Ally Financial Inc. (ALLY), the auto lender majority-owned by the U.S. government, agreed to pay $2.1 billion to avoid lawsuits related to its bankrupt mortgage unit, Residential Capital LLC.
Under the settlement, Ally will pay $1.95 billion in cash to the ResCap bankruptcy estate, plus $150 million in insurance proceeds, according to a court filing today. The money will be added to $4.5 billion ResCap raised by selling its mortgage-servicing business and a loan portfolio and eventually distributed to creditors owed at least $6.3 billion under a reorganization plan supported by Detroit-based Ally.
Settling creditors include ResCap noteholder Paulson & Co., MBIA Insurance Corp. and a group of securitization trusts that sued for losses tied to bad mortgages. Under the accord, Ally will be guaranteed full repayment of the $1.13 billion it claims ResCap owes it, Ally said in a statement.
The deal “signals an end to the litigation, infighting and potential ‘nuclear war’ in these cases,” ResCap bankruptcy attorney Gary Lee wrote in court papers filed today in Manhattan. The judge overseeing ResCap’s bankruptcy, Martin Glenn, had warned the parties that without a settlement, their court fights would be like “nuclear war.”
The settlement is more than twice the $750 million that Ally agreed to pay when ResCap filed bankruptcy a year ago. Unsecured creditors attacked that proposed payment as too low.
“Putting these issues behind us is in the best interest of our shareholders, employees and customers,” Ally Chief Executive Officer Michael A. Carpenter said in the statement.
The settlement doesn’t resolve claims against Ally brought by the Federal Housing Finance Agency and the Federal Deposit Insurance Corp., as receiver for certain failed banks.
The reorganization plan ResCap will propose under the deal will confirm that the company has responsibility for the costs and obligations of a foreclosure settlement it signed last year with the U.S. Justice Department, Ally said.
ResCap, based in New York, filed for bankruptcy partly to help it resolve lawsuits brought by purchasers of mortgage bonds backed by home loans. The investors claimed the bonds lost value because many of the loans were bad. Such losses account for much of the $25 billion in unsecured debt that the creditors committee claimed ResCap may owe.
Ally’s 8 percent bonds due in 2031 fell 1.3 percent to 130.8 cents on the dollar today minutes after the settlement was made public, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
ResCap’s 6.5 percent bonds that were due in April, fell less than 1 percent to 33.7 cents on the dollar, according to Trace. The bonds have gained about 39 percent this year.
“We are supportive of the settlement that allows Ally to move forward,” said Dan Kamensky, a partner at Paulson, the largest holder of the unsecured bonds.
ResCap, Ally and the creditors came to an agreement after weeks of negotiating with the help of a mediator, U.S. Bankruptcy Judge James Peck. On May 13, word of a settlement leaked out as a former bankruptcy judge, Arthur J. Gonzalez, prepared to make public the results of his investigation into Ally’s pre-bankruptcy relationship with ResCap. The amount of the settlement wasn’t made public until today.
The settling parties persuaded Glenn to temporarily seal the investigative report at least until the deal comes before the court for final approval.
Gonzalez, who spent more than $80 million on his investigation, examined claims that Ally exerted so much control over ResCap that the auto lender could be forced to pay the unsecured debts of its mortgage unit.
Berkshire Hathaway Inc., the holding company run by the billionaire Warren Buffett, asked Glenn to unseal Gonzalez’s report, saying creditors need it to decide whether to support or oppose the settlement.
“Sealing the examiner’s report deprives creditors of the very benefit of appointing an examiner: an objective and independent assessment of the prepetition dealings between the debtors and Ally that lie at the heart of these bankruptcy cases,” Berkshire said in its request, filed late yesterday.
Berkshire, a ResCap bondholder, last year successfully pushed for an examiner to be appointed by the court.
The case is In re Residential Capital LLC, 12-bk-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Steven Church in Wilmington, Delaware at email@example.com