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ResCap Sues AIG, Allstate Over Repayment Priority

Residential Capital LLC sued AIG Asset Management LLC, Allstate Insurance Co. and other mortgage- bond buyers to prevent them from collecting money ahead of other creditors in the company’s bankruptcy.

Mortgage investors who lost money on securities they bought from ResCap shouldn’t be given priority over unsecured creditors, ResCap said in a complaint filed Feb. 19 U.S. Bankruptcy Court in Manhattan.

The lawsuit is a response to an attempt by affiliates of AIG, Allstate, Massachusetts Mutual Life Insurance Co. and Prudential Insurance Co. of America to get paid before unsecured creditors, ResCap said. Should the insurers succeed, they may end up collecting twice for almost identical claims at the expense of unsecured creditors, ResCap said.

Elevating the investor claims “will have numerous inequitable effects,” according to the complaint.

Scott Shelley, a lawyer for the bond buyers, didn’t immediately respond to an e-mail requesting comment on the complaint.

ResCap filed for bankruptcy last year, partly to help it resolve lawsuits brought by investors that purchased mortgage bonds backed by $226 billion worth of home loans. The lawsuits claimed the bonds lost value because many of the loans were bad.

Ally Settlement

ResCap and its parent company, Ally Financial Inc. (ALLY), have proposed settling with the 392 trusts that purchased the securities by giving investors an $8.7 billion claim in ResCap’s bankruptcy case.

Some of the entities that ResCap sued would collect money under both that settlement and a motion that AIG, Allstate and the other entities filed in bankruptcy court in November, according to the complaint.

Creditors have objected to the settlement, which would allow investors to try to collect as much as $8.7 billion, depending on how much money ResCap raises through asset sales. In October, the company auctioned its loan portfolio and loan- servicing business for about $4.5 billion.

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

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