ResCap Had $3 Billion in Ally Claims, Examiner Finds

Residential Capital LLC, the bankrupt mortgage company that dropped all claims against its parent Ally Financial Inc. (ALLY) in exchange for $2.1 billion, probably would have won more than $3 billion by suing, a bankruptcy examiner found.

ResCap, Ally and a group of creditors settled those potential lawsuits before they had a chance to read the report. The examiner, former bankruptcy judge Arthur J. Gonzalez, filed the $80 million report last month, but the judge overseeing ResCap’s bankruptcy agreed to keep it secret at the request of the company, the creditors and Ally.

The group had negotiated the $2.1 billion settlement and did not want the report made public until a key part of the deal was approved by U.S. Bankruptcy Judge Martin Glenn today.

Gonzalez concluded that ResCap had legitimate claims against its parent for various actions Ally took before the mortgage company filed for bankruptcy last year, including breaching contracts and wrongly transferring assets.

ResCap was “likely” to recover about $1.31 billion on its strongest claims and “more likely than not” to win $1.78 billion on other allegations, Gonzalez found. Ally would probably have prevailed on claims worth about $2.36 billion, he found.

Claims Immunity

In return for paying $2.1 billion, Ally will win immunity from those claims should the settlement win final approval from Glenn as part of ResCap’s reorganization plan. Today, Glenn approved a so-called plan support agreement that requires Ally, ResCap and a group of creditors, including trustees for mortgage bond investors, to back the reorganization plan and the settlement.

The settling parties spent weeks working with a mediator trying to work out a deal. Knowing that Gonzalez had finished his report pushed them to settle, ResCap said in court papers. They were so concerned about what it might say that they agreed that if the report was made public before the support agreement was approved by Glenn, any of the parties could back out of the deal, according to court papers.

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. 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.

Gonzalez Conclusion

Under the accord, Ally was guaranteed to be repaid $1.13 billion it claimed ResCap owes it. Earlier this month Glenn approved that payment. That debt would probably have been found to be legitimate, Gonzalez concluded.

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.

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.

Gonzalez 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.

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 schurch3@bloomberg.net

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

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