ResCap Gets More Time to Control its Chapter 11 Case

   By Joseph Checkler 
 

NEW YORK--Residential Capital LLC on Wednesday got more time to file a reorganization plan clear from the threat of rival proposals, two weeks before a hearing on a key settlement with parent Ally Financial Inc.

Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan gave ResCap until Aug. 21 to file a restructuring plan and until Oct. 21 to solicit votes on that proposal, a procedural move made necessary by the Bankruptcy Code's limits on how long companies can stay in Chapter 11.

"The debtors have made tremendous progress," said Morrison & Foerster LLP's Lorenzo Marinuzzi, a lawyer for ResCap. ResCap's eventual Chapter 11 exit figures to revolve around a $2.1 billion payment to ResCap and creditors from Ally, a settlement reached late last month that ended a protracted fight between government-controlled Ally and those creditors.

Judge Glenn will consider approving that settlement at a hearing set for June 26. That same day, an independent examiner's report into Ally's relationship with ResCap both before and after the mortgage subsidiary's 2012 bankruptcy filing is expected to be released publicly. That report, by former bankruptcy judge Arthur J. Gonzalez, cost ResCap's estate about $80 million in professional fees and has thus far only been seen by Mr. Gonzalez's team and Judge Glenn. Both ResCap and creditors have said that the uncertainty surrounding that report's content helped them reach their settlement, as did mediation by another U.S. bankruptcy judge, James Peck.

As part of the $2.1 billion settlement, which was $1.35 billion more than Ally said it would pay when ResCap entered Chapter 11 last spring, creditors agreed not to pursue litigation against Ally that threatened to upend both the bankruptcy case and Ally's balance sheet.

Also at Wednesday's hearing, a lawyer for ResCap creditor Berkshire Hathaway Inc. (BRKA, BRKB) fought ResCap in its bid to pay down $1.1 billion in debt to Ally and another $800 million to bondholders. The lawyer said the matter should be at least pushed back until the June 26 hearing, considering Judge Glenn hasn't even approved the settlement yet. He said he wanted to question a ResCap witness about the proposal, and the judge said he could later at Wednesday's hearing. Judge Glenn seemed unlikely to rule on that matter until later.

ResCap, once the fifth-largest mortgage servicer in the country, filed for Chapter 11 bankruptcy on May 14, 2012, as litigation over soured mortgage securities mounted and bond payments loomed. Last year, 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 mortgage firm's bankruptcy filing was intended to help Ally, which is 74% owned by U.S. taxpayers and not part of the bankruptcy, make a clean break from ResCap so it can move forward with repaying the bailout it received through the Troubled Asset Relief Program.

(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]. Follow him on Twitter at @JoeCheckler

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