Judge Says He Will Send ResCap Plan to Creditors for a Vote

   By Joseph Checkler 
 

NEW YORK--A judge Wednesday said he's prepared to send Residential Capital LLC's liquidation plan to creditors for a vote, setting the Ally Financial Inc. subsidiary up for approval of the proposal this fall.

The conditional approval by Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan of the so-called disclosure statement, or plain-English version of a company's bankruptcy exit proposal, came after he overruled the remaining objections and said the few remaining ones should be dealt with at a later hearing in the case, the one where he will decide whether to approve it. ResCap also settled the objections of many parties before the hearing, including ones from federal housing authorities. The judge said he wants to see a copy of the document with small changes he asked for, and then he plans to allow creditor solicitation.

The judge did have some concerns with provisions of the proposal that release Ally from lawsuits later and made the company make changes to the ballots that explain that provision to creditors.

The proposal, filed in early July by ResCap and its official committee of unsecured creditors, would pay the fraying mortgage servicer's general unsecured creditors about 36 cents on the dollar.

"No party is getting everything they wanted," said Kenneth H. Eckstein, a Kramer Levin Naftalis & Frankel LLP attorney who represents the creditors' committee. Mr. Eckstein mentioned junior secured creditors that will get paid 100 cents on the dollar for the money they were owed before the bankruptcy but are also fighting for interest accrued since ResCap's May 2012 Chapter 11 filing. That matter is being handled separately, under mediator and U.S. Bankruptcy Court Judge James Peck.

A lawyer for those creditors said he wouldn't push on the few objections his group still has, although it will continue the fight for the interest payments at a separate bankruptcy-court trial.

ResCap's plan to reorganize and ultimately liquidate is based on a crucial settlement among the company, government-controlled parent Ally and the creditors' committee, which calls for Ally to pay $2.1 billion to settle creditor claims. In return, Ally 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.

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 the one of 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, including a costly independent examiner's report that mostly absolved Ally of wrongdoing in terms of its dealings with ResCap.

(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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