Ally Financial Inc. (ALLY:US) may owe $25 billion to unsecured creditors of its bankrupt Residential Capital LLC unit, the creditors said in court papers seeking to sue Ally.
Ally created the “mortgage securitization mess” that helped force ResCap, as the unit is known, into bankruptcy, the creditors claim in a motion filed last night in U.S. Bankruptcy Court in Manhattan. To save itself, Ally allegedly took assets from ResCap and imposed liabilities on the unit in a scheme that began as early as 2004.
The official committee of ResCap’s unsecured creditors and a court-appointed bankruptcy examiner have been investigating Ally’s pre-bankruptcy relationship with ResCap. They focused on a settlement proposed by Ally in which ResCap would give up the right to sue its parent in exchange for a $750 million payment.
“Ally believes the claims are without merit,” the company said in an emailed statement. “We are highly confident in our legal position. Our settlement offer reflected a desire to reach closure not an admission of guilt.”
ResCap, based in New York, filed for bankruptcy May 14 with plans to sell its assets and use the proceeds to repay as much of its debt as possible. Ally, a Detroit-based bank that specializes in car loans, is 74 percent-owned by the U.S. Treasury after receiving a bailout.
In the proposed lawsuit, creditors would seek to force Ally to take responsibility for much of ResCap’s debt.
Creditors say the $750 million settlement offer would not be enough. They are negotiating with ResCap and Ally, and if those talks fail, the committee would sue Ally.
Any lawsuit by the creditors requires permission from U.S. Bankruptcy Judge Martin Glenn.
Information emerging from the court-ordered examiner’s investigation shows Ally’s intent to “exploit and misuse” its control over ResCap, the creditors said in court papers. The details emerging from the investigation may support claims that would make Ally liable for all of ResCap’s unsecured debt, which may total $25 billion, they say.
Arthur Gonzalez, a former bankruptcy judge, was appointed last year to investigate transactions between ResCap and Ally as well as Cerberus Capital Management LP, which led a group of investors that acquired a 51 percent stake in Ally, then known as GMAC, in 2006.
“The information available to date paints a stark picture of AFI’s domination, control and abuse of the debtors that supports strong claims against the AFI defendants,” lawyers for the creditors’ committee said in the filing.
Ally might face claims of preferential transfer, fraudulent conveyance, indemnification and equitable subordination, according to the filing.
The case is In re Residential Capital LLC, 12-bk-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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