ResCap Sues Hedge Funds to Stop Demand for More Interest

Residential Capital LLC, the bankrupt mortgage company, sued a group of hedge funds it owes almost $1 billion, accusing them of wrongly pushing for extra interest payments that would cost more than $180 million.

The so-called Ad Hoc Group of Junior Secured Noteholders includes Appaloosa Management LP, Marathon Asset Management LP and Silver Point Finance LLC. The funds invest in the debt of bankrupt companies.

ResCap on May 3 sued the group and the indenture trustee for the notes, which pay 9.625 percent interest and are due in 2015, in U.S. Bankruptcy Court in Manhattan. The bonds today fell more than 1 percent to 109.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The company is trying to avoid paying interest at a default rate that has accrued on the debt since last year’s bankruptcy filing. In previous court filings, the hedge funds claimed the value of ResCap’s current and former assets is so great that the company must pay the extra interest, according to the complaint.

The Ad Hoc Group is pursuing “a misguided creation of collateral value that is premised upon factual and legal fallacies,” ResCap said in its lawsuit.

Christopher Shore, an attorney for the Ad Hoc Group, didn’t immediately respond to an e-mailed request for comment on the suit.

ResCap, based in New York, filed for bankruptcy May 14 with plans to sell assets and use the proceeds to repay as much of its debt as possible.

The dispute involves the value of the collateral backing junior secured notes.

The Ad Hoc Group has said in court papers that the collateral, which includes mortgage assets the company sold last year, is worth $2.22 billion, or more than the $2.1 billion in notes. Under the U.S. Bankruptcy Code, that makes the notes “oversecured.”

ResCap claims the notes are “undersecured” because collateral is worth only $1.51 billion.

If the noteholders win, they will be entitled to collect interest accrued after ResCap filed its Chapter 11 petition. The company won’t have to pay the interest if U.S. Bankruptcy Judge Martin Glenn rules in its favor.

The case is In re Residential Capital LLC, 12-bk-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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