ResCap Continues Settlements Over Mortgage Issues
07/10/2012| 04:33pm US/Eastern
By Joseph Checkler
NEW YORK--A judge on Tuesday said Residential Capital LLC can continue making settlements with its mortgage holders who are in bankruptcy or whose homes are in foreclosure proceedings, saving time and money for the Ally Financial Inc. mortgage-servicing wing as it attempts to reorganize in bankruptcy.
Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan approved the request, which gives ResCap sweeping authority to settle with the more than 65,000 customers whose homes are in foreclosure and 51,000 who are in personal bankruptcy. Without Judge Glenn's approval, ResCap feared counterparties would make the company come to court for each individual settlement. Judge Glenn had given interim approval to the request last month.
ResCap also reported progress in its proposed $8.7 billion settlement with mortgage-security investors. Morrison & Foerster LLP's Anthony Princi, a ResCap lawyer, said 337 of the 392 trusts that represent those mortgage-security investors have already directed their trustees to accept the agreements.
"This is meaningful progress," Princi said.
Later at Tuesday's hearing, the company struck deals with several adversaries over mortgage securities litigation against ResCap affiliates not in bankruptcy and some of its former executives.
ResCap asked that the six cases, which involve a total of 150,000 loans with original balances of $26 billion, be covered by the "automatic stay" provision that protects companies in bankruptcy from litigation. The Federal Deposit Insurance Corp. and several other parties objected, but most of the parties later agreed to a compromise that will allow the plaintiffs to conduct discovery of the non-ResCap entities even while the lawsuits are temporarily halted. One lawyer representing Western & Southern Life Insurance Co., a holder of 23,000 second-lien loans, couldn't reach a deal. Judge Glenn later ruled that Western & Southern's discovery would be subject to similar terms as the others.
Originally, 27 such mortgage-securities cases existed, but 21 of them had either been halted or dismissed. Judge Glenn seemed reluctant to extend the automatic stay to affiliates not in bankruptcy. ResCap originally argued that the judge could halt the lawsuits if they could cause harm to ResCap itself. Defendants in the cases include Ally, two Ally subsidiaries and former officers and directors.
Looming bond payments and mounting litigation over soured mortgage securities prompted ResCap to file for Chapter 11 bankruptcy on May 14 in a move intended to help government-controlled Ally sever itself from legal exposure.
Last month, Judge Glenn handed a win to Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) when he said he would appoint an independent examiner to look into the relationship between ResCap and Ally both before ResCap filed for Chapter 11 and since. Last week, former U.S. Bankruptcy Court Chief Judge Arthur J. Gonzalez was named as the examiner.
ResCap's bankruptcy is based on the sales of its mortgage-servicing portfolio and a separate "legacy" portfolio of mortgages that were being held for sale. Last month, Berkshire's $1.7 billion bid made it the lead bidder in an upcoming auction of the legacy portfolio, with Fortress Investment Group (>> Fortress Investment Group LLC) subsidiary Nationstar Mortgage Holdings Inc.'s (>> National Semiconductor Corporation) $2.5 billion bid surpassing Berkshire to become the lead bidder on the mortgage-servicing portfolio.
An auction on those assets is scheduled for this fall.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)
Write to Joseph Checkler at firstname.lastname@example.org.