Bloomberg News

Berkshire Seeks Court Examiner to Probe ResCap Deals

June 05, 2012

Berkshire Hathaway Inc. (A:US), the holding company run by billionaire Warren Buffett, asked a judge to appoint an examiner to investigate deals Residential Capital LLC made before it filed bankruptcy.

Berkshire said yesterday in a court filing that it agrees with the official committee of unsecured creditors, which last week asked for permission to investigate ResCap’s transactions with its parent, Ally Financial Inc. (ALLY:US) U.S. Bankruptcy Judge Martin Glenn approved the committee’s request today. Berkshire went one step further by seeking an independent probe.

“That investigation must be conducted by an impartial examiner appointed by the court,” Berkshire said in court papers. “Investigating potentially improper prepetition transactions between a debtor and its affiliates, and evaluating potential claims arising from those transactions, are quintessential duties of a bankruptcy examiner.”

Berkshire holds more than $500 million of ResCap’s unsecured bonds and more than $900 million of its junior secured bonds, according to the filing. Berkshire, which owns the bonds directly and through affiliates, bought the debt more than two years ago, Ted Weschler, a company investment manager, said in court papers.

Bonds Gain

Three of ResCap’s unsecured bonds rose following the news. The company’s 6.5 percent bonds that matured on June 1 climbed 23 percent to 19 cents on the dollar, the 6.5 percent bonds maturing next year rose 11 percent to 21 cents on the dollar, and the 6.875 percent bonds gained 8.1 percent to 20 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

On June 1, unsecured creditors asked Glenn for permission to investigate deals that the bankrupt mortgage company made to help Ally avoid billions of dollars of potential legal liability. His approval in Manhattan gives the committee’s lawyers permission to interview witnesses under oath and subpoena documents.

The committee’s request to look into the deals is routine in large corporate bankruptcies. Berkshire’s is rarer. Results of such investigations are usually given more weight by judges because they are considered independent.

ResCap filed for bankruptcy May 14 with plans to sell most of its assets to Fortress Investment Group LLC. (FIG:US) Ally, a Detroit- based bank that specializes in car loans, supported the bankruptcy filing as a way to resolve legal claims related to mortgage-backed securities. Ally is 74 percent-owned by the U.S. Treasury after receiving a bailout.

Ally Purchase

ResCap has proposed dispensing with potential lawsuits against Ally as part of the sale of mortgage loans and other financial assets to its parent company. Ally agreed to pay $750 million to ResCap to settle any claims against the parent, purchase as much as $1.6 billion of securities if others don’t, and provide $150 million to help finance ResCap’s operations during bankruptcy, according to a company statement.

Thirty-two of the company’s 33 biggest unsecured claims were related to active or potential mortgage-securities litigation, according to court papers. ResCap didn’t give a value for the claims and said it disputes all of them.

Susan Fitzpatrick, a spokeswoman for ResCap, and Gina Proia, a spokeswoman for Ally, declined to comment on the filing.

Berkshire Pursuit

Berkshire sought to buy ResCap from Ally before the government-owned company put the home lender in bankruptcy, three people familiar with the matter said last month.

Berkshire would have paid almost nothing up front for the assets, while taking on potential liabilities such as mounting litigation costs and other claims, the people said. Buffett sought to avoid a ResCap bankruptcy filing because Berkshire had unsecured debt in the mortgage unit, according to the people. Ally turned down the Berkshire proposal after deciding that a bankruptcy filing and sale better protected the company from future liabilities, the people said.

The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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