Opinion

Alison Frankel

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

Alison Frankel
Mar 13, 2013 20:56 UTC

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.

Amid ‘activist’ debate, Strine sides with hedge fund dogging SandRidge

Alison Frankel
Mar 12, 2013 21:01 UTC

Leo Strine, the Chancellor of Delaware Chancery Court, is no particular friend of the activist shareholder, as hedge funds and institutional investors who press corporate boards for change have become known. Strine is after all on record, in a November 2010 essay for the American Bar Association’s The Business Lawyer, arguing that short-term shareholder pressure impedes corporate boards from building long-term value. That’s a theme echoed loudly last week by a pair of gray eminences of corporate law, Martin Lipton of Wachtell, Lipton, Rosen & Katz and Ira Millstein of Weil, Gotshal & Manges, in warnings about the potentially deleterious effect of what Millstein called “newfound activism (with a) focus on short-term results.” Both Milstein’s relatively moderate opinion piece in Dealbook and Lipton’s bellicose client alert argued that hedge funds focused on quarterly results and shareholder returns are fundamental threats to U.S. corporations. Or, as Strine put it in his prescient 2010 essay, “It is increasingly the case that the agenda-setters in corporate policy discussions are highly leveraged hedge funds, with no long-term commitment to the corporations in which they invest.”

Nevertheless, when Strine had to take sides last week between an activist hedge fund and a self-interested corporate board in a showdown involving seats on the board of the oil and natural gas company SandRidge Energy, his choice was emphatic: SandRidge’s board, he ruled in a 38-page opinion, “failed to exercise its discretion in a reasonable manner” when it used the threat of a $4.3 billion “proxy put” bond buyback to try to sway shareholders against supporting an alternative slate of directors proposed by the hedge fund TPG-Axon. Strine granted a shareholder motion to enjoin SandRidge from continuing to use the maneuver (which I’ll explain in more detail below) in its campaign against the TPG slate.

As usual, Strine’s opinion is dense and fact-intensive, so I’m not suggesting that the chancellor has changed his message on short-term investors. In fact, shareholder counsel Stuart Grant of Grant & Eisenhofer told me that the SandRidge record and the opinion itself do not indicate that hedge fund backing for the alternative slate was a factor in Strine’s decision. Instead, Grant said, the chancellor’s focus was on the board’s interest in its own entrenchment. “Chancery Court bends over backward to give boards discretion as long as there’s no conflict,” he said. “If there’s a conflict, the court is going to look really, really hard at the board’s conduct.” And in this case, said Mark Lebovitch of Bernstein Litowitz Berger & Grossmann, who argued for shareholders at the March 7 injunction hearing, “the chancellor saw a board that was clearly behaving badly.” If there’s a broad message in the ruling, in other words, it’s that boards are not always in the right in Delaware, even when they’re fending off meddlesome hedge funds.

How SCOTUS wiretap ruling helps Internet privacy defendants

Alison Frankel
Mar 12, 2013 13:26 UTC

I’ve spent the last two weeks vacationing out of the country, with only intermittent access to headlines from the United States. Every time I checked in, I felt as though I’d missed another huge legal story: the U.S. Supreme Court’s ruling on materiality and securities class certification in Amgen v. Connecticut Retirement Plans; oral arguments in Argentina’s appeal in the renegade bondholder litigation; a New York state court’s long-awaited holding that insurance regulators were within their rights to approve MBIA’s $5 billion restructuring in 2009; Credit Suisse throwing in the towel on Ambac’s mortgage-backed securities claims; and the slashing of Apple’s billion-dollar patent infringement damages against Samsung. But one of the great things about legal journalism is that first-day coverage isn’t usually the end of the story, especially when it comes to judicial opinions.

Take, for example, the Supreme Court’s ruling late last month in Clapper v. Amnesty International. On its face, the decision addresses a challenge by human rights advocates and media groups to a 2008 amendment of the Foreign Intelligence Surveillance Act that makes it easier for the government to obtain approval from a special court for wiretaps on intelligence targets outside of the United States. Opponents of the amendment, who asserted that their work requires them to engage in sensitive phone and email communications with likely targets of such surveillance, claimed the law violates the First and Fourth Amendments and the separation of powers doctrine. The court, as you probably read soon after the decision was announced on Feb. 26, said that the 2nd Circuit Court of Appeals erred when it concluded the plaintiffs had standing to bring their case. In a 5-to-4 ruling, the Supreme Court held that the human rights and media groups could not show, without resorting to speculation, that they faced “certainly impending” harm from the 2008 amendment. The majority also said that the plaintiffs could not establish standing through the costs they incurred to prevent harm from the new law.

That’s good news for government spooks, of course. But as Ropes & Gray noted in a very smart client alert last week, it’s also good news for companies facing class actions based on alleged breaches of their customers’ online privacy. Defendants have shelled out tens of millions of dollars (mostly in charitable contributions and legal fees for the other side) in consumer class actions filed in the wake of data breaches or revelations of undisclosed customer tracking. The Clapper ruling should make it easier for Internet businesses to win the quick dismissal of these cases on standing grounds.

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