ResCap Rebuffs Berkshire, Keeps Fortress as Lead Bidder

Residential Capital LLC rejected an offer from Berkshire Hathaway Inc. (BRK/A), the holding company run by billionaire Warren Buffett, to be the initial bidder in a proposed auction of ResCap’s most-valuable assets.

ResCap asked the judge overseeing its bankruptcy to name a Fortress Investment Group LLC (FIG) affiliate and Ally Financial Inc. (ALLY) as the so-called stalking-horse bidders for separate auctions, according to court papers filed yesterday in Manhattan.

Before ResCap entered bankruptcy May 14, it negotiated a deal to name Fortress as the lead bidder, with a $2.4 billion offer, in a proposed auction for ResCap’s mortgage unit. Ally, ResCap’s parent, separately offered $1.4 billion for a set of loan assets.

Fortress’s bid “will likely remain the highest and best offer for the debtors’ servicing platform,” ResCap said in its filing in U.S. Bankruptcy Court in Manhattan.

U.S. Bankruptcy Judge Martin Glenn is scheduled to decide on June 18 whether to approve the proposed auctions and name Fortress and Ally as the stalking-horse bidders. Berkshire, based in Omaha, Nebraska, filed court papers this week offering to replace those companies.

Glenn can choose Nationstar, Berkshire, or approve an auction with no stalking-horse.

Legal Claims

Should Glenn approve ResCap’s proposals, Berkshire still could bid in the auctions. It wouldn’t have the advantages given to the stalking-horse, including any breakup fee.

Ally, based in Detroit, supported ReCap’s bankruptcy filing as a way to resolve legal claims related to mortgage-backed securities. Ally is 74 percent-owned by the U.S. Treasury after receiving a bailout.

Ally has offered to either serve as a stalking-horse at an auction for the loan assets, or to buy the assets as part of a court-approved reorganization plan that would resolve certain legal claims against it.

A committee of unsecured creditors has objected to the proposed auction of the mortgage servicing unit, saying it was being rushed.

At the hearing next week, Glenn will also consider Berkshire’s request for an examiner to investigate deals made before the company sought court protection, including transactions with its parent, Ally. Berkshire said in a court filing that it holds more than $900 million of ResCap’s junior secured bonds.

Breakup Fee

Fortress’ Nationstar Mortgage Holdings Inc. would act as stalking-horse for the mortgage unit under ResCap’s proposal. Should it be outbid at the auction, it would get a $72 million breakup fee, according to court records.

Replacing Nationstar would discourage investors from trying to buy assets out of bankruptcy, the company said in a court filing yesterday. Its executives and employees spent a lot of time and money studying ResCap’s mortgage unit before agreeing to become the stalking-horse bidder, Nationstar said.

Under bankruptcy court rules, when a company wins approval as the stalking-horse, its initial offer becomes a binding sales contract that can be enforced even if no one else participates in the auction. Should a company be outbid, it typically receives a breakup fee and its expenses are reimbursed.

Clearly Superior

To replace Nationstar, Berkshire would need to convince the judge that its offer is clearly superior, either because it is offering more money, or because it would close the sale quicker and with fewer contingencies, Mark Collins, head of the bankruptcy and restructuring department of Richards Layton & Finger, a Wilmington, Delaware, law firm.

“All things being equal, the nod typically goes to the one who was there first,” Collins said.

Berkshire has offered to match Nationstar’s price for the mortgage unit while lowering the breakup fee to $24 million.

When companies fight for the right to be the stalking-horse bidder, some judges have declined to select one, instead ordering an auction to go forward without granting bid protections, such as a breakup fee, to any bidder, Collins said in an interview today. That, in theory, saves money.

Judges also look at how much effort the bankrupt company put into trying to identify a stalking-horse. If the company spent months negotiating with several potential bidders, a judge may hesitate to replace the chosen stalking-horse, Collins said.

“All of those things will play into the court’s decision,” he said.

The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net