ResCap Seeks Ally Deal Approval Before Probe Report

Residential Capital LLC, the bankrupt former mortgage company, will ask a judge today to approve a $2.1 billion deal with its parent Ally Financial Inc. (ALLY) before unveiling a report into the disputes they settled.

The companies and their allies among ResCap’s creditors will be in federal court in Manhattan, seeking approval of a plan support agreement that requires them to back the proposed deal.

If U.S. Bankruptcy Judge Martin Glenn makes public an $80 million investigative report about ResCap’s pre-bankruptcy relationship with Ally too early, the deal could fall apart, the companies say.

The settlement, reached last month, helps Ally move closer to repaying a U.S. bailout by dodging lawsuits and other claims that ResCap creditors said could be as much as $25 billion. ResCap’s creditors want to avoid a long court fight that would delay their repayment and which Glenn compared to “nuclear war.”

The company that requested the report, Berkshire Hathaway Inc., the holding company run by the billionaire Warren Buffett, wants Glenn to unseal the report, saying creditors who are not part of the deal need it to decide whether to support or oppose the settlement.

‘Disgruntled Creditor’

ResCap called Berkshire a “disgruntled creditor” that is trying to leverage its name and position to get interest that has accrued since ResCap filed bankruptcy last year.

The settling parties spent weeks working with a mediator trying to work out a deal. The report, which none of the parties has seen, 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 plan support agreement was approved by Glenn, then 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 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.

Ally Guarantee

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 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.

ResCap, Ally and unsecured 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 settling parties persuaded Glenn to temporarily seal the investigative report at least until the deal comes before the court for final approval.

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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