ResCap’s $750 mln pre-filing deal with Ally is dead. Now what?

March 13, 2013

The last time I checked in on the messy Chapter 11 bankruptcy of Residential Capital, the onetime mortgage lending arm of Ally Financial, squabbling ResCap creditors had put aside their differences to unite in opposition to a deal that granted holders of ResCap mortgage-backed securities an $8.7 billion allowed claim for breaches of ResCap MBS representations and warranties. Earlier this year, junior and senior bondholders and other unsecured ResCap creditors filed objections to that agreement, claiming that it was a backdoor bailout for Ally. Under the creditors’ theory, Ally secretly directed ResCap’s negotiations with lawyers for MBS noteholders, who agreed to back Ally’s own $750 million pre-filing settlement with ResCap in exchange for Ally’s support of the noteholders’ unduly large allowed put-back claim. Ally, according to the ResCap creditors, was the Machiavellian villain pulling ResCap’s strings.

A month later, the MBS allowed-claim fight has been temporarily tabled, but some ResCap creditors are tantalizingly close to airing their grievances against Ally in a suit on behalf of the estate. In a dramatic twist late last month, ResCap reached a deal with its unsecured creditors’ committee in which the bankrupt mortgage lender agreed to walk away from its $750 million settlement with Ally, which would have wiped out all of Ally’s potential liability to ResCap for what creditors considered a bargain price. ResCap furthermore placed the future of its claims against Ally in the hands of the creditors’ committee, agreeing that if the committee moves for standing to sue ResCap’s onetime parent, ResCap won’t contest the motion.

The details of the agreement are spelled out in a little-noticed exhibit to a Feb. 26 brief by the creditors’ committee, which is represented by Kramer Levin Naftalis & Frankel. In the filing, the committee dropped its call for the appointment of a Chapter 11 trustee and pledged its support for a 60-day extension of ResCap’s exclusive right to propose a plan of reorganization. ResCap, in return, ceded standing to the committee on its claims against Ally. (The mortgage lender also said it wouldn’t propose a plan without the support of the creditors’ committee, but, under pressure from bondholders, later backed away from giving the committee veto power.)

Under the terms of ResCap’s pre-filing deal with Ally, the $750 million settlement expired on Feb. 28. U.S. Bankruptcy Judge Martin Glenn of Manhattan agreed on March 5 to extend ResCap’s period of exclusivity and to appoint a new ResCap chief restructuring officer, who has the unenviable task of attempting to craft a consensual settlement among ResCap, Ally, creditors and bondholders, the latter two of which can’t seem to agree with each other on anything but the unfair shake they believe that they’ve so far received from Ally and the MBS noteholders.

Ally, which is represented by Kirkland & Ellis, isn’t at all happy about ResCap’s newfound alliance with the creditors’ committee. In a filing on March 4, the troubled bank said that ResCap’s abandonment of their settlement and concession to creditors on standing to bring subsequent claims against Ally was “both disappointing and perplexing.” The bank asserted that it had kept all of its promises to its spinoff and had been dutifully working with a court-appointed mediator to attain a consensual plan. But instead of being grateful to its former parent, Ally said, ResCap had given up the sure thing of a $750 million deal in favor of peace with the committee.

Ally warned that it would not simply stand by if the committee eventually moved to sue on behalf of the ResCap estate. It also said that until a court-appointed examiner reported on the viability of any ResCap fraud claims against Ally, it would be a waste of resources for the creditors to assert them.

The bank, moreover, may not be the only obstacle between the creditors’ committee and a fraud suit against ResCap’s former parent. If there’s no reorganization plan reached by the end of April and the creditors’ committee moves for standing to bring claims against Ally on behalf of the estate, you can expect opposition from an ad hoc group of junior secured noteholders represented by White & Case and Milbank, Tweed, Hadley & McCloy. That group contends that it has a bigger stake in ResCap’s reorganization than the creditors’ committee; the committee, meanwhile, has threatened to sue over ResCap’s obligations to the junior noteholders. Needless to say, these two groups don’t get along.

I left messages with lawyers for the noteholders, the committee, Ally and ResCap (which is represented by Morrison & Foerster). None got back to me.

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