The judge overseeing Residential Capital LLC’s bankruptcy ordered a probe of the mortgage company’s proposal to settle legal claims against its parent Ally Financial Inc. (ALLY) that may be worth billions of dollars.
U.S. Bankruptcy Judge Martin Glenn today granted a request from Berkshire Hathaway Inc. (BRK/A), the holding company run by billionaire Warren Buffett, for an independent investigation of ResCap’s proposal to accept $750 million from Ally to settle potential legal liability tied to mortgage-related securities.
“Under the facts and circumstances of this case, the court concludes appointment of an examiner is required,” Glenn said at a court hearing in Manhattan.
ResCap, based in New York, filed for bankruptcy May 14 with an agreement making an affiliate of Fortress Investment Group LLC (FIG) the lead bidder at an auction for its mortgage lending and servicing unit. Ally, a Detroit-based bank that specializes in car loans, is 74 percent-owned by the U.S. Treasury after receiving a bailout.
Glenn put off deciding some details of the investigation, including how much money the examiner will have to spend and when a public report on the probe will be due. Those issues will be decided after the U.S. Trustee names an examiner, Glenn said.
Ally has agreed to pay $750 million to ResCap, purchase as much as $1.6 billion of securities if others don’t, and provide $150 million to help finance ResCap’s operations during bankruptcy, according to a company statement.
Berkshire owns about $900 million of ResCap’s junior secured bonds. Berkshire argued that various deals ResCap made with Ally and others while preparing to file bankruptcy should be investigated by an independent, court-approved examiner.
Glenn has already approved a similar investigation being conducted by the official committee of unsecured creditors, which is typical in large bankruptcy cases.
ResCap’s 6.5 percent, unsecured bonds that mature next year rose 4.6 percent to 23 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Of ResCap’s 33 biggest unsecured claims, 32 were related to active or potential mortgage-securities litigation, according to court papers. ResCap didn’t give a value for the claims and said it disputes all of them.
Berkshire is also seeking to buy ResCap’s mortgage servicing unit for about $2.4 billion and a portfolio of loans for about $1.45 billion, according to court documents.
Before ResCap filed for bankruptcy it agreed to name Fortress’ Nationstar Mortgage Holdings Inc. (NSM) as the lead bidder for the mortgage unit and Ally as the lead bidder for the loan portfolio.
The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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