Creditors of Residential Capital LLC objected to a proposed settlement the bankrupt home lender made with investors in its mortgage-backed securities that would give the investors an $8.7 billion claim in the Chapter 11 case.
The official committee of ResCap’s unsecured creditors said in a filing yesterday in U.S. Bankruptcy Court in Manhattan that it was “dismayed” to have found that the negotiations that led to the settlement were dominated and controlled by ResCap’s parent company, Ally Financial Inc. The committee said Ally was concerned with limiting its own liability.
“It appears that the debtors, or, in fact, Ally, negotiated the deal with one overriding objective in mind: obtaining the institutional investors’ support for a release of all estate and third-party claims against Ally based on a capped settlement payment of $750 million,” the creditors committee said in its request for the judge to reject the settlement.
In exchange for the investors’ support for the $750 million settlement of Ally’s exposure, ResCap agreed to give the investors a bankruptcy claim that is $4 billion more than what the company publicly has stated was its potential liability from claims by the trusts overseeing its residential mortgage-backed securities, according to the creditors committee.
In the proposed settlement ResCap asked the court to approve last year, hundreds of securitization trusts would drop legal claims related to 1.6 million mortgages originally worth $221 billion. In return, the investors would share an $8.7 billion bankruptcy claim.
The so-called RMBS Trust Settlement would “swamp” ResCap’s unsecured creditors, according to the committee’s objection. If a non-conflicted party had negotiated with the investors, the allowed claim would have been substantially lower and in line with ResCap’s earlier estimate of its potential liability, according to the committee.
To contact the reporter on this story: Edvard Pettersson in the Los Angeles federal courthouse at
To contact the editor responsible for this story: Michael Hytha at email@example.com.