ResCap Seeks Approval of Settlement

Residential Capital LLC, as it marches toward exiting bankruptcy, is asking a judge to approve the settlement of a $99.7 million class-action lawsuit over alleged improper fees it charged on loans made more than nine years ago.

In a Tuesday filing with the U.S. Bankruptcy Court in Manhattan, ResCap said it will pay $14.5 million to the borrowers, in addition to the $12.9 million it already paid after losing previous court trials on the matter. While the settlement was reached in early 2012, ResCap's bankruptcy case triggered a halt of pending litigation. Now, less than a week away from asking a judge to clear its Chapter 11 exit, ResCap is asking him to lift the automatic stay allowed by bankruptcy law so he can approve the deal.

The settlement includes 248 loans and about 365 potential borrowers on those loans, ResCap said. The plaintiffs alleged that two ResCap subsidiaries collected improper fees and interest on second mortgages. While those borrowers initially won a $99.7 million judgement, a lower court called for a new trial over much of that money.

ResCap will ask Judge Martin Glenn to approve the deal at a Dec. 17 hearing. The settlement also requires state court approval, the company said. If approved, the remaining borrowers will receive $14.5 million and will promise not to go after ResCap or its affiliates for more money related to the loans in the future.

ResCap, the mortgage servicing subsidiary of government-controlled Ally Financial Inc., will ask Judge Glenn to approve its plan to exit bankruptcy and eventually liquidate at a multi-day hearing starting next week. Recently, the company has been satisfying objections to its proposal, as well as settling lawsuits with parties both inside and outside of bankruptcy court.

Last month, a federal judge approved ResCap's $100 million settlement of a class-action lawsuit over soured mortgage-backed securities, some $37.66 billion worth of investments which went bad in the collapse of the housing market. And this past summer, the company agreed to set aside nearly $60 million as part of a settlement for borrowers with high-cost loans.

The company is still working on satisfying many objections to its liquidation plan, and Judge Glenn has set aside six days on his calendar for hearings to consider the proposal. The plan is based largely on a settlement among the company, its creditors and Ally that calls for Ally to pay $2.1 billion to settle creditor claims but absolves it from future liabilities in the case.

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, sever itself from those issues so it could 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 more than $430 million in fees for the professionals working on its case.

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.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to )

Write to Joseph Checkler at [e-mail]

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