ResCap Judge Won't Disqualify Company, Creditor Lawyers

The judge overseeing Residential Capital LLC’s bankruptcy said he won’t disqualify key lawyers and advisers from participating in part of the case, rejecting a motion by a group of noteholders.

U.S. Bankruptcy Judge Martin Glenn in Manhattan said a group of junior secured noteholders had been trying to “derail” the bankruptcy case. He denied a motion by the group that would have disqualified lawyers for ResCap and a committee of unsecured creditors from participating in any hearings on claims that ResCap’s units may hold against one another.

The group said in court papers that such claims could affect “the distribution of at least $500 million and likely in excess of a billion dollars to creditors.” It claimed the attorneys had a conflict of interest because of the intercompany claims.

Glenn said the group was really trying to force the court to make a determination about the value of the so-called intercompany claims. He said he would not delay consideration of a proposed settlement between ResCap, its parent, Ally Financial Inc. (ALLY), and the unsecured creditors’ committee.

If Glenn approves the settlement, Detroit-based Ally will pay $2.1 billion to creditors in return for immunity from current and future lawsuits related to mortgage-backed securities that went bad. Glenn will consider approving the accord as part of ResCap’s reorganization plan.

Noteholders weren’t trying to disrupt the case or interfere with the settlement, their attorney Christopher Shore said in court today.

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: Andrew Dunn at adunn8@bloomberg.net.

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