Patrick Fitzgerald
Mortgage lender Residential Capital LLC is facing a number of
objections from the government's bankruptcy watchdog, its pension
insurer and other creditors to the outline of its plan to exit
bankruptcy protection
U.S. Trustee Tracy Hope Davis, a Justice Department official who
acts as a watchdog overseeing the nation's bankruptcy courts, took
aim at "impermissible payments" earmarked for some bondholders' and
investors' lawyers and financial advisers, in a court filing
Thursday.
The trustee is also concerned about the broad releases from
civil lawsuits granted to Ally Financial Inc. and its managers as
part of its bankruptcy deal with its mortgage subsidiary.
Ally, which isn't under Chapter 11 protection, has agreed to pay
$2.1 billion to its mortgage subsidiary and its creditors in return
for protection from litigation over ResCap's mortgage business. The
broad scope of those releases has caught the attention of several
U.S. government officials.
Ms. Davis said the Ally releases may violate the Bankruptcy
Code's prohibition against granting releases to so-called nondebtor
third parties.
Bankruptcy courts have often cast a skeptical eye to
bankruptcy-exit plans that include such third-party releases,
especially when they are going to insiders--top executives and
directors--of a company that is not part of the bankruptcy
case.
The government's pension insurer, the Pension Benefit Guaranty
Corp., also is concerned about the plan, saying the "overly broad"
releases don't absolve Ally from its obligation to ResCap's
underfunded pension plan. The PBGC, created under the Employee
Retirement Income Security Act of 1974, takes over a private-sector
pension plan after determining an employer is unable to keep paying
benefits. ResCap hasn't taken steps to terminate its pension
plan.
The Federal Housing Finance Agency, the conservator of Fannie
Mae (FNMA) and Freddie Mac (FMCC), also is concerned about how
ResCap is handling its fraud lawsuit against Ally. Freddie Mac
bought $6 billion worth of mortgage-backed securities from ResCap
between 2005 and 2007 is suing the company over dodgy mortgages
backing the securities.
In addition to the red flags raised by the government, a number
of other investors also raised concerns about ResCap's plan
outline. Judge Martin Glenn has scheduled a hearing on the plan
outline, known as a disclosure statement, for next Wednesday. The
judge must approve the disclosure, which describes when and how
much creditors will recover, before creditors can vote on the
plan.
ResCap filed its plan to reorganize--and ultimately
liquidate--in early July. The company, once the country's
fifth-largest mortgage servicer and 10th-largest mortgage lender,
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 can focus on
repaying the bailout it received during the financial crisis.
Ally, formerly General Motors' main financing arm and once known
as GMAC, is now 74% owned by the U.S. government after receiving a
bailout during the financial crisis that topped $17 billion.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com
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