ResCap Opens Last Bankruptcy Phase Fighting Hedge Funds

Residential Capital LLC, the defunct mortgage company, opened a weeklong bankruptcy trial in which it will fight hedge funds including Aurelius Capital Management LP over a liquidation plan that resolves more than $100 billion in claims.

The company is asking U.S. Bankruptcy Judge Martin Glenn in Manhattan to approve a plan to distribute billions of dollars to creditors that ResCap raised by liquidating assets. The assets included a mortgage platform bought by Ocwen Loan Servicing LLC and Green Tree Servicing LLC for $3 billion.

All the company’s big creditors voted for the bankruptcy plan except for a group of hedge funds holding about $1 billion in notes, ResCap’s lead attorney, Gary Lee, said today in court.

Bankruptcy law won’t allow “one party to hold everyone else hostage,” Lee, of the law firm of Morrison & Foerster LLP, told Glenn. “And that’s what’s happening this week.”

ResCap, which is owned by Detroit-based Ally Financial Inc. (ALLY), filed for bankruptcy in May 2012 with plans to sell its mortgage unit and other assets. The company completed those sales this year, raising about $4.5 billion.

Under the plan, junior-secured noteholders would recover all the principal and interest owed them at the time ResCap and its affiliates entered bankruptcy. The noteholders have demanded interest since the filing and other payments they say they’re owed as a result of the bankruptcy.

The noteholders have attacked a $2.1 billion settlement that the bankruptcy plan is based on. The accord ends lawsuits and other claims by mortgage bond investors who blame New York-based ResCap and its parent for losses. The noteholders say the settlement damaged their collateral and let Ally off too easily.

Earlier Ruling

In a tentative ruling last week, Glenn rejected some of the noteholder allegations, finding their collateral was not worth what they claimed.

The trial that starts today will feature dozens of witnesses testifying about the settlement with Ally and technical issues of bankruptcy law. It is scheduled to last through Nov. 26.

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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