liabilities related to those creditors. After the sales of two huge chunks of assets earlier this year, that settlement loomed as one of the largest issues in ResCap's 14-month-old bankruptcy. The other was Mr. Gonzalez's report. The creditors had said at one point that Ally may be on the hook for all $25 billion in claims in ResCap's bankruptcy, though Mr. Gonzalez didn't go nearly that far in his assessment.

If the plan is ultimately ratified by creditors and approved by Judge Glenn at a hearing tentatively set for November, 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.

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, to sever itself from those issues so it can 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 nearly $400 million in fees for the professionals working on its case.

(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 [e-mail]

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