Residential Capital LLC, the bankrupt home-loan company owned by the U.S. government, asked court permission to settle a legal fight over mortgage-backed securities by giving investors the right to pursue an $8.7 billion claim in bankruptcy.
Under the proposed settlement, hundreds of securitization trusts would drop legal claims related to 1.6 million mortgages originally worth $221 billion. In return, the investors would share an $8.7 billion bankruptcy claim.
The investors hold “the single largest set of disputed claims against the debtors estates by a wide margin, and the RMBS Trust Settlement would resolve them without the need for protracted, costly and all-consuming litigation,” ResCap said in court papers made public today in U.S. Bankruptcy Court in Manhattan.
ResCap, based in Minneapolis, filed for bankruptcy May 14 with plans to sell most of its assets and to resolve lawsuits related to mortgage-backed securities.
The company today won approval from U.S. Bankruptcy Judge Martin Glenn to pay wages and other routine bills. Glenn said he would also approve an agreement between ResCap and its owner, Ally Financial Inc. (ALLY:US), to continue sharing certain business services.
Ally, a Detroit-based bank that specializes in car loans, is 74 percent-owned by the U.S. Treasury after receiving a bailout. Ally has agreed to buy a portfolio of loans from ResCap for $1.6 billion and ResCap’s agreement to settle legal claims against its parent, according to court papers.
Ally’s board supported ResCap’s bankruptcy filing in part to resolve billions of dollars in potential legal claims related to mortgage-backed securities.
The proposed Ally settlement is separate from the $8.7 billion offer with investors who bought mortgage securities packaged by ResCap.
That offer doesn’t guarantee the investors would split $8.7 billion. That number would be used to calculate how much cash investors would receive once ResCap sells its assets and develops a reorganization plan to distribute the proceeds among its creditors. In bankruptcy, creditors rarely receive the full amount of what they are owed and often fight with each other over who gets paid first.
Next week, ResCap will return to court seeking approval to sell a loan portfolio at an auction in which Ally would be the initial bidder. ResCap will also seek approval for a similar deal with an affiliate of Fortress Investment Group LLC (FIG:US), which is seeking to buy the company’s mortgage lending and servicing business for $2.4 billion. The Fortress affiliate, Nationstar Mortgage Holdings Inc., would also serve as the so-called stalking-horse, or initial, bidder at an auction.
Warren Buffett’s Berkshire Hathaway Inc. has asked Glenn for permission to replace Fortress as the stalking-horse bidder. ResCap attorney Larren Nashelsky told Glenn today that the company still hasn’t decided how it will respond to Berkshire’s offer.
“We have to decide with our client what it all means,” Nashelsky said in court.
The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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