ResCap Makes Case for Approval of Chapter-11 Exit Plan

   By Joseph Checkler 
 

NEW YORK--Residential Capital LLC on Tuesday began building its case to exit Chapter 11 under a proposal supported by all but one of its major creditor groups, pointing out those objecting are being treated better than all other creditors in the case.

"We believe that the creditors have spoken," said Morrison & Foerster LLP's Gary Lee, ResCap's lead lawyer, in his opening argument of the multiday court hearing over whether to confirm the plan. Last week, Mr. Lee said more than 95% of ResCap's creditors ratified its liquidation plan, with one notable exception.

Standing in the way are hedge funds holding about half of ResCap's $2.2 billion in junior secured bonds. They are set to be repaid in full but say they are owed additional interest accrued since the May 2012 Chapter-11 filing. While the hedge funds lost the first round of a trial over whether their claims should be treated as "oversecured," which could entitle them to hundreds of millions of dollars in extra interest, the confirmation hearings allow them to argue that their bonds are secured by assets of certain ResCap affiliates in bankruptcy. If they win on those issues, they have a chance to become recognized as oversecured and can lay claim to post-bankruptcy interest.

"It's clear to us that the [junior bond holders] are undersecured," said Kramer Levin Naftalis & Frankel's Kenneth H. Eckstein, a lawyer for ResCap's official committee of unsecured creditors, who support the plan.

A lawyer for the junior bondholders, Milbank, Tweed, Hadley & McCloy LLP's Gerard Uzzi, said some of the bonds are secured by claims that ResCap entities have against one another. Those intercompany claims, Mr. Uzzi said, are being treated as unsecured by ResCap. "We don't like what they're giving us," Mr. Uzzi added during his opening argument Tuesday.

Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan has set aside six days for hearings on the plan, which is based largely on a settlement among the company, most of its creditors and ResCap's government-controlled parent Ally Financial Inc.

The plan calls for Ally to pay $2.1 billion to settle creditors' claims but absolves it from future liabilities in the case. Most major objections to the plan have been settled, except for the one from the ad-hoc group made up mostly of hedge funds that include Aurelius Capital Management LP and Davidson Kempner Capital Management LLC.

Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) owns more than $900 million of those same junior bonds but isn't a part of the ad-hoc group's suit seeking the additional interest. But the company could benefit if the ad-hoc group prevails.

If the plan is approved by Judge Glenn, different classes of creditors will recover different amounts based on the ResCap-related entity that owes them money. In general, most unsecured creditors will receive around 35 cents on the dollar. The junior secured bondholders would get paid in full.

Another key settlement in the case gives the holders of more than one million ResCap mortgages a $7.3 billion claim, which in a best-case scenario would be paid out at a reduced percentage that may entitle them to more than $700 million in cash, according to ResCap's latest payback plan filed with the court.

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 could focus on repaying the government bailout it received during the financial crisis.

During its bankruptcy proceedings, 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 under Chapter 11, the Ally payment to creditors was set at $750 million, but it became clear early on that creditors wanted more and the figure was raised to the $2.1 billion in June. 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.

The hearing resumes Wednesday morning in Manhattan bankruptcy court.

(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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