Insurer of ResCap's RMBS Wants Right to Go After Claims

   By Joseph Checkler 
 

An insurer of some of Residential Capital LLC's residential mortgage-backed securities says ResCap's reorganization plan could stop it from going after the trustees that oversee the securities trusts.

In a Monday filing with U.S. Bankruptcy Court in Manhattan, Syncora Guarantee Inc. said it should have a legal right to go after the RMBS trustees' claims but won't because of wording in the reorganization plan.

"The provisions of the plan that propose to impair or eliminate such rights should not be approved, and as a condition of confirmation the plan should be modified to delete exculpation of the trustees of the Syncora trusts," Syncora said in the filing. Without the "exculpation," Syncora argues, it would be free to go after the claims on behalf of the RMBS trusts.

As part of ResCap's larger reorganization plan, the company allowed a $7.3 billion claim for the trusts representing more than one million original mortgages. Syncora, which insures $2.5 billion worth of the RMBS, said wording in the reorganization plan suggests that insurers--including itself--will be shut out of collecting money from the trusts, even if the trusts get payments from ResCap.

The plan says insurance companies "do not have any reciprocal contractual rights to receive distribution for claims" on behalf of the investments they're insuring, Syncora said. ResCap lawyers didn't immediately respond to a request for comment.

ResCap's reorganization and eventual liquidation plan, which Judge Martin Glenn will consider approving at a hearing set for next month, is based on a settlement among the company, government-controlled parent Ally Financial Inc. and ResCap's creditors. Ally will pay $2.1 billion to settle creditor claims but is off the hook from further liabilities. 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.

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.

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 more than $400 million in fees for the professionals working on its case, including Mr. Gonzalez's costly examination.

(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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